GRI

Performance |

Achieving financial success with
transparency and strong governance.

See footnotes below for descriptions of these non-generally accepted accounting principles, or GAAP, measures, the reasons management believes they are useful to investors, and reconciliations to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.

  1. EBIT represents earnings from continuing operations before interest and taxes. EBIT margin is the ratio of EBIT to net sales.

Reconciliation of Earnings From Continuing Operations Before
Income Taxes to EBIT

Dollars in millions   FY16     FY15     FY14  
Earnings from continuing operations before                  
income taxes $ 983   $ 921   $ 884  
Interest income   -5     -4     -3  
Interest expense   88     100     103  
EBIT(i) — non-GAAP $ 1,066   $ 1,017   $ 984  
EBIT margin(i) — non-GAAP   18.5 %   18.0 %   17.8 %
Net sales $ 5,761   $ 5,655   $ 5,514  

(i) Economic profit (EP) is defined by the company as earnings from continuing operations before income taxes, excluding noncash U.S. GAAP restructuring and intangible asset impairment costs, and interest expense; less an amount of tax based on the effective tax rate, and less a charge equal to average capital employed multiplied by a cost of capital rate. EP is a key financial metric that the company’s management uses to evaluate business performance and allocate resources, and is a component in determining employee incentive compensation. The company’s management believes EP provides additional perspective to investors about financial returns generated by the business and represents profit generated over and above the cost of capital used by the business to generate that profit.

2. Reconciliation of Economic Profit (Unaudited) (i)

Dollars in millions and all calculations
based on rounded numbers
  FY16     FY15     FY14  
Earnings from continuing operations before                  
income taxes $ 983   $ 921   $ 884  
Noncash U.S. GAAP restructuring and                  
intangible asset impairment costs   9     1     3  
Interest expense   88     100     103  
Earnings from continuing operations before                  
income taxes, noncash U.S. GAAP restructuring and intangible asset impairment costs, and                  
interest expense $ 1,080   $ 1,022   $ 990  
Income taxes on earnings from continuing                  
operations before income taxes, noncash
U.S. GAAP restructuring, intangible asset
                 
impairment costs and interest expense (ii)   368     350     342  
Adjusted after-tax profit $ 712   $ 672   $ 648  
Average capital employed (iii) $ 2,472   $ 2,393   $ 2,494  
Capital charge (iv) $ 222   $ 214   $ 225  
Economic profit (i) (adjusted after-tax profit                  
less capital charge) $ 490   $ 458   $ 423  

(ii)The tax rate applied is the effective tax rate on earnings from continuing operations, which was 34.1%, 34.2% and 34.6% in fiscal years 2016, 2015 and 2014, respectively.

(iii)Total capital employed represents total assets less non-interest bearing liabilities. Adjusted capital employed represents total capital employed adjusted to add back current year after tax noncash U.S. GAAP restructuring and intangible asset impairment costs. Average capital employed is the average of adjusted capital employed for the current year and total capital employed for the prior year, based on year-end balances. See below for details of the average capital employed calculation:

    FY16     FY15     FY14  
Total assets $ 4,518   $ 4,164   $ 4,258  
Less:                  
Accounts payable and accrued liabilities(v)   1,032     976     912  
Income taxes payable       31     8  
Other liabilities(v)   784     745     768  
Deferred income taxes   82     95     103  
Noninterest bearing liabilities   1,898     1,847     1,791  
Total capital employed   2,620     2,317     2,467  
After tax noncash U.S. GAAP restructuring                  
and intangible asset impairment costs   6     1     2  
Adjusted capital employed $ 2,626   $ 2,318   $ 2,469  
Average capital employed $ 2,472   $ 2,393   $ 2,494  

(iv)Capital charge represents average capital employed multiplied by a cost of capital rate, which was 9 percent for all fiscal years presented. The calculation of capital charge includes the impact of rounding numbers.

(v)Accounts payable and accrued liabilities were combined into one financial statement line as of June 30, 2016. The change has been retrospectively applied to all periods presented. Accounts payable and accrued liabilities and Other liabilities are adjusted to exclude interest-bearing liabilities.

3.Free cash flow is calculated as net cash provided by continuing operations less capital expenditures and was $596 million, $733 million and $649 million for fiscal years 2016, 2015 and 2014, respectively. For fiscal years 2016, 2015 and 2014, net cash provided by continuing operations was $768 million, $858 million and $786 million respectively, and capital expenditures were $172 million, $125 million and $137 million respectively. The company’s management uses free cash flow and free cash flow as a percent of sales to help assess the cash generation ability of the business and funds available for investing activities, such as acquisitions, investing in the business to drive growth, and financing activities, including debt payments, dividend payments and share repurchases. Free cash flow does not represent cash available only for discretionary expenditures, since the company has mandatory debt service requirements and other contractual and nondiscretionary expenditures. In addition, free cash flow may not be the same as similar measures provided by other companies due to potential differences in methods of calculation and items being excluded.

Note: Currency-neutral net sales growth represents U.S. GAAP net sales growth excluding the impact of foreign currency exchange rates. The company’s management believes this measure provides useful additional information to investors about trends in the company’s core business operations. The following table presents the currency-neutral net sales growth reconciliation for fiscal years 2016, 2015 and 2014:

Fiscal Year Sales Growth Reconciliation

    FY16     FY15     FY14  
Total sales growth – GAAP   1.9 %   2.6 %   -0.3 %
Less: Foreign exchange   -2.7 %   -2.1 %   -2.0 %
Currency neutral sales growth non-GAAP   4.6 %   4.7 %   1.7 %