Best Buy Reports Better-Than-Expected First Quarter Earnings

Information


Best Buy Co., Inc. (NYSE: BBY) today announced results for the 13-week
first quarter ended May 4, 2019 (“Q1 FY20”), as compared to the 13-week
first quarter ended May 5, 2018 (“Q1 FY19”).

                 
    Q1 FY20   Q1 FY19
Revenue ($ in millions)                
Enterprise   $ 9,142     $ 9,109  
Domestic segment   $ 8,481     $ 8,412  
International segment   $ 661     $ 697  
Enterprise comparable sales % change1     1.1 %     7.1 %

Domestic comparable sales % change1

    1.3 %     7.1 %

Domestic comparable online sales % change1

    14.5 %     12.0 %

International comparable sales % change1

    (1.2) %     6.4 %
Operating Income                
GAAP operating income as a % of revenue     3.7 %     2.9 %
Non-GAAP operating income as a % of revenue     3.8 %     3.3 %
Diluted Earnings per Share ("EPS")                
GAAP diluted EPS   $ 0.98     $ 0.72  
Non-GAAP diluted EPS   $ 1.02     $ 0.82  
   

For GAAP to non-GAAP reconciliations of the measures referred to in the
above table, please refer to the attached supporting schedule
Reconciliation of Non-GAAP Financial Measures.

“Q1 was a strong quarter and a good start to the year,” said Hubert
Joly, Best Buy chairman and CEO. “We reported comparable sales growth at
the high end of our guidance and delivered better-than-expected
profitability. In addition to these strong financial results, we
continued to make significant progress implementing our Best Buy 2020
strategy to enrich lives through technology and further develop our
competitive differentiation.”

Joly continued, “As you know, we made an exciting announcement last
month. On June 11, 2019, Corie Barry will become the fifth CEO in Best
Buy’s 53-year history. At that time, I will transition to the newly
created role of executive chairman of the board. I am very proud of the
seamless transition we have decided to implement, as it reflects
positively on our momentum as well as our focus on executive development
and succession planning.”

Best Buy’s CFO and Strategic Transformation Officer Corie Barry
commented, “I am deeply grateful to Hubert and the rest of the board of
directors for their confidence in me and their clear belief that this
leadership evolution is in the best interests of Best Buy and all its
stakeholders. As I think about my new role, I could not be more
fortunate to have Mike Mohan at my side as our new president and COO.
Our strategy is the right one and is resonating with customers. I am so
excited to work with the entire leadership team in this next chapter as
we continue to implement the strategy that we helped build together.”

Barry continued, “We are pleased with our Q1 performance. As we look to
the full year, we are reiterating the guidance we provided at the
beginning of the year. This outlook balances our better-than-expected Q1
earnings, the fact that it is early in the year and our best estimate of
the impact associated with the recent increase in tariffs on goods
imported from China. Specifically, I am referring to the increase in
tariffs from 10% to 25% on the products on the $200 billion List 3 that
originally went into effect last September.”

FY20 Financial Guidance

Best Buy is providing the following Q2 FY20 financial outlook:

  • Enterprise revenue of $9.5 billion to $9.6 billion
  • Enterprise comparable sales growth of 1.5% to 2.5%
  • Non-GAAP effective income tax rateof approximately 24.5%2
  • Diluted weighted average share count of approximately 269 million
  • Non-GAAP diluted EPS of $0.95 to $1.002

Best Buy is reiterating the following full-year FY20 financial outlook
provided on February 27, 2019:

  • Enterprise revenue of $42.9 billion to $43.9 billion
  • Enterprise comparable sales growth of 0.5% to 2.5%
  • Enterprise non-GAAP operating income rate of approximately 4.6%2,
    which is flat to FY19
  • Non-GAAP effective income tax rate of approximately 24.5%2
  • Non-GAAP diluted EPS of $5.45 to $5.652

Domestic Segment Q1 FY20 Results

Domestic Revenue
Domestic revenue of $8.48 billion increased
0.8% versus last year. The increase was driven by comparable sales
growth of 1.3% and revenue from GreatCall, Inc. (“GreatCall”), which was
acquired in Q3 FY19, partially offset by the loss of revenue from 105
Best Buy Mobile and 12 large-format store closures in the past year.

From a merchandising perspective, the largest comparable sales growth
drivers were appliances, wearables and tablets. These drivers were
partially offset by declines in the entertainment category.

Domestic online revenue of $1.31 billion increased 14.5% on a comparable
basis primarily due to higher average order values and increased
traffic. As a percentage of total Domestic revenue, online revenue
increased approximately 180 basis points to 15.4% versus 13.6% last year.

Domestic Gross Profit Rate
Domestic gross profit rate was
23.7% versus 23.3% last year. The gross profit rate increase of
approximately 40 basis points was primarily driven by the impact of
GreatCall’s higher gross profit rate and improved product margin rates,
which include the benefit of gross profit optimization initiatives.
These favorable items were partially offset by higher supply chain costs.

Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic
GAAP SG&A was $1.68 billion, or 19.8% of revenue, versus $1.67 billion,
or 19.8% of revenue, last year. On a non-GAAP basis, SG&A was $1.66
billion, or 19.6% of revenue, versus $1.66 billion, or 19.7% of revenue,
last year. Both GAAP and non-GAAP SG&A increased primarily due to
GreatCall operating expenses, which were partially offset by lower
incentive compensation expense. Additionally, GAAP SG&A in Q1 FY20
included an additional $17 million of intangible asset amortization
related to GreatCall.

International Segment Q1 FY20 Results

International Revenue
International revenue of $661 million
decreased 5.2% versus last year. This decline was primarily driven by
the impact of approximately 390 basis points of negative foreign
currency exchange rates and a comparable sales decline of 1.2%, which
was driven by Canada.

International Gross Profit Rate
International gross profit
rate was 24.2% versus 23.4% last year. The gross profit rate increase of
approximately 80 basis points was primarily due to Canada, which
delivered improved gross profit rates in several product categories and
increased revenue in the higher margin rate services category.

International SG&A
International GAAP SG&A was $158
million, or 23.9% of revenue, versus $165 million, or 23.7% of revenue,
last year. On a non-GAAP basis, SG&A was $158 million, or 23.9% of
revenue, versus $164 million, or 23.5% of revenue, last year. Both GAAP
and non-GAAP SG&A decreased due to the favorable impact of foreign
exchange rates.

Dividends and Share Repurchases
In
Q1 FY20, the company returned a total of $232 million to shareholders
through share repurchases of $98 million and dividends of $134 million.
On February 27, 2019, the company announced the intent to spend between
$750 million and $1 billion on share repurchases in FY20.

Adoption of New Lease Accounting Standard
Effective
at the beginning of Q1 FY20, the company adopted Accounting Standards
Update 2016-02, Leases, using the “Comparatives Under 840
Option” approach to transition. Under this method, financial information
related to periods prior to adoption will be as originally reported
under the previous standard - Accounting Standards Codification ("ASC")
840, Leases. The effects of adopting the new standard (ASC 842, Leases)
were recognized as a cumulative net of tax adjustment that decreased
opening retained earnings by $19 million. The most significant impact of
adoption was the recognition of operating lease assets and operating
lease liabilities of $2.7 billion and $2.8 billion, respectively. The
company expects the impact of adoption to be immaterial to its
consolidated statements of earnings and consolidated statements of cash
flows on an ongoing basis.

Conference Call

Best Buy is scheduled to conduct an earnings conference call at 8:00
a.m. Eastern Time (7:00 a.m. Central Time) on May 23, 2019. A webcast of
the call is expected to be available at www.investors.bestbuy.com,
both live and after the call.

Notes:
(1) In Q1 FY20, the company refined its methodology
for calculating comparable sales. It now reflects certain revenue
streams previously excluded from the comparable sales calculation, such
as credit card revenue, gift card breakage, commercial sales and sales
of merchandise to wholesalers and dealers, as applicable. The impact of
adopting these changes is immaterial to all periods presented, and
therefore prior-period comparable sales disclosures have not been
restated.

On March 1, 2018, the company announced its intent to close all of the
remaining 257 Best Buy Mobile stand-alone stores in the U.S. As a
result, all revenue related to these stores has been excluded from the
comparable sales calculation beginning in March 2018.

(2) A reconciliation of the projected non-GAAP operating income,
non-GAAP effective income tax rate and non-GAAP diluted EPS, which are
forward-looking non-GAAP financial measures, to the most directly
comparable GAAP financial measures, is not provided because the company
is unable to provide such reconciliation without unreasonable effort.
The inability to provide a reconciliation is due to the uncertainty and
inherent difficulty predicting the occurrence, the financial impact and
the periods in which the non-GAAP adjustments may be recognized. These
GAAP measures may include the impact of such items as restructuring
charges; litigation settlements; goodwill impairments; gains and losses
on investments; certain acquisition-related costs; and the tax effect of
all such items. Historically, the company has excluded these items from
non-GAAP financial measures. The company currently expects to continue
to exclude these items in future disclosures of non-GAAP financial
measures and may also exclude other items that may arise (collectively,
“non-GAAP adjustments”). The decisions and events that typically lead to
the recognition of non-GAAP adjustments, such as a decision to exit part
of the business or reaching settlement of a legal dispute, are
inherently unpredictable as to if or when they may occur. For the same
reasons, the company is unable to address the probable significance of
the unavailable information, which could be material to future results.

Forward-Looking and Cautionary Statements:
This earnings
release contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 as contained in Section
27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that reflect management’s current views and
estimates regarding future market conditions, company performance and
financial results, operational investments, business prospects, new
strategies, the competitive environment and other events. You can
identify these statements by the fact that they use words such as
“anticipate,” “believe,” “assume,” “estimate,” “expect,” “intend,”
“foresee,” “project,” “guidance,” “plan,” “outlook,” and other words and
terms of similar meaning. These statements involve a number of risks and
uncertainties that could cause actual results to differ materially from
the potential results discussed in the forward-looking statements. Among
the factors that could cause actual results and outcomes to differ
materially from those contained in such forward-looking statements are
the following: competition (including from multi-channel retailers,
e-commerce business, technology service providers, traditional
store-based retailers, vendors and mobile network carriers), our
expansion strategies, our focus on services as a strategic priority, our
reliance on key vendors and mobile network carriers, our ability to
attract and retain qualified employees, changes in market compensation
rates, risks arising from statutory, regulatory and legal developments,
macroeconomic pressures in the markets in which we operate, failure to
effectively manage our costs, our reliance on our information technology
systems, our ability to prevent or effectively respond to a privacy or
security breach, our ability to effectively manage strategic ventures,
alliances or acquisitions, our dependence on cash flows and net earnings
generated during the fourth fiscal quarter, susceptibility of our
products to technological advancements, product life cycle preferences
and changes in consumer preferences, economic or regulatory developments
that might affect our ability to provide attractive promotional
financing, interruptions and other supply chain issues, catastrophic
events, our ability to maintain positive brand perception and
recognition, product safety and quality concerns, changes to labor or
employment laws or regulations, our ability to effectively manage our
real estate portfolio, constraints in the capital markets or our vendor
credit terms, changes in our credit ratings, any material disruption in
our relationship with or the services of third-party vendors, risks
related to our exclusive brand products and risks associated with
vendors that source products outside of the U.S., including trade
restrictions or changes in the costs of imports (including existing or
new tariffs or duties and changes in the amount of any such tariffs or
duties) and risks arising from our international activities.

A further list and description of these risks, uncertainties and other
matters can be found in the company’s annual report and other reports
filed from time to time with the Securities and Exchange Commission
(“SEC”), including, but not limited to, Best Buy’s Annual Report on Form
10-K filed with the SEC on March 28, 2019. Best Buy cautions that the
foregoing list of important factors is not complete, and any
forward-looking statements speak only as of the date they are made, and
Best Buy assumes no obligation to update any forward-looking statement
that it may make.

BEST BUY CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

($ and shares in millions, except per share amounts)

(Unaudited and subject to reclassification)

   
Three Months Ended
May 4, 2019 May 5, 2018
Revenue $ 9,142 $ 9,109
Cost of goods sold   6,973     6,984  
Gross profit 2,169 2,125
Gross profit % 23.7 % 23.3 %
Selling, general and administrative expenses 1,835 1,830
SG&A % 20.1 % 20.1 %
Restructuring charges   -     30  
Operating income 334 265
Operating income % 3.7 % 2.9 %
Other income (expense):
Investment income and other 14 11
Interest expense   (18)     (19)  
Earnings before income tax expense 330 257
Income tax expense 65 49
Effective tax rate   19.8 %   19.2 %
Net earnings $ 265   $ 208  
 
Basic earnings per share $ 0.99 $ 0.74
Diluted earnings per share $ 0.98 $ 0.72
 
Weighted-average common shares outstanding
Basic 267.6 282.6
Diluted 271.5 288.3
 

BEST BUY CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

(Unaudited and subject to reclassification)

   
May 4, 2019 May 5, 2018
Assets
Current assets
Cash and cash equivalents $ 1,561 $ 1,848
Short-term investments - 785
Receivables, net 833 860
Merchandise inventories 5,195 4,964
Other current assets   425   473
Total current assets 8,014 8,930
Property and equipment, net 2,334 2,385
Operating lease assets 2,708 -
Goodwill 915 425
Other assets   579   342
Total assets $ 14,550 $ 12,082
 
Liabilities and equity
Current liabilities
Accounts payable $ 4,718 $ 4,619
Unredeemed gift card liabilities 265 285
Deferred revenue 409 371
Accrued compensation and related expenses 275 296
Accrued liabilities 851 934
Current portion of operating lease liabilities 639 -
Current portion of long-term debt   14   550
Total current liabilities 7,171 7,055
Long-term operating lease liabilities 2,173 -
Long-term liabilities 659 815
Long-term debt 1,193 792
Equity   3,354   3,420
Total liabilities and equity $ 14,550 $ 12,082
 

BEST BUY CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited and subject to reclassification)

   
Three Months Ended
May 4, 2019 May 5, 2018
Operating activities
Net earnings $ 265 $ 208
Adjustments to reconcile net earnings to total cash provided by
operating activities:
Depreciation and amortization 200 176
Restructuring charges - 30
Stock-based compensation 36 32
Deferred income taxes 13 9
Other, net 1 (2 )
Changes in operating assets and liabilities, net of acquired assets
and liabilities:
Receivables 182 189
Merchandise inventories 207 243
Other assets (14 ) (13 )
Accounts payable (519 ) (214 )
Other liabilities (379 ) (506 )
Income taxes   10       52  
Total cash provided by operating activities 2 204
 
Investing activities
Additions to property and equipment (193 ) (181 )
Sales of investments - 1,245
Other, net   1       9  
Total cash provided by (used in) investing activities   (192 )     1,073  
 
Financing activities
Repurchase of common stock (98 ) (400 )
Issuance of common stock 11 24
Dividends paid (134 ) (128 )
Repayments of debt (4 ) (11 )
Other, net   (1 )     (1 )
Total cash used in financing activities (226 ) (516 )
 
Effect of exchange rate changes on cash   (1 )     (12 )
Increase (decrease) in cash, cash equivalents and restricted cash (417 ) 749
Cash, cash equivalents and restricted cash at beginning of period   2,184       1,300  
Cash, cash equivalents and restricted cash at end of period $ 1,767     $ 2,049  
 

BEST BUY CO., INC.

SEGMENT INFORMATION

($ in millions)

(Unaudited and subject to reclassification)

   
Three Months Ended
Domestic Segment Results May 4, 2019 May 5, 2018
Revenue $ 8,481 $ 8,412
Comparable sales % change 1.3 % 7.1 %
Comparable online sales % change 14.5 % 12.0 %
Gross profit $ 2,009 $ 1,962
Gross profit as a % of revenue 23.7 % 23.3 %
SG&A $ 1,677 $ 1,665
SG&A as a % of revenue 19.8 % 19.8 %
Operating income $ 332 $ 267
Operating income as a % of revenue 3.9 % 3.2 %
 
Domestic Segment Non-GAAP Results1
Gross profit $ 2,009 $ 1,962
Gross profit as a % of revenue 23.7 % 23.3 %
SG&A $ 1,660 $ 1,659
SG&A as a % of revenue 19.6 % 19.7 %
Operating income $ 349 $ 303
Operating income as a % of revenue 4.1 % 3.6 %
 
Three Months Ended
International Segment Results May 4, 2019 May 5, 2018
Revenue $ 661 $ 697
Comparable sales % change (1.2 ) % 6.4 %
Gross profit $ 160 $ 163
Gross profit as a % of revenue 24.2 % 23.4 %
SG&A $ 158 $ 165
SG&A as a % of revenue 23.9 % 23.7 %
Operating income (loss) $ 2 $ (2 )
Operating income (loss) as a % of revenue 0.3 % (0.3 ) %
 
International Segment Non-GAAP Results1
Gross profit $ 160 $ 163
Gross profit as a % of revenue 24.2 % 23.4 %
SG&A $ 158 $ 164
SG&A as a % of revenue 23.9 % 23.5 %
Operating income (loss) $ 2 $ (1 )
Operating income (loss) as a % of revenue 0.3 % (0.1 ) %
 
(1)   For GAAP to non-GAAP reconciliations, please refer to the attached
supporting schedule titled Reconciliation of Non-GAAP Financial
Measures.
 

BEST BUY CO., INC.

REVENUE CATEGORY SUMMARY

(Unaudited and subject to reclassification)

       
Revenue Mix Summary Comparable Sales
Three Months Ended Three Months Ended
Domestic Segment May 4, 2019 May 5, 2018 May 4, 2019 May 5, 2018
Computing and Mobile Phones 46 % 46 % 1.0 % 10.2 %
Consumer Electronics 31 % 32 % 0.9 % 2.9 %
Entertainment 6 % 7 % (12.7 ) % (0.8 ) %
Appliances 11 % 10 % 10.5 % 13.0 %
Services 6 % 5 % 6.8 % 7.3 %
Other - % - % N/A N/A
Total 100 % 100 % 1.3 % 7.1 %
 
Revenue Mix Summary Comparable Sales
Three Months Ended Three Months Ended
International Segment May 4, 2019 May 5, 2018 May 4, 2019 May 5, 2018
Computing and Mobile Phones 46 % 47 % (4.0 ) % 4.4 %
Consumer Electronics 31 % 30 % 2.5 % 9.4 %
Entertainment 5 % 6 % (14.0 ) % (8.3 ) %
Appliances 9 % 9 % (2.0 ) % 37.7 %
Services 7 % 6 % 13.4 % (6.1 ) %
Other 2 % 2 % 15.3 % (1.9 ) %
Total 100 % 100 % (1.2 ) % 6.4 %
 

BEST BUY CO., INC.
RECONCILIATION OF NON-GAAP FINANCIAL
MEASURES

($ in millions, except per share amounts)
(Unaudited
and subject to reclassification)

The following information provides reconciliations of the most
comparable financial measures presented in accordance with accounting
principles generally accepted in the U.S. (GAAP financial measures) to
presented non-GAAP financial measures. The company believes that
non-GAAP financial measures, when reviewed in conjunction with GAAP
financial measures, can provide more information to assist investors in
evaluating current period performance and in assessing future
performance. For these reasons, internal management reporting also
includes non-GAAP measures. Generally, presented non-GAAP measures
include adjustments for items such as restructuring charges, goodwill
impairments, gains and losses on investments, certain
acquisition-related costs and the tax effect of all such items. In
addition, certain other items may be excluded from non-GAAP financial
measures when the company believes this provides greater clarity to
management and investors. These non-GAAP financial measures should be
considered in addition to, and not superior to or as a substitute for,
the GAAP financial measures presented in this earnings release and the
company’s financial statements and other publicly filed reports.
Non-GAAP measures as presented herein may not be comparable to similarly
titled measures used by other companies.

           
Three Months Ended Three Months Ended
May 4, 2019 May 5, 2018
Domestic International Consolidated Domestic International Consolidated
SG&A $ 1,677 $ 158 $ 1,835 $ 1,665 $ 165 $ 1,830
% of revenue 19.8

 %

23.9

 %

20.1

 %

19.8

 %

23.7

 %

20.1

 %

Intangible asset amortization1 (17 ) - (17 ) - - -
Tax reform-related item - employee bonus2   -     -     -     (6 )   (1 )   (7 )
Non-GAAP SG&A $ 1,660   $ 158   $ 1,818   $ 1,659   $ 164   $ 1,823  
% of revenue 19.6

 %

23.9

 %

19.9

 %

19.7

 %

23.5

 %

20.0

 %

 
Operating income (loss) $ 332 $ 2 $ 334 $ 267 $ (2 ) $ 265
% of revenue 3.9

 %

0.3

 %

3.7

 %

3.2

 %

(0.3 )% 2.9

 %

Intangible asset amortization1 17 - 17 - - -
Restructuring charges3 - - - 30 - 30
Tax reform-related item - employee bonus2   -     -     -     6     1     7  
Non-GAAP operating income (loss) $ 349   $ 2   $ 351   $ 303   $ (1 ) $ 302  
% of revenue 4.1

 %

0.3

 %

3.8

 %

3.6

 %

(0.1 )% 3.3

 %

 
Effective tax rate 19.8

 %

19.2

 %

Intangible asset amortization1 0.3

 %

-

 %

Restructuring charges3 -

 %

0.7

 %

Tax reform-related item - employee bonus2   -

 %

  0.1

 %

Non-GAAP effective tax rate   20.1

 %

  20.0

 %

 
Three Months Ended Three Months Ended
May 4, 2019 May 5, 2018
Pretax Earnings Net of Tax4 Per Share Pretax Earnings Net of Tax4 Per Share
GAAP diluted EPS $ 0.98 $ 0.72
Intangible asset amortization1 $ 17 $ 13 0.04 $ - $ - -
Restructuring charges3 - - - 30 22 0.08
Tax reform-related item - employee bonus2 - -   -   7 5   0.02  
Non-GAAP diluted EPS $ 1.02   $ 0.82  
(1)   Represents the non-cash amortization of definite-lived intangible
assets associated with the acquisition of GreatCall, Inc., including
customer relationships, tradenames and technology.
 
(2) Represents final adjustments for amounts paid and associated taxes
related to a one-time bonus for certain employees announced in
response to future tax savings created by the Tax Cuts and Jobs Act
enacted into law in Q4 FY18.
 
(3) Represents charges associated with the closure of Best Buy Mobile
stand-alone stores in the U.S.
 
(4) The non-GAAP adjustments relate primarily to adjustments in the U.S.
As such, the income tax charge is calculated using the statutory tax
rate for the U.S. (24.5% for the periods ended May 4, 2019, and May
5, 2018).
 

Return on Assets and Non-GAAP Return on
Invested Capital

The following table includes a reconciliation to the calculation of
return on assets ("ROA") (GAAP financial measure), along with the
calculation of non-GAAP return on invested capital (“ROIC”) for total
operations, which includes both continuing and discontinued operations
(non-GAAP financial measure) for the periods presented.

The company defines non-GAAP ROIC as non-GAAP net operating profit after
tax divided by average invested capital using the trailing four-quarter
average. The company believes non-GAAP ROIC is a useful financial
measure for investors in evaluating the efficiency and effectiveness of
the use of capital and believes non-GAAP ROIC is an important component
of shareholders' return over the long term. Effective at the beginning
of Q1 FY20, the company adopted new lease accounting guidance that
resulted in the recognition of operating lease assets and operating
lease liabilities on the balance sheet. Certain changes have been made
as described within the footnotes to the calculation as a result of this
adoption. This method of determining non-GAAP ROIC may differ from other
companies' methods and therefore may not be comparable to those used by
other companies.

   
Calculation of Return on Assets ("ROA") May 4, 20191 May 5, 20181
Net earnings $ 1,521 $ 1,020
Total assets   13,611       13,340    
ROA   11.2   %   7.6   %
 
Calculation of Non-GAAP Return on Invested Capital ("ROIC") May 4, 20191 May 5, 20181

Net Operating Profit After Taxes (NOPAT)

Operating income - continuing operations $ 1,969 $ 1,808
Operating income - discontinued operations   -       1    
Total operating income 1,969 1,809
Add: Operating lease interest2 113 117
Add: Non-GAAP operating income adjustments3 68 148
Add: Investment income 52 55
Less: Income taxes4   (542 )     (740 )  
Non-GAAP NOPAT $ 1,660 $ 1,389
 

Average Invested Capital

Total assets $ 13,611 $ 13,340
Less: Excess cash5 (1,365 ) (2,722 )
Add: Capitalized operating lease assets6 2,272 3,126
Total liabilities (10,397 ) (9,457 )
Exclude: Debt7   1,895       1,345    
Average invested capital $ 6,016 $ 5,632
 
Non-GAAP ROIC   27.6   %   24.7   %
 
(1)   Income statement accounts represent the activity for the trailing 12
months ended as of each of the balance sheet dates. Balance sheet
accounts represent the average account balances for the four
quarters ended as of each of the balance sheet dates.
 
(2) Operating lease interest represents the add-back to operating income
to approximate the total interest expense that the company would
incur if its operating leases were owned and financed by debt.
Historically, the company used an add-back multiple of 30% of annual
rent expense; however, as a result of the adoption of new lease
accounting guidance, the multiple was recalculated and prior periods
have been updated to reflect this change. For periods prior to FY20,
the add-back is approximated by multiplying the trailing 12-month
total rent expense by 15%. For periods beginning on or after FY20,
the add-back is now approximated by multiplying average operating
lease assets by 4%, which approximates the interest rate on the
company’s operating lease liabilities.
 
(3) Includes adjustments for tax reform-related items, restructuring
charges and acquisition-related costs. Additional details regarding
these adjustments are included in the Reconciliation of Non-GAAP
Financial Measures schedule within the company’s quarterly earnings
releases.
 
(4) Income taxes are calculated using a blended statutory rate at the
Enterprise level based on statutory rates from the countries in
which the company does business, which primarily consists of the
U.S. (with a statutory rate ranging from 24.5% to 38.0% for the
periods presented) and Canada (with a statutory rate ranging from
26.6% to 26.9% for the periods presented).
 
(5) Cash and cash equivalents and short-term investments are capped at
the greater of 1% of revenue or actual amounts on hand. The cash and
cash equivalents and short-term investments in excess of the cap are
subtracted from the company’s calculation of average invested
capital to show their exclusion from total assets.
 
(6) Capitalized operating lease assets represent the estimated net
assets that the company would record if the company's operating
leases were owned. Historically, the company used a multiple of five
times annual rent expense; however, as a result of the adoption of
new lease accounting guidance, the multiple was recalculated and
prior periods have been updated to reflect this change. For periods
prior to FY20, the asset is approximated by multiplying the trailing
12-month total rent expense by the multiple of four. For periods
beginning on or after FY20, capitalized operating lease assets are
now included within total assets on the balance sheet.
 
(7) Debt includes short-term debt, current portion of operating lease
liabilities, current portion of long-term debt, long-term operating
lease liabilities and long-term debt and is added back to the
company’s calculation of average invested capital to show its
exclusion from total liabilities.