BT 2011 Annual Report Download - page 61

FINANCIAL REVIEW
58
ALTERNATIVE PERFORMANCE MEASURES
Free cash flow
Reported free cash flow
Reported free cash flow is one of the group’s key performance
indicators by which our financial performance is measured.
Reported 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. Reported 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, reported
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 reported free cash flow
does not mean that this is a measure of the funds that are available
for distribution to shareholders.
Adjusted free cash flow
We also measure financial performance based on an adjusted basis
before specific items. Adjusted free cash flow is before the cash
impact of specific items including tax related specific items. For
non-tax related specific items, the adjustment is made on a pre-tax
basis. Adjusted free cash flow provides an additional measure of the
free cash flow generated by the group based on its trading
performance.
A reconciliation from net cash inflow from operating activities, the
most directly comparable IFRS measure, to reported and adjusted
free cash flow is set out below.
2011 2010 2009
Year ended 31 March £m £m £m
Net cash inflow from operations 4,566 4,825 4,706
Add back pension deficit payment 1,030 525 –
Included in cash flows from investing
activities
Net capital expenditure (2,630) (2,480) (3,038)
Interest received 29 16 19
Dividends received from associates 7 3 6
Purchases of non-current financial
assets (18) – –
Included in cash flows from financing
activities
Interest paid (973) (956) (956)
Reported free cash flow 2,011 1,933 737
Net cash outflow from specific items 212 173 35
Adjusted free cash flow 2,223 2,106 772
The net cash outflow from specific items of £212m in 2011
principally comprised BT Global Services restructuring charges and
property rationalisation costs. The net cash outflow of £173m in
2010 principally comprised BT Global Services restructuring charges
and property rationalisation costs, offset by a cash receipt of
£226m following the agreement of substantially all outstanding tax
matters with HMRC relating to the 2008, 2007 and 2006 tax years.
The net cash outflow of £35m in 2009 principally comprised BT
Global Services restructuring costs and group transformation costs.
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. In addition,
the gross balances are adjusted to take account of netting
arrangements.
Net debt 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.
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 from this measure, the most directly
comparable IFRS measure, to net debt is given below.
2011 2010
At 31 March £m £m
Loans and other borrowings 9,856 12,791
Less:
Cash and cash equivalents (351) (1,452)
Current asset investments (19) (406)
9,486 10,933
Adjustments:
To retranslate currency denominated
balances at swapped rates where hedged (408) (1,326)
To remove fair value adjustments
and accrued interest applied to reflect
the effective interest method (262) (324)
Net debt 8,816 9,283
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