Investors sent shares of Levi Strauss & Co. (LEVI) higher by neary 3% intra-day after the company reported better than expected results. But new language in the company’s latest quarterly filing reveals Levi’s preferred free cash flow metric is now significantly inflated thanks to a change in methodology.

Previously, Levi calculated Adjusted free cash flow as operating cash flow:

— Less purchases of property, plant and equipment
— Plus proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
— Less repurchases of common stock, tax withholdings on equity award exercises, and cash dividends to stockholders

Beginning in Q2 2022, Levi no longer includes certain items listed above and is adopting a more traditional free cash flow calculation— operating cash flow less purchases of property, plant and equipment.

While investors will likely welcome the simplified calculation method— which excludes items from financing and investing activities we believe never belonged in a free cash flow calculation— the change was implemented to inflate Levi’s cash flow and make comparables look more favorable.

Without the change, Levi’s Adjusted free cash flow would have been negative in the six months ended May 9, 2022. During this period, three of the four items now excluded from Levi’s Adjusted free cash flow calculation would’ve been unfavorable relative to the prior six month period.

We quantified the impact had the excluded items been included in the current six month Adjusted free cash flow calculation:

— FX contracts not for hedging ($4.3)
— Stock repurchase ($114.2 million)
— Equity award tax withholdings $49.2 million
— Dividends ($39.5 million)

The new calculation method allowed Levi to report Adjusted free cash flow for the six months ended May 9, 202 of $25.4 million. Without the change, Levi’s Adjusted free cash flow would have been ($204.6 million), or 905.5% lower.

For perspective, the change increased the prior year’s six month Adjusted free cash flow from $59.7 million to $180.5 million, or 202.3%.

Levi recast the prior period results under the new calculation method and will continue doing so.

The timing of the change is no coincidence. During the quarter, Levi’s hiked its dividend 66%, the Board authorized a new $750 million repurchase program, and the company’s loss on non-hedging FX bets more than doubled.

Each would’ve reduced Adjusted free cash flow had they been included in the calculation.

Investors might perceive the change in starkly different ways. While Levi’s free cash flow is undeniably inflated relative to the old calculation, the headline could’ve just as easily suggested the company has now adopted a methodology that rightly excludes non-operating items that have historically depressed the company’s preferred cash flow metric.