PERFORMANCE

See footnotes below for descriptions of these non-generally accepted accounting principles, or non-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. The non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures and should be read in connection with the company’s consolidated financial statements presented in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures provided by other companies due to potential differences in methods of calculation and items being excluded.

1. EBIT represents earnings before income taxes, interest income and interest expense. EBIT margin is the ratio of EBIT to net sales. The company’s management believes these measures provide useful additional information to investors to enhance their understanding about trends in the company’s operations and are useful for period-over-period comparisons.

   Reconciliation of EBIT

   Dollars in millions	FY20	FY19	FY18
   Earnings before income taxes	$1,185	$1,024	$1,054
   Interest income	-2	-3	-6
   Interest expense	99	97	85
   EBIT — non-GAAP	$1,282	$1,118	$1,133
   EBIT margin — non-GAAP	19.1%	18.0%	18.5%
   Net sales	$6,721	$6,214	$6,124

2.  

   Reconciliation of Economic Profit ⁽ⁱ⁾

   Dollars in millions and all calculations based on rounded numbers	FY20	FY19	FY18
   Earnings before income taxes	$1,185	$1,024	$1,054
   Add back:
   Noncash U.S. GAAP restructuring and intangible asset impairment charges	2	2	2
   Interest expense	99	97	85
   Earnings before income taxes, noncash U.S. GAAP restructuring and intangible asset impairment charges, and interest expense	$1,286	$1,123	$1,141
   Less: Income taxes on earnings before income taxes, noncash U.S. GAAP restructuring and intangible asseh impairment charges and interest expense (ii)	267	222	249
   Adjusted after-tax profit	$1,019	$901	$892
   Average capital employed (iii)	$3,478	$3,231	$2,977
   Less: Capital charge (iv)	$313	$291	$268
   Economic profit (i) (adjusted after-tax profit less capital charge)	$706	$610	$624

   1. Economic profit (EP) is defined by the company as earnings before income taxes, excluding noncash U.S. GAAP restructuring and intangible asset impairment charges, and interest expense; less income taxes (calculated utilizing the company’s effective tax rate), and less a capital charge (calculated as 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. The tax rate applied is the effective tax rate on net earnings, which was 20.8%, 19.8% and 21.8% in fiscal years 2020, 2019 and 2018, respectively.
3. 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 charges. 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.
4. Capital charge represents average capital employed multiplied by a cost of capital, which was 9% for all fiscal years presented. The calculation of capital charge includes the impact of rounding numbers.

5. Accounts payable and accrued liabilities and Other Liabilities are adjusted to exclude interest-bearing liabilities.

3.  

   Reconciliation of Free Cash Flow

   Dollars in millions	FY20	FY19	FY18
   Net cash provided by operations (GAAP)	$1,546	$992	$976
   Less: capital expenditures	(254)	(206)	(194)
   Free cash flow (non-GAAP)	1,292	786	782
   Free cash flow as a percentage of net sales (non-GAAP)	19.2%	12.6%	12.8%
   Net sales	$6,721	$6,214	$6,124

   The company’s management uses free cash flow and free cash flow as a percent of net 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 non-discretionary 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.