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Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
accompanying consolidated financial statements for further discussion of our stock repurchase program. In addition, cash used by financing activities relates
to our principal payments on capital leases, which were higher in 2011 as we are currently leasing more network equipment than in prior years. Our
obligations under capital leases increased by $24.7 million from December 31, 2010 to December 31, 2011, net of principal payments. In addition, included in
the cash used by financing activities for the year ended December 31, 2011 was $11.8 million of cash collateral posted to secure letters of credit related to
certain of our lease agreements. Previously, our letters of credit were guaranteed by Time Warner. See "Note 1" in our accompanying consolidated financial
statements for further discussion of our restricted cash.
Cash used by financing activities was $41.8 million for the year ended December 31, 2010, compared to $749.6 million for the year ended
December 31, 2009. This change was due to the $709.3 million of net cash distributed to Time Warner in the year ended December 31, 2009, as we swept the
majority of our domestic cash to Time Warner prior to the spin-off.
Free Cash Flow
We use Free Cash Flow as a supplemental measure of our performance. We define Free Cash Flow as cash provided by continuing operations, less
capital expenditures, product development costs and principal payments on capital leases. We consider Free Cash Flow to be a liquidity measure that provides
useful information to management and investors about the amount of cash generated by the continuing business that, after capital expenditures, capitalized
product development costs and principal payments on capital leases, can be used for strategic opportunities, including investing in our business, making
strategic acquisitions and strengthening the balance sheet. Analysis of Free Cash Flow also facilitates management's comparisons of our operating results to
competitors' operating results. A limitation on the use of this metric is that Free Cash Flow does not represent the total increase or decrease in cash for the
period because it excludes the identified non-operating cash flows and the results of discontinued operations.
Free Cash Flow is a non-GAAP financial measure and may be different than similarly-titled non-GAAP financial measures used by other companies.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and
presented in accordance with GAAP.
The following table presents our reconciliation of Free Cash Flow to cash provided by continuing operations (in millions):
Years Ended December 31,
2011 2010 2009
Cash provided by continuing operations $ 296.0 $ 593.5 $ 906.7
Less: Capital expenditures and product development costs 82.3 95.9 135.3
Less: Principal payments on capital leases 49.0 37.5 31.1
Free Cash Flow $ 164.7 $ 460.1 $ 740.3
Free Cash Flow decreased for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This decrease is due to the decline
in cash provided by continuing operations, discussed in "Summary Cash Flow Information—Operating Activities" above and due to the increase in principal
payments on capital leases, discussed in "Summary Cash Flow Information—Financing Activities" above, partially offset by reduced capital expenditures and
product development costs.
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