british american tobacco p.l.c. annual report 2008 - Financial review 4 of 5



Net debt/financing

The Group defines net debt as borrowings, including related derivatives, less cash and cash equivalents and current available-for-sale investments. The maturity profile of net debt is as follows:

Net debt due within one year  
Related derivatives33(91)
Cash and cash equivalents2,1612,309
Current available-for-sale investments5779
Net debt due beyond one year  
Related derivatives(11)(27)
Total net debt(8,842)(9,891)

Retirement benefit schemes

The Group’s subsidiaries operate around 160 retirement benefit arrangements globally. The majority of the scheme members belong to defined benefit schemes, most of which are funded externally and many are closed to new entrants. The Group also operates a number of defined contribution schemes.

The overall net liability for all pension and healthcare schemes in Group subsidiaries amounted to £1,024 million at the end of 2009, up from £773 million at the end of 2008. The present total value of funded scheme liabilities was £5,250 million (2008: £4,647 million), while unfunded scheme liabilities amounted to £282 million (2008: £248 million).

The increase in the scheme liabilities and deficits in the schemes were largely due to changes in assumptions, including lower discount rates for liabilities and higher expected inflation.

Contributions to the defined benefit schemes are determined after consultation with the respective trustees and actuaries of the individual externally funded schemes, taking into account the regulatory environment.

Changes in the Group

The Group acquired Bentoel during 2009 and from 1 January 2010 BAT Indonesia was merged into Bentoel. There were a number of changes in the Group in 2008, described under adjusting items above. In January 2010, the Group announced the planned closure of the Tire factory in Turkey and the consolidation of all manufacturing in Turkey in the Samsum factory.

Share buy-back programme

In 2008, the Board decided to suspend the on-market share buy-back programme that the Group initiated in 2003, in order to preserve the Group’s financial flexibility during the period of economic uncertainty. No shares were bought back during 2009.

Regional structure from 2009

The Group’s regional structure was realigned from 1 January 2009 after the acquisitions of ST and the cigarette assets of Tekel. The Europe region was divided into Eastern Europe and Western Europe, the Americas region now includes Latin America, the Caribbean and Canada, while Asia-Pacific now includes Japan. The 2008 segmental information has been re-allocated on the basis of the new regional structure.

Non-GAAP measures

In the reporting of financial information, the Group uses certain measures that are not required under IFRS, the generally accepted accounting principles (GAAP) under which the Group reports. The Group believes that these additional measures, which are used internally, are useful to users of the financial information in helping them to understand the underlying business performance.

The principal non-GAAP measures which the Group use are adjusted profit from operations and adjusted diluted earnings per share, which is reconciled to diluted earnings per share. These measures remove the impact of adjusting items from earnings.

Management reviews current and prior year segmental adjusted profit from operations of subsidiaries and adjusted post-tax results of associates and joint ventures at constant rates of exchange. This allows comparison of the Group’s results had they been translated at last year’s rate of exchange. This does not adjust for the normal transactional gains and losses in operations which are generated by exchange movements.

The Group also prepares an alternative cash flow, which includes a measure of ‘free cash flow’, to illustrate the cash flow before transactions relating to borrowings, and provides gross turnover as an additional disclosure to indicate the impact of duty, excise and other taxes.

In accordance with the secondary listing of the ordinary shares of British American Tobacco p.l.c. on the main board of the JSE Limited (JSE) in South Africa, the Group is required to also present headline earnings per share.