Performance

FOOTNOTES

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.

1. EBIT represents earnings from continuing operations 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 about trends in the company’s operations and are useful for period-over-period comparisons.

   Reconciliation of EBIT

   Dollars in millions	FY19	FY18	FY17
   Earnings from continuing operations before income taxes	$1,024	$1,054	$1,033
   Interest income	(3)	(6)	(4)
   Interest expense	97	85	88
   EBIT — non-GAAP	$1,118	$1,133	$1,117
   EBIT margin — non-GAAP	18.0%	18.5%	18.7%
   Net sales	$6,214	$6,124	$5,973

2. Reconciliation of Economic Profit ⁽ⁱ⁾

   Dollars in millions and all calculations based on rounded numbers	FY19	FY18	FY17	FY16	FY15	FY14
   Earnings from continuing operations before income taxes	$1,024	$1,054	$1,033	$983	$921	$884
   Add back:
   Non-cash U.S. GAAP restructuring and intangible asset impairment costs	2	2	4	9	1	3
   Interest expense	97	85	88	88	100	103
   Earnings from continuing operations before income taxes, non-cash U.S. GAAP restructuring and intangible asset impairment charges, and interest expense	$1,123	$1,141	$1,125	$1,080	$1,022	$990
   Less: Income taxes on earnings from continuing operations before income taxes, non-cash U.S. GAAP restructuring and intangible asset impairment charges and interest expense (ii)	222	249	359	368	350	342
   Adjusted after-tax profit	$ 901	$ 892	$ 766	$ 712	$ 672	$ 648
   Average capital employed (iii)	$3,231	$2,977	$2,680	$2,463	$2,385	$2,486
   Less: Capital charge (iv)	$ 291	$ 268	$ 241	$ 222	$ 214	$ 224
   Economic profit (i) (adjusted after-tax profit less capital charge)	$ 610	$ 624	$ 525	$ 490	$ 458	$ 424

   1. Economic profit (EP) is defined by the Company as earnings from continuing operations before income taxes, excluding non-cash 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. The aggregate EP for FY14 to FY19 is $3.131 billion.
   2. The tax rate applied is the effective tax rate on earnings from continuing operations, which was 19.8%, 21.8%, 31.9%, 34.1%, 34.2% and 34.6% in fiscal years 2019, 2018, 2017, 2016, 2015 and 2014, 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:

   Dollars in millions	FY19	FY18	FY17	FY16	FY15	FY14
   Total assets(v)	$5,116	$5,060	$4,573	$4,510	$4,154	$4,251
   Less:
   Accounts payable and accrued liabilities(v)	1,033	1,000	1,002	1,032	976	912
   Income taxes payable	9	—	—	—	—	—
   Other liabilities(v)	774	778	770	784	745	768
   Deferred income taxes	50	72	61	82	95	103
   Non-interest bearing liabilities	1,866	1,850	1,833	1,898	1,847	1,791
   Total capital employed	3,250	3,210	2,740	2,612	2,307	2,460
   After tax non-cash U.S. GAAP restructuring and intangible asset impairment charges	1	1	2	6	1	2
   Adjusted capital employed	$3,251	$3,211	$2,742	$2,618	$2,308	$2,462
   Average capital employed	$3,231	$2,977	$2,680	$2,463	$2,385	$2,486

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. Amounts for fiscal years 2016, 2015 and 2014 have been retrospectively adjusted to conform to the current year presentation of debt issuance costs required by Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.”
6. Accounts payable and accrued liabilities were combined into one financial statement line as of June 30, 2016. The change has been retrospectively applied to fiscal years 2015 and 2014. 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.

   Reconciliation of Free Cash Flow

   Dollars in millions	FY19	FY18*	FY17*
   Net cash provided by continuing operations (GAAP)	$ 992	$ 976	$ 868
   Less: capital expenditures	(206)	(194)	(231)
   Free cash flow (non-GAAP)	$ 786	$ 782	$ 637
   Free cash flow as a percentage of net sales (non-GAAP)	12.6%	12.8%	10.7%
   Net sales	$6,214	$6,124	$5,973

   *Net cash provided by continuing operations and free cash flow for fiscal years 2018 and 2017 have been adjusted to reflect the retrospective adoption of Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” effective July 1, 2018.

   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 stock 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.