BT 2009 Annual Report Download - page 50

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
48 BT GROUP PLC ANNUAL REPORT & FORM 20-F
BUSINESS AND FINANCIAL REVIEWS FINANCIAL REVIEW
reconciliation of underlying operating costs to reported operating
costs is given on page 35.
Adjusted performance measures
Performance measures presented as ‘adjusted’ are stated before
contract and financial review charges recorded within BT Global
Services and specific items. As explained on page 10, during 2009,
the new management team undertook an extensive review of BT
Global Services’ financial position and contracts. Having completed
the contract and financial reviews, a charge of £1,639m was
recognised in 2009 (2008 and 2007: £nil). Given the size of these
charges, we have presented EBITDA, operating profit, profit before
taxation and earnings per share before these charges and specific
items as the directors believe that the presentation of the group’s
results in this way is relevant to an understanding of the group’s
financial performance. A reconciliation from adjusted EBITDA to
operating profit, the most directly comparable IFRS measure is
included on pages 34 and 35. A reconciliation from adjusted profit
before taxation to the reported (loss) profit is included on page 32.
A reconciliation from adjusted earnings per share to reported (loss)
earnings per share is included on page 39.
Free cash flow
Free cash flow is one of our key performance indicators with which
our performance against our strategy is measured. Free cash flow is
defined as the net increase in cash and cash equivalents less cash
flows from financing activities (except interest paid) and less the
acquisition or disposal of group undertakings and less the net sale
of short-term investments. Free cash flow is primarily a liquidity
measure, however we also believe it is an important indicator of our
overall operational performance as it reflects the cash we generate
from operations after capital expenditure and financing costs, both
of which are significant ongoing cash outflows associated with
investing in our infrastructure and financing our operations. In
addition, free cash flow excludes cash flows that are determined at
a corporate level independently of ongoing trading operations such
as dividends, share buy backs, acquisitions and disposals and
repayment of debt. Our use of the term free cash flow does not
mean that this is a measure of the funds that are available for
distribution to shareholders. A reconciliation of free cash flow to
net cash inflow from operating activities, the most directly
comparable IFRS measure, is included on page 41.
Net debt
Net debt consists of loans and other borrowings (both current and
non current), less current asset investments and cash and cash
equivalents. Loans and other borrowings are measured at the net
proceeds raised, adjusted to amortise any discount over the term of
the debt. For the purpose of this measure, current asset
investments and cash and cash equivalents are measured at the
lower of cost and net realisable value. Currency denominated
balances within net debt are translated to Sterling at swapped rates
where hedged.
This definition of net debt measures balances at the expected value
of future undiscounted cash flows due to arise on maturity of
financial instruments and removes the balance sheet adjustments
made from the re-measurement of hedged risks under fair value
hedges and the use of the effective interest method as required by
IAS 39. In addition, the gross balances are adjusted to take account
of netting arrangements.
Net debt is considered to be an alternative performance measure
as it is not defined in IFRS. The most directly comparable IFRS
measure is the aggregate of loans and other borrowings (current
and non current), current asset investments and cash and cash
equivalents. A reconciliation of net debt to this measure is included
on page 103. It is considered both useful and necessary to disclose
net debt as it is a key measure against which performance against
the group’s strategy is measured. It is a measure of the group’s net
indebtedness that provides an indicator of the overall balance sheet
strength. It is also a single measure that can be used to assess both
the group’s cash position and indebtedness. There are material
limitations in the use of alternative performance measures and the
use of the term net debt does not necessarily mean that the cash
included in the net debt calculation is available to settle the
liabilities included in this measure.
BUSINESS AND FINANCIAL REVIEWS