Pension Adjustments:

We don't bother with the earnings or cash flow adjustment (the latter is pretty dubious anyway).
The pension deficit is always PBO less fair value of plan assets. In some company accounts, esp
European, this may not equal the booked pension deficit because of actuarial smoothing or non-netting
against pension assets.
Another thing to note is the varying agency treatment for healthcare deficits, which are often unfunded.
Moodys often doesn't adjust for these on grounds they are v long-term, but really to get the metric
down as their operating lease treatment is cruel. I think they look at the age of the workforce sort of
thing. We do a full adjustment for healthcare deficits, as do S&P. Generally we follow S&P adjustments,
as they usually provide good disclosure.
The standard tax rate we use is 35% for US firms, 30% for European firms. This is because
pension/healthcare contributions are tax-deductible, at least in the US. We neglected a tax adjustment
on many LGIM reports so please correct this if you see it.

Now time to update with the last 10Qs and 10K. General principle - always use last disclosed numbers if
there are revisions. The quarterlies can be a pain for the cash flows as they will just give you eg a 9M
number in Q3 on 10Q so you have to go to the last one and get a 6M number and subtract one from the
other to get the Q3 number.
Few things:
- we should do a tax adjustment for the pension liability - basically multiply by 0.65 assuming 35% tax
rate. I changed in your pension sheet total, but not sure if its done. it wasnt done in previous ones but
this was bad, it should be done. Also check your key leverage metric is in line with agencies.
- the graphs were a bit lax last round so good to clean up - see attached - things to do (1) hide LTMQ2,
LTMQ1 columns - we only need the last LTMQ column (2) change curious axes interval like units of 3 to
standard units of 1,2,5, 10 (3) Get rid of superfluous digits in axes labels, (4) if necessary change the axes
intervals for tight series - eg EBITDA margin (if EBITDA margin moves 50bp that can be a big deal but you
dont see it if you start your axes from zero)


- read agencies first when identifying strengths and weakness and getting feel for business issues. The
guys who did the original ones didnt have access to agencies but we do. also always send me the
agencies when you send these.
- in agency section keep it tight around the rating outlook/threshold/actions
- in the latest results try to put the last Q in the context of previous quarters - so here last Q was
disappointing after a series of strong quarters
- the earnings section was not done well in previous reports (very elevator and obsessed with revenues -
the client complained) so we need to change the style - we should (1) start with a one sentence general
description of revenues and earnings (cyclicality/ volatility/margins etc) (2) couple of sentences on last
few years experience providing drivers (3) mention any themes from the last presentation/transcript -
in this case they have some strong segments they are building and some weak ones they are divesting.
(4) in outlook bit mention any guidance - if no guidance say no guidance. We need something so if no
guidance what is BBG outlook for revenues and EBITDA/earnings?
- always investigate sharp movements in the financials - like here dividend cash flows have doubled LTM
- so did they announce an increase in dividends? when? how much? similarly capex going down? why?
- our leverage numbers for 9M13 are very wrong - if something doesnt make sense we need to check
whats happening
- we havent mentioned the K-DOW settlement in the cash flows or anywhere else that I can see
- a week ago they announced they were carving out a big chunk of their business - we mention this in
the news section and nowhere else - with a major M&A like this we need it reflected in the text pretty
comporehensively - we also need to do a pro forma on the leverage metrics

Sources of News:
bbg cn, reuters website, corp website, just google news, FT, WSJ, seekingalpha

basically this will be a strength/opportunity - ie they are divesting $3bn, but what will it be used for? we
then do a pro forma debt/ebitda for after the deal based on last LTM numbers
also the last earnings transcript needs to be looked at - we don't need to look at every word but the first
bit by the CEO usually highlights any big issues facing the company. we also check the analysts questions
section as that tells us what analysts are looking at
so straight away they are talking of their debt reduction plan, and also telling us what segments are
performing well
this is the sort of stuff we really want in the earnings section.

Just noticing on a second look - a lot of the formatting is out of template - notable the table in the front
and the financial table at back - can we please keep exactly within template? Do not mess with the
columns in excel. Also we only want 3 years annual historics not the 5 you have given. We do not
provide more than the template.
Also, I notice all the charts are out of template! I will redo this time but please stick to template in
future. When creating a new chart copy an old one and change the formula. Do not attempt a new one

- Note: There is a bug on the spreadsheet, probably carried over from last year. The net interest line
was picking up equity-accounted earnings. I have corrected see attached. Wont affect our key ratios or
summary stats. But please bear in mind for future reports.
Other important points:
- follow closely template style, headings for charts etc - all these reports should look the same
- the $2.5bn K-Dow award in Q2 is affecting the cash flow analysis so I have done adjustments for this.
Wherever you see a big movement in numbers, check you have done it right or either adjust for it or
explain it in the text.
- I have changed the earnings/last results sections a lot - remember the client has complained about an
elevator approach in earnings. for last results, read the press reports, pres and front bit of the transcript,
and just pick out the main points. for earnings section, read agencies and talk generally about earnings
volatility, 3-5 year performance, management forward-looking guidance. we do not need a lot of words
and numbers.
- In the leverage graph, can we do unadjusted gross debt instead of interest cover going forward. We
changed this approach about 6 months ago but its not reflected in a lot of older reports. This is because
often corps talk about their gross debt targets.

do it in form: (AA+neg/A1/AA+) with S&P first then Moodys then Fitch. If a rating is missing put a dash -
eg (AA+neg/A1/-). If there is a neg or pos watch do in form (AA+*-/A1/A*+). Watch developing just has a
* with no + or - after it.

1 - Follow the old format for columns etc. These are highly standardized and we should not deviate in
terms of formatting, except for unusual credits.
For example:
- We have too many half-yearly columns - we only want 5.
- We have liabilities coming as minus. This is not standard.
- We have some P&L items as positives where they should be minuses.

2 - Change some formulas
- we are still using the old /8 and /24 Moody's approximations in the lease adjustment. We need to get
rid of these - and just use annual lease payments or an approximation consist with S&P 7% discounting
- lines 96 and 97 are giving very odd numbers, I assume as we have changed signs in other parts of the
sheet. Can we delete these lines from the sheet, and all further sheets - they are not important.
- can you put line 83 FCC with the other coverage ratios

3 - Cash flow lines
Also we say something unusual in the earnings bit about how cash is rising even though there are
negative free cash flows. This is despite there being no change in material change in debt, M&A,
buybacks. The reason is we are not picking up all the major non-debt related cash flow items in our cash
flow statement. We should be able to match net free cash flows (at the bottom) roughly with the
change in net debt.

The two changes I suggest are:
- add proceeds from disposal of intangibles and divestments of PPE to line 63 (investment/M&A line).
This should not impact our main metrics.
4 - Changes to P&L
Also can you put other income below EBIT and EBITDA. This is typically associate income - we cant see
the debt so we shouldn't count the earnings in our leverage is the idea. This is another contentious point
- but the general rule is just keep them out of EBIT/EBITDA.
5 - Editing out bad style things
- Can we get rid of things like that capital P in "lease and Pension adjustments". Always look over the
sheet and get rid of things like inconsistent capitalization - it makes a huge difference on presentations