BT 2010 Annual Report Download - page 57

REVIEW OF THE YEAR FINANCIAL REVIEW
55BT GROUP PLC ANNUAL REPORT & FORM 20-F
ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
An explanation of each of these alternative performance measures
is set out below. Reconciliations to the nearest measure prepared in
accordance with IFRS are included within the body of the Financial
review and in the Consolidated financial statements. The
alternative performance measures we use may not be directly
comparable to similarly titled measures used by other companies.
EBITDA
In addition to measuring financial performance of the lines of
business based on operating profit, we also measure performance
based on adjusted EBITDA. EBITDA is defined as the group profit or
loss before depreciation, amortisation, net finance expense and
taxation. Since this is a non-GAAP measure, it may not be directly
comparable to the EBITDA of other companies, as they may define it
differently. EBITDA is a common measure used by investors and
analysts to evaluate the operating financial performance of
companies, particularly in the telecommunications sector.
We consider EBITDA to be a useful measure of our operating
performance because it reflects the underlying operating cash costs,
by eliminating depreciation and amortisation. EBITDA is not a direct
measure of our liquidity, which is shown by our cash flow statement,
and it needs to be considered in the context of our financial
commitments. A reconciliation from adjusted EBITDA to operating
profit, the most directly comparable IFRS measure, is given on
page 102.
Adjusted performance measures
Performance measures presented as ‘adjusted’ are stated before
specific items, contract and financial review charges of £1,639m
recognised within BT Global Services in 2009 and net interest on
pensions.
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 in the
segment information note on page 102. A reconciliation from
adjusted operating profit to the reported profit is included on
page 42. A reconciliation from adjusted earnings per share to
reported earnings per share is included on page 110.
Specific items
In our income statement and segmental analysis we separately
identify specific items and present our results both before and after
these items. This is consistent with the way that financial
performance is measured by management and is reported to the
Board and the
Operating Committee and assists in providing a
meaningful analysis of the trading results of the group. The
directors believe that presentation of the group’s results in this way
is relevant to the understanding of the group’s financial
performance as specific items are significant one-off or unusual in
nature and have little predictive value. Items that we consider to be
significant one-off or unusual in nature include disposals of
businesses and investments, business restructuring costs, asset
impairment charges, property rationalisation programmes and the
settlement of multiple tax years in a single settlement. An analysis
of Specific items recognised in all years presented is included on
pages 45 and 106.
Contract and financial review charges
Adjusted revenue, adjusted EBITDA and adjusted operating profit
are stated before specific items and the BT Global Services contract
and financial review charges of £1,639m recognised in 2009 due to
the size and nature of these charges.
Net interest on pensions
Adjusted profit before taxation and adjusted earnings per share are
also presented before net interest on pensions, as disclosed in
note 29 to the consolidated financial statements, due to the
volatile nature of this item.
Underlying revenue, operating costs and capital expenditure
Underlying revenue, operating costs and capital expenditure refers
to the amounts excluding 1) the contribution in the current year
from acquisitions that are not reflected in the comparable period in
the prior year due to the date the acquisition was completed, and
2) the impact of rebasing the prior year to be on a constant
currency basis compared with the current year. No adjustment is
made to the prior year reported revenue, operating costs or capital
expenditure in determining the year on year movement in
underlying revenue, operating costs and capital expenditure. The
directors believe that presentation of the group’s revenue,
operating costs and capital expenditure in this way is relevant to an
understanding of the group’s financial performance.
Both acquisitions and foreign exchange rate movements can
have significant impacts on the group’s reported revenue,
operating costs and capital expenditure and therefore can impact
year on year comparisons. Presentation of the group’s revenue,
operating costs and capital expenditure excluding the year on year
impact of acquisitions and on a constant currency basis allows the
group’s revenue, operating costs and capital expenditure to be
presented on a consistent basis for the purpose of year on year
comparisons. A reconciliation of reported operating costs and
capital expenditure to underlying operating costs and capital
expenditure is presented below:
Operating Capital
costs expenditure Total
Year ended 31 March 2010 £m £m £m
Reported 19,116 2,533 21,649
Less:
Specific items (427) – (427)
Depreciation and amortisation (3,039) – (3,039)
Leaver costs (142) – (142)
15,508 2,533 18,041
Less:
Foreign exchange (316) (16) (332)
Acquisitions (32) – (32)
Total underlying costs 15,160 2,517 17,677
Free cash flow
Free cash flow is one of our key performance indicators by which
our financial performance is measured. Free cash flow is defined as
the net increase in cash and cash equivalents less cash flows from
financing activities (except net interest paid) and less the
acquisition or disposal of group undertakings and less the net sale
of short-term investments and excluding pension deficit payments.
Free cash flow is primarily a liquidity measure, however we also