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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2016

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 1-4171

KELLOGG COMPANY

 

State of Incorporation—Delaware		IRS Employer Identification No.38-0710690

One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599

Registrant’s telephone number: 269-961-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).

Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

Common Stock outstanding as of October 29, 2016 — 350,905,165 shares

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KELLOGG COMPANY

INDEX

 

	Page
PART I — Financial Information
Item 1:
Financial Statements
Consolidated Balance Sheet — October 1, 2016 and January 2, 2016	3
Consolidated Statement of Income — quarter and year-to-date periods ended October 1, 2016 and October 3, 2015	4
Consolidated Statement of Comprehensive Income – quarter and year-to-date periods ended October 1, 2016 and October 3, 2015	5
Consolidated Statement of Equity — year ended January 2, 2016 and year-to-date period ended October 1, 2016	6
Consolidated Statement of Cash Flows — year-to-date periods ended October 1, 2016 and October 3, 2015	7
Notes to Consolidated Financial Statements	8
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3:
Quantitative and Qualitative Disclosures about Market Risk	60
Item 4:
Controls and Procedures	61
PART II — Other Information
Item 1A:
Risk Factors	63
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 6:
Exhibits	63
Signatures	64
Exhibit Index	65

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Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET

(millions, except per share data)

	October 1, 2016 (unaudited)			January 2, 2016 *
Current assets
Cash and cash equivalents	$	346		$	251
Accounts receivable, net	1,523			1,344
Inventories:
Raw materials and supplies	321			315
Finished goods and materials in process	899			935
Deferred income taxes	—			227
Other prepaid assets	207			164
Total current assets	3,296			3,236
Property, net of accumulated depreciation of $5,356 and $5,236	3,558			3,621
Investments in unconsolidated entities	438			456
Goodwill	4,971			4,968
Other intangibles, net of accumulated amortization of $52 and $47	2,287			2,268
Pension	256			231
Other assets	513			471
Total assets	$	15,319		$	15,251
Current liabilities
Current maturities of long-term debt	$	1,138		$	1,266
Notes payable	454			1,204
Accounts payable	1,986			1,907
Accrued advertising and promotion	517			447
Accrued income taxes	35			42
Accrued salaries and wages	280			325
Other current liabilities	591			548
Total current liabilities	5,001			5,739
Long-term debt	6,296			5,275
Deferred income taxes	459			685
Pension liability	928			946
Nonpension postretirement benefits	50			77
Other liabilities	385			391
Commitments and contingencies
Equity
Common stock, $.25 par value	105			105
Capital in excess of par value	786			745
Retained earnings	6,807			6,597
Treasury stock, at cost	(4,008		)	(3,943		)
Accumulated other comprehensive income (loss)	(1,505		)	(1,376		)
Total Kellogg Company equity	2,185			2,128
Noncontrolling interests	15			10
Total equity	2,200			2,138
Total liabilities and equity	$	15,319		$	15,251

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

(millions, except per share data)

	Quarter ended							Year-to-date period ended
(Results are unaudited)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015
Net sales	$	3,254		$	3,329			$	9,917		$	10,383
Cost of goods sold	1,990			2,096				6,138			6,664
Selling, general and administrative expense	854			899				2,482			2,589
Operating profit	410			334				1,297			1,130
Interest expense	58			56				343			168
Other income (expense), net	3			(6		)		7			(78		)
Income before income taxes	355			272				961			884
Income taxes	62			66				215			227
Earnings (loss) from unconsolidated entities	(1		)	(1		)		1			(3		)
Net income	$	292		$	205			$	747		$	654
Net income (loss) attributable to noncontrolling interests	—			—				—			(1		)
Net income attributable to Kellogg Company	$	292		$	205			$	747		$	655
Per share amounts:
Basic	$	0.83		$	0.58			$	2.13		$	1.85
Diluted	$	0.82		$	0.58			$	2.11		$	1.84
Dividends per share	$	0.52		$	0.50			$	1.52		$	1.48
Average shares outstanding:
Basic	350			354				350			354
Diluted	354			356				354			356
Actual shares outstanding at period end								351			354

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(millions)

	Quarter ended October 1, 2016										Year-to-date period ended October 1, 2016
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount				Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	292									$	747
Other comprehensive income (loss):
Foreign currency translation adjustments	(20		)	7			(13		)		(123		)	20			(103		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	3			(1		)	2				(57		)	23			(34		)
Reclassification to net income	—			(1		)	(1		)		8			(4		)	4
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service cost	—			—			—				(1		)	—			(1		)
Reclassification to net income:
Net experience loss	1			—			1				3			—			3
Prior service cost	1			(1		)	—				3			(1		)	2
Other comprehensive income (loss)	$	(15	)	$	4		$	(11	)		$	(167	)	$	38		$	(129	)
Comprehensive income							$	281									$	618
Comprehensive income attributable to Kellogg Company							$	281									$	618
	Quarter ended October 3, 2015										Year-to-date period ended October 3, 2015
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount				Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	205									$	654
Other comprehensive income (loss):
Foreign currency translation adjustments	(88		)	5			(83		)		(142		)	(11		)	(153		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	7			(2		)	5				11			(3		)	8
Reclassification to net income	(7		)	1			(6		)		(14		)	1			(13		)
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service credit (cost)	66			(25		)	41				66			(25		)	41
Reclassification to net income:
Net experience loss	1			—			1				3			—			3
Prior service cost	2			—			2				7			(2		)	5
Other comprehensive income (loss)	$	(19	)	$	(21	)	$	(40	)		$	(69	)	$	(40	)	$	(109	)
Comprehensive income							$	165									$	545
Net Income (loss) attributable to noncontrolling interest							—										(1		)
Other comprehensive income (loss) attributable to noncontrolling interests							1										—
Comprehensive income attributable to Kellogg Company							$	164									$	546

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF EQUITY

(millions)

 

	Common stock					Capital in excess of par value			Retained earnings			Treasury stock					Accumulated other comprehensive income (loss)			Total Kellogg Company equity			Non-controlling interests			Total equity
(unaudited)	shares		amount									shares		amount
Balance, January 3, 2015	420		$	105		$	678		$	6,689		64		$	(3,470	)	$	(1,213	)	$	2,789		$	62		$	2,851
Common stock repurchases												11		(731		)				(731		)				(731		)
Net income									614											614						614
Acquisition of noncontrolling interest, net																							7			7
VIE deconsolidation																							(58		)	(58		)
Dividends									(700		)									(700		)				(700		)
Other comprehensive loss																	(163		)	(163		)	(1		)	(164		)
Stock compensation						51														51						51
Stock options exercised and other						16			(6		)	(5	)	258						268						268
Balance, January 2, 2016	420		$	105		$	745		$	6,597		70		$	(3,943	)	$	(1,376	)	$	2,128		$	10		$	2,138
Common stock repurchases												6		(426		)				(426		)				(426		)
Net income									747											747						747
Acquisition of noncontrolling interest, net																							5			5
Dividends									(533		)									(533		)				(533		)
Other comprehensive loss																	(129		)	(129		)				(129		)
Stock compensation						45														45						45
Stock options exercised and other						(4		)	(4		)	(6	)	361						353						353
Balance, October 1, 2016	420		$	105		$	786		$	6,807		70		$	(4,008	)	$	(1,505	)	$	2,185		$	15		$	2,200

Refer to notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

(millions)

 

	Year-to-date period ended
(unaudited)	October 1, 2016			October 3, 2015
Operating activities
Net income	$	747		$	654
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization	357			387
Postretirement benefit plan expense (benefit)	(53		)	(68		)
Deferred income taxes	(26		)	(61		)
Stock compensation	45			32
Venezuela remeasurement	11			165
Variable-interest entity impairment	—			(49		)
Other	(14		)	35
Postretirement benefit plan contributions	(29		)	(21		)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables	(208		)	(214		)
Inventories	25			1
Accounts payable	139			162
Accrued income taxes	10			11
Accrued interest expense	53			15
Accrued and prepaid advertising and promotion	66			49
Accrued salaries and wages	(45		)	(14		)
All other current assets and liabilities	(57		)	(115		)
Net cash provided by (used in) operating activities	1,021			969
Investing activities
Additions to properties	(376		)	(389		)
Acquisitions, net of cash acquired	(21		)	(161		)
Investments in unconsolidated entities, net proceeds	27			(456		)
Other	(11		)	43
Net cash provided by (used in) investing activities	(381		)	(963		)
Financing activities
Net issuances (reductions) of notes payable	(749		)	533
Issuances of long-term debt	2,061			672
Reductions of long-term debt	(1,230		)	(604		)
Net issuances of common stock	356			196
Common stock repurchases	(426		)	(381		)
Cash dividends	(533		)	(523		)
Other	—			(3		)
Net cash provided by (used in) financing activities	(521		)	(110		)
Effect of exchange rate changes on cash and cash equivalents	(24		)	(40		)
Increase (decrease) in cash and cash equivalents	95			(144		)
Cash and cash equivalents at beginning of period	251			443
Cash and cash equivalents at end of period	$	346		$	299
Supplemental cash flow disclosures
Interest paid	$	294		$	154
Income taxes paid	$	225		$	290
Supplemental cash flow disclosures of non-cash investing activities:
Additions to properties included in accounts payable*	$	87		$	110

*The Q3 2015 Consolidated Statement of Cash Flows has been revised to correctly eliminate the non-cash effect of accrued capital expenditures of $27 million from changes in Accounts payable, resulting in an increase in net cash provided by operating activities and changes in Additions to properties, resulting in a decrease in net cash used in investing activities. These revisions were not considered material to the previously issued Q3 2015 financial statements.

Refer to Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

for the quarter ended October 1, 2016 (unaudited)

Note 1 Accounting policies

Basis of presentation

The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects all adjustments, all of which are of a normal and recurring nature, that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2015 Annual Report on Form 10-K.

The condensed balance sheet information at January 2, 2016 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended October 1, 2016 are not necessarily indicative of the results to be expected for other interim periods or the full year.

Accounts payable

The Company has agreements with certain third parties to provide accounts payable tracking systems which facilitates participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these agreements is to capture overall supplier savings, in the form of payment terms or vendor funding, created by facilitating suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreement for those payment obligations that have been sold by suppliers. As of October 1, 2016, $692 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $513 million of those payment obligations to participating financial institutions. As of January 2, 2016, $524 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $425 million of those payment obligations to participating financial institutions.

New accounting standards

Improvements to employee share-based payment accounting. In March 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) as part of its simplification initiative. The Company early adopted the accounting standard update in the first quarter of 2016. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The main provisions of the ASU are as follows:

•	Excess tax benefits and deficiencies for share-based payments are recorded as an adjustment of income taxes and reflected in operating cash flows after adoption of this ASU. Excess tax benefits and deficiencies were previously recorded in equity and as financing cash flows prior to adoption of this ASU.

•	The guidance allows the employer to withhold up to the maximum statutory tax rates in the applicable jurisdictions without triggering liability accounting. The Company's accounting treatment of outstanding equity awards was not impacted by its adoption of this provision of the ASU.

•	The guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company is not making this election, and will continue to account for forfeitures on an estimated basis.

Balance sheet classification of deferred taxes. In November 2015, the FASB issued an ASU to simplify the presentation of deferred income taxes. The ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Entities should apply the new guidance either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted the updated standard in the first quarter of 2016, on a prospective basis.  The year-end 2015 balances for

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current deferred tax assets and current deferred liabilities were $227 million and $9 million, respectively. Prior period balances have not been adjusted.

Simplifying the presentation of debt issuance costs. In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. Entities should apply the new guidance on a retrospective basis. The Company adopted the updated standard in the first quarter of 2016 with no significant impact on its financial statements.

Simplifying the accounting for measurement-period adjustments. In September 2015, the FASB issued an ASU to simplify the accounting for measurement-period adjustments for items in a business combination. The ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities should apply the new guidance prospectively to adjustments to provisional amounts that occur after the effective date of the ASU with earlier application permitted for financial statements that have not been issued. The Company adopted the updated standard in the first quarter of 2016 with no significant impact on its financial statements.

Customer's accounting for fees paid in a cloud computing arrangement. In April 2015, the FASB issued an ASU to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Entities should apply the new guidance either; 1) prospectively to all arrangements entered into or materially modified after the effective date or 2) retrospectively. The Company adopted the updated standard prospectively in the first quarter of 2016 with no significant impact on its financial statements.

Accounting standards to be adopted in future periods

Income Taxes. In October 2016, the FASB, as part of their simplification initiative, issued an ASU to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current Generally Accepted Accounting Principles (GAAP) prohibit recognition of current and deferred income taxes for intra-entity asset transfers until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendments in the ASU eliminate the exception, such that entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. That is, early adoption should be the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the period of adoption.  The Company is currently assessing the impact and timing of adoption of the ASU.

Statement of Cash Flows. In August 2016, the FASB issued an ASU to provide cash flow statement classification guidance for certain cash receipts and payments including (a) debt prepayment or extinguishment costs; (b) contingent consideration payments made after a business combination; (c) insurance settlement proceeds; (d) distributions from equity method investees; (e) beneficial interests in securitization transactions and (f) application of the predominance principle for cash receipts and payments with aspects of more than one class of cash flows.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, in which case adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.   The amendments in this ASU should be applied retrospectively.  The Company is currently assessing the impact and timing of adoption of the ASU.

Leases. In February 2016, the FASB issued an ASU which will require the recognition of lease assets and lease liabilities by lessees for all leases with terms greater than 12 months. The distinction between finance leases and operating leases will remain, with similar classification criteria as current GAAP to distinguish between capital and operating leases. The principal difference from current guidance is that the lease assets and lease liabilities arising from operating leases will be recognized on the Consolidated Balance Sheet. Lessor accounting remains substantially similar to current GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that implementing this ASU will have on its financial statements and disclosures, as well as timing of implementation.

Recognition and measurement of financial assets and liabilities. In January 2016, the FASB issued an ASU which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the

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presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. Entities should apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company will adopt the updated standard in the first quarter of 2018. The Company does not expect the adoption of this guidance to have a significant impact on its financial statements.

Revenue from contracts with customers. In May 2014, the FASB issued an ASU, as amended, which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. To achieve that core principle, an entity would be required to apply the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. When the ASU was originally issued it was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption was not permitted. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The updated standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Entities will be permitted to adopt the new revenue standard early, but not before the original effective date.  Entities will have the option to apply the final standard retrospectively or use a modified retrospective method, recognizing the cumulative effect of the ASU in retained earnings at the date of initial application. An entity will not restate prior periods if it uses the modified retrospective method, but will be required to disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the ASU as compared to the guidance in effect prior to the change, as well as reasons for significant changes. The Company will adopt the updated standard in the first quarter of 2018. The Company is currently evaluating the impact that implementing this ASU will have on its financial statements and disclosures, as well as whether it will use the retrospective or modified retrospective method of adoption.

Note 2 Sale of accounts receivable

In March 2016, the Company entered into an agreement (the “Receivable Sales Agreement”), to sell, on a revolving basis, certain trade accounts receivable balances to a third party financial institution. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Receivable Sales Agreement provides for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is $550 million (increased from $350 million as of April 2, 2016).  During the year-to-date period ended October 1, 2016, approximately $1.0 billion of accounts receivable have been sold via this arrangement. Accounts receivable sold of $546 million remained outstanding under this arrangement as of October 1, 2016. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is approximately $3 million for the year-to-date period ended October 1, 2016 and is included in Other income and expense.

In July 2016, the Company entered into a $200 million U.S. accounts receivable securitization program with a third party financial institution. In September 2016 the program was amended to increase its capacity to $400 million. Under the program, we receive cash consideration of up to $400 million and a deferred purchase price asset for the remainder of the purchase price. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. This securitization program utilizes Kellogg Funding Company (Kellogg Funding), a wholly-owned subsidiary of the Company. Kellogg Funding's sole business consists of the purchase of receivables, from its parent or other subsidiary and subsequent transfer of such receivables and related assets to financial institutions. Although Kellogg Funding is included in our consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of Kellogg Funding assets prior to any assets or value in Kellogg Funding becoming available to the Company or its subsidiaries. The assets of Kellogg Funding are not available to pay creditors of the Company or its subsidiaries. This program expires in July 2017.

During the year-to-date period ended October 1, 2016, $341 million of accounts receivable have been sold via the accounts receivable securitization program. As of October 1, 2016, approximately $260 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company

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received net cash proceeds of approximately $222 million and a deferred purchase price asset of approximately $38 million. The portion of the purchase price for the receivables which is not paid in cash by the financial institutions is a deferred purchase price asset, which is paid to Kellogg Funding as payments on the receivables are collected from customers. The deferred purchase price asset represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price asset is included in Other prepaid assets on the Consolidated Balance Sheet. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is included in Other income and expense and is not material.

The Company has no retained interests in the receivables sold under the programs above, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of October 1, 2016 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.

Additionally, from time to time certain of the Company's foreign subsidiaries will factor, without recourse, accounts receivable balances of certain customers. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. No sold receivable balances under these programs were outstanding as of October 1, 2016. During the year-to-date period ended October 1, 2016, $33 million of accounts receivable have been sold via these programs. The recorded net loss on the sale of these receivables is included in Other income and expense and is not material.

Note 3 Goodwill and other intangible assets

Acquisitions

In March 2016, the Company completed the acquisition of an organic and natural snack company for $18 million, which was accounted for under the purchase method and financed with cash on hand.  The assets, which primarily consist of indefinite lived brands, and liabilities are included in the Consolidated Balance Sheet as of October 1, 2016 within the North America Other segment.

In September 2016, the Company acquired a majority ownership interest in a natural, bio-organic certified breakfast company for €5 million, which was accounted for under the purchase method and financed with cash on hand.  The assets, which primarily consist of indefinite lived intangible assets and goodwill, and liabilities, including non-controlling interests, are included in the Consolidated Balance Sheet as of October 1, 2016, within the Europe segment.

Joint Venture

In January 2016, the Company formed a Joint Venture with Tolaram Africa to develop snacks and breakfast foods for the West Africa market.  In connection with the formation, the Company contributed the rights to indefinitely use the Company’s brands for this market and these categories, including the Pringles brand.  Accordingly, the Company recorded a contribution of $5 million of intangible assets not subject to amortization with a corresponding increase in Investments in unconsolidated entities during the first quarter of 2016, which represents the value attributed to the Pringles brand for this market.

Carrying amount of goodwill

(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Consoli- dated
January 2, 2016	$	131		$	3,568		$	82		$	456		$	431		$	76		$	224		$	4,968
Additions	—			—			—			—			8			—			—			8
Currency translation adjustment	—			—			—			2			(8		)	(2		)	3			(5		)
October 1, 2016	$	131		$	3,568		$	82		$	458		$	431		$	74		$	227		$	4,971

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Intangible assets subject to amortization

(millions)

Gross carrying amount	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Consoli- dated
January 2, 2016	$	8		$	42		$	—		$	5		$	45		$	6		$	10		$	116
Currency translation adjustment	—			—			—			—			—			—			—			—
October 1, 2016	$	8		$	42		$	—		$	5		$	45		$	6		$	10		$	116
Accumulated Amortization
January 2, 2016	$	8		$	16		$	—		$	4		$	11		$	6		$	2		$	47
Amortization	—			2			—			—			2			—			1			5
October 1, 2016	$	8		$	18		$	—		$	4		$	13		$	6		$	3		$	52
Intangible assets subject to amortization, net
January 2, 2016	$	—		$	26		$	—		$	1		$	34		$	—		$	8		$	69
Currency translation adjustment	—			—			—			—			—			—			—			—
Amortization	—			(2		)	—			—			(2		)	—			(1		)	(5		)
October 1, 2016	$	—		$	24		$	—		$	1		$	32		$	—		$	7		$	64

For intangible assets in the preceding table, amortization was $5 million and $6 million for the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively. The currently estimated aggregate annual amortization expense for full-year 2016 is approximately $7 million.

Intangible assets not subject to amortization

(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Consoli- dated
January 2, 2016	$	—		$	1,625		$	—		$	158		$	416		$	—		$	—		$	2,199
Additions	—			—			—			18			3			—			—			21
Contribution to joint venture	—			—			—			—			(5		)	—			—			(5		)
Currency translation adjustment	—			—			—			1			7			—			—			8
October 1, 2016	$	—		$	1,625		$	—		$	177		$	421		$	—		$	—		$	2,223

Note 4 Investments in unconsolidated entities

In September 2015, the Company acquired, for $445 million, a 50% interest in Multipro Singapore Pte. Ltd. (Multipro), a leading distributor of a variety of food products in Nigeria and Ghana and also obtained an option to acquire 24.5% of an affiliated food manufacturing entity under common ownership based on a fixed multiple of future earnings as defined in the agreement (Purchase Option). The purchase price was subject to final adjustments based on Multipro’s 2015 earnings, as defined in the agreement, which was finalized during the quarter ended July 2, 2016. The final purchase price adjustment resulted in a $28 million reduction in the purchase price, which reduced the carrying amount of the investment. The acquisition of the 50% interest is accounted for under the equity method of accounting. The Purchase Option, which was recorded at cost and will be monitored for impairment through the exercise period, which is upon the earlier of the entity achieving a minimum level of earnings as defined in the agreement, in which case the Company has a one year exercise period, or 2020.

The difference between the amount paid for Multipro and the underlying equity in net assets is primarily attributable to intangible assets, a portion of which will be amortized in future periods, and goodwill.

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Note 5 Restructuring and cost reduction activities

The Company views its continued spending on restructuring and cost reduction activities as part of its ongoing operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.

Project K

Project K, a four-year efficiency and effectiveness program, was announced in November 2013, and is expected to continue generating a significant amount of savings that may be invested in key strategic areas of focus for the business. Additionally, the Company expects that these savings may be used to drive future growth in the business.

The focus of the program is to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation. The program is expected to continue to provide a number of benefits, including an optimized supply chain infrastructure, the implementation of global business services, and a new global focus on categories.

The Company currently anticipates that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.2 to $1.4 billion, with after-tax cash costs, including incremental capital investments, estimated to be $900 million to $1.1 billion. Based on current estimates and actual charges to date, the Company expects the total project charges will consist of asset-related costs totaling $400 to $450 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs totaling $400 to $450 million which will include severance, pension and other termination benefits; and other costs totaling $400 to $500 million which will consist primarily of charges related to the design and implementation of global business capabilities. A significant portion of other costs are the result of the implementation of global business service centers which are intended to simplify and standardize business support processes.

The Company currently expects that total pre-tax charges will impact reportable segments as follows: U.S. Morning Foods (approximately 18%), U.S. Snacks (approximately 17%), U.S. Specialty (approximately 1%), North America Other (approximately 10%), Europe (approximately 17%), Latin America (approximately 2%), Asia-Pacific (approximately 6%), and Corporate (approximately 29%). Certain costs impacting Corporate relate to additional initiatives to be approved and executed in the future. When these initiatives are fully defined and approved, the Company will update its estimated costs by reportable segment as needed.

Since the inception of Project K, the Company has recognized charges of $960 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $583 million recorded in COGS and $371 million recorded in SGA.

Other Projects

In 2015 the Company implemented a zero-based budgeting (ZBB) program in its North America business that is expected to deliver visibility to ongoing annual savings. During 2016, ZBB was expanded to include the international segments of the business. In support of the ZBB initiative, the Company incurred pre-tax charges of approximately $4 million and $21 million during the quarter and year-to-date period ended October 1, 2016, respectively. Total charges of $33 million have been recognized since the inception of the ZBB program.

Total Projects

During the quarter ended October 1, 2016, the Company recorded total charges of $40 million across all restructuring and cost reduction activities. The charges were comprised of $12 million recorded in cost of goods sold (COGS) and $28 million recorded in selling, general and administrative (SGA) expense. During the year-to-date period ended October 1, 2016, the Company recorded total charges of $164 million across all restructuring and cost reduction activities. The charges consist of $66 million recorded in COGS and $98 million recorded in SGA expense.

During the quarter ended October 3, 2015, the Company recorded total charges of $85 million across all restructuring and cost reduction activities. The charges consist of $2 million recorded as a reduction of revenue, $57 million recorded in COGS and $26 million recorded in SGA expense. During the year-to-date period ended October 3, 2015, the Company recorded total charges of $243 million across all restructuring and cost reduction

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activities. The charges consist of $4 million recorded as a reduction of revenue, $154 million recorded in COGS and $85 million recorded in SGA expense.

The tables below provide the details for charges across all restructuring and cost reduction activities incurred during the quarter and year-to-date periods ended October 1, 2016 and October 3, 2015 and program costs to date for programs currently active as of October 1, 2016.

	Quarter ended							Year-to-date period ended							Program costs to date
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015				October 1, 2016
Employee related costs	$	6		$	31			$	26		$	64			$	285
Asset related costs	5			15				32			62				178
Asset impairment	—			—				16			18				121
Other costs	29			39				90			99				409
Total	$	40		$	85			$	164		$	243			$	993
	Quarter ended							Year-to-date period ended							Program costs to date
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015				October 1, 2016
U.S. Morning Foods	$	4		$	30			$	13		$	51			$	231
U.S. Snacks	8			15				62			34				188
U.S. Specialty	1			1				4			3				15
North America Other	7			11				20			40				110
Europe	6			12				34			56				207
Latin America	2			1				6			2				22
Asia Pacific	2			2				6			10				80
Corporate	10			13				19			47				140
Total	$	40		$	85			$	164		$	243			$	993

For the quarters ended October 1, 2016 and October 3, 2015 employee related costs consist primarily of severance benefits, asset related costs consist primarily of accelerated depreciation, and other costs consist primarily of third-party incremental costs related to the development and implementation of global business capabilities.

At October 1, 2016 total exit cost reserves were $67 million, related to severance payments and other costs of which a substantial portion will be paid out in 2016 and 2017. The following table provides details for exit cost reserves.

	Employee Related Costs			Asset Impairment			Asset Related Costs			Other Costs			Total
Liability as of January 2, 2016	$	55		$	—		$	—		$	33		$	88
2016 restructuring charges	26			16			32			90			164
Cash payments	(46		)	—			(14		)	(91		)	(151		)
Non-cash charges and other	—			(16		)	(18		)	—			(34		)
Liability as of October 1, 2016	$	35		$	—		$	—		$	32		$	67

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Note 6 Equity

Earnings per share

Basic earnings per share is determined by dividing net income attributable to Kellogg Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table. There were 3 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended October 1, 2016, respectively. There were 3 million anti dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended October 3, 2015, respectively.

Quarters ended October 1, 2016 and October 3, 2015:

(millions, except per share data)	Net income attributable to Kellogg Company			Average shares outstanding		Earnings per share
2016
Basic	$	292		350		$	0.83
Dilutive potential common shares				4		(0.01		)
Diluted	$	292		354		$	0.82
2015
Basic	$	205		354		$	0.58
Dilutive potential common shares				2		—
Diluted	$	205		356		$	0.58

Year-to-date periods ended October 1, 2016 and October 3, 2015:

(millions, except per share data)	Net income attributable to Kellogg Company			Average shares outstanding		Earnings per share
2016
Basic	$	747		350		$	2.13
Dilutive potential common shares				4		(0.02		)
Diluted	$	747		354		$	2.11
2015
Basic	$	655		354		$	1.85
Dilutive potential common shares				2		(0.01		)
Diluted	$	655		356		$	1.84

In February 2014, the Company's board of directors approved a share repurchase program authorizing the repurchase of up to $1.5 billion of our common stock through December 2015. In December 2015, the board of directors approved a new authorization to repurchase of up to $1.5 billion of our common stock beginning in 2016 through December 2017.

During the year-to-date period ended October 1, 2016, the Company repurchased approximately 6 million shares of common stock for a total of $426 million. During the year-to-date period ended October 3, 2015, the Company repurchased 6 million shares of common stock for a total of $381 million.

Comprehensive income

Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience losses and prior service cost related to employee benefit plans.

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Reclassifications out of AOCI for the quarter and year-to-date periods ended October 1, 2016 consisted of the following:

(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended October 1, 2016			Year-to-date period ended October 1, 2016
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	(4	)	$	(11	)	COGS
Foreign currency exchange contracts	(1		)	(1		)	SGA
Interest rate contracts	2			10			Interest expense
Commodity contracts	3			10			COGS
	$	—		$	8		Total before tax
	(1		)	(4		)	Tax expense (benefit)
	$	(1	)	$	4		Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	1		$	3		See Note 9 for further details
Prior service cost	1			3			See Note 9 for further details
	$	2		$	6		Total before tax
	(1		)	(1		)	Tax expense (benefit)
	$	1		$	5		Net of tax
Total reclassifications	$	—		$	9		Net of tax

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Reclassifications out of Accumulated Other Comprehensive Income (AOCI) for the quarter and year-to-date periods ended October 3, 2015 consisted of the following:

(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended October 3, 2015			Year-to-date period ended October 3, 2015
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	(11	)	$	(27	)	COGS
Foreign currency exchange contracts	—			2			SGA
Interest rate contracts	1			2			Interest expense
Commodity contracts	3			9			COGS
	$	(7	)	$	(14	)	Total before tax
	1			1			Tax expense (benefit)
	$	(6	)	$	(13	)	Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	1		$	3		See Note 9 for further details
Prior service cost	2			7			See Note 9 for further details
	$	3		$	10		Total before tax
	—			(2		)	Tax expense (benefit)
	$	3		$	8		Net of tax
Total reclassifications	$	(3	)	$	(5	)	Net of tax

Accumulated other comprehensive income (loss) as of October 1, 2016 and January 2, 2016 consisted of the following:

(millions)	October 1, 2016			January 2, 2016
Foreign currency translation adjustments	$	(1,417	)	$	(1,314	)
Cash flow hedges — unrealized net gain (loss)	(70		)	(39		)
Postretirement and postemployment benefits:
Net experience loss	(13		)	(16		)
Prior service cost	(5		)	(7		)
Total accumulated other comprehensive income (loss)	$	(1,505	)	$	(1,376	)

Noncontrolling interests

In December 2012, the Company entered into a series of agreements with a third party including a subordinated loan (VIE Loan) of $44 million which was convertible into approximately 85% of the equity of the entity (VIE). Due to this convertible subordinated loan and other agreements, the Company determined that the entity was a variable interest entity, the Company was the primary beneficiary and the Company consolidated the financial statements of the VIE. During 2015, the 2012 Agreements were terminated and the VIE loan, including related accrued interest and other receivables, were settled, resulting in a charge of $19 million which was recorded as Other income (expense) in the year-to-date period ended October 3, 2015.  Upon termination of the 2012 Agreements, the Company was no longer considered the primary beneficiary of the VIE, the VIE was deconsolidated, and the Company derecognized all assets and liabilities of the VIE, including an allocation of a portion of goodwill from the U.S. Snacks operating segment, resulting in a $67 million non-cash gain, which was recorded within SGA expense for the year-to-date period ended October 3, 2015.

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Note 7 Debt

The following table presents the components of notes payable at October 1, 2016 and January 2, 2016:

 

	October 1, 2016						January 2, 2016
(millions)	Principal amount			Effective interest rate (a)			Principal amount			Effective interest rate
U.S. commercial paper	$	100		0.48	%		$	899		0.45	%
Europe commercial paper	320			(0.15	)%		261			0.01	%
Bank borrowings	34						44
Total	$	454					$	1,204

(a) Negative effective interest rates on certain borrowings in Europe are the result of efforts by the European Central Bank to stimulate the economy in the eurozone.

In the third quarter of 2016 the Company entered into interest rate swaps with notional amounts totaling approximately $1.6 billion, which effectively converted $700 million of its ten-year 4.0% U.S. Dollar Notes due 2020, $358 million of its ten-year 3.125% U.S. Dollar Notes due 2022, $211 million of its ten-year 2.75% notes due 2023 and $300 million of its ten-year 3.25% Notes due 2026 from fixed to floating rate obligations.

In August 2016, the Company terminated interest rate swaps with notional amounts totaling €600 million, which were designated as fair value hedges of its eight-year 1.00% EUR Notes due 2024. The interest rate swaps effectively converted the interest rate on the Notes from fixed to floating and the unrealized gain upon termination of $13 million will be amortized to interest rate expense over the remaining term of the Notes.

In May 2016, the Company issued €600 million (approximately $671 million USD at October 1, 2016, which reflects the discount and translation adjustments) of eight-year 1.00% Euro Notes due 2024, resulting in aggregate net proceeds after debt discount of $679 million. The proceeds from these Notes were used for general corporate purposes, including, together with cash on hand and additional commercial paper borrowings, repayment of the Company's $750 million, five-year 4.45% U.S. Dollar Notes due 2016 at maturity. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision. The Notes were designated as a net investment hedge of the Company's investment in its Europe subsidiary when issued.

In the second quarter of 2016 the Company entered into interest rate swaps with notional amounts totaling approximately $958 million and €600 million which effectively converted $600 million of its 4.0% ten-year U.S. Dollar Notes due 2020, $358 million of its ten-year 3.125% U.S. Dollar Notes due 2022 and €600 million of its eight-year 1.00% Euro Notes due 2024 from fixed to floating rate obligations. The U.S. Dollar interest rate swaps were settled during the quarter for an unrealized gain of $12 million which will be amortized to interest expense over the remaining term of the related Notes.

In March 2016, the Company redeemed $475 million of its 7.45% U.S. Dollar Debentures due 2031. In connection with the debt redemption, the Company incurred $153 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees related to the tender offer.

In March 2016, the Company issued $750 million of ten-year 3.25% U.S. Dollar Notes and $650 million of thirty-year 4.5% U.S. Dollar Notes, resulting in aggregate net proceeds after debt discount of $1.382 billion. The proceeds from these Notes were used for general corporate purposes, which included repayment of a portion of the Company’s 7.45% U.S. Dollar Debentures due 2031 and a portion of its commercial paper borrowings. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.

The effective interest rates on debt obligations resulting from the Company’s interest rate swaps as of October 1, 2016 were as follows: (a) five-year 1.875% U.S. Dollar Notes due 2016 – 2.01%; (b) five-year 1.75% U.S. Dollar Notes due 2017 –  1.87%; (c) seven-year 3.25% U.S. Dollar Notes due 2018 – 2.58%; (d) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.54%; (e) ten-year 4.00% U.S. Dollar Notes due 2020 – 2.04%; (f) ten-year 3.125% U.S. Dollar Notes due 2022 – 1.30%; (g) ten-year 3.125% U.S. Dollar Notes due 2023 – 1.43%; (h) eight-year 1.00% Euro Notes due 2024 – 1.08% and (i) ten-year 3.25% U.S. Notes due 2026 – 3.12%.

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Note 8 Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2015 Annual Report on Form 10-K.

The Company classifies pre-tax stock compensation expense in COGS and SGA expense principally within its corporate operations. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized was as follows:

	Quarter ended							Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015
Pre-tax compensation expense	$	16		$	12			$	49		$	37
Related income tax benefit	$	6		$	4			$	18		$	13

As of October 1, 2016, total stock-based compensation cost related to non-vested awards not yet recognized was $99 million and the weighted-average period over which this amount is expected to be recognized was 2 years.

Stock options

During the year-to-date periods ended October 1, 2016 and October 3, 2015, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 2015 Annual Report on Form 10-K.

Year-to-date period ended October 1, 2016:

	Employee and director stock options	Shares (millions)		Weighted- average exercise price			Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
	Outstanding, beginning of period	19		$	58
	Granted	3		76
	Exercised	(6	)	56
	Forfeitures and expirations	(1	)	67
	Outstanding, end of period	15		$	62		7.2	$	226
	Exercisable, end of period	8		$	58		6.1	$	168

Year-to-date period ended October 3, 2015:

	Employee and director stock options	Shares (millions)		Weighted- average exercise price			Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
	Outstanding, beginning of period	21		$	56
	Granted	3		64
	Exercised	(4	)	53
	Forfeitures and expirations	—		—
	Outstanding, end of period	20		$	58		7.1	$	192
	Exercisable, end of period	12		$	55		6.0	$	145

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The weighted-average grant date fair value of options granted was $9.44 per share and $7.20 per share for the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively. The fair value was estimated using the following assumptions:

	Weighted- average expected volatility		Weighted- average expected term (years)	Weighted- average risk-free interest rate		Dividend yield
Grants within the quarter ended October 1, 2016:	17	%	6.9	1.60	%	2.60	%
Grants within the quarter ended October 3, 2015:	16	%	6.9	1.98	%	3.00	%

The total intrinsic value of options exercised was $140 million and $50 million for the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively.

Performance shares

In the first quarter of 2016, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-year currency-neutral comparable operating profit growth and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.

A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of comparable operating profit growth achievement. Compensation cost related to comparable operating profit growth performance is revised for changes in the expected outcome. The 2016 target grant currently corresponds to approximately 176,000 shares, with a grant-date fair value of $80 per share.

Based on the market price of the Company’s common stock at October 1, 2016, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:

(millions)	October 1, 2016
2014 Award	$	30
2015 Award	$	24
2016 Award	$	27

The 2013 performance share award, payable in stock, was settled at 35% of target in February 2016 for a total dollar equivalent of $3 million.

Other stock-based awards

During the year-to-date period ended October 1, 2016, the Company granted restricted stock units and a nominal number of restricted stock awards to eligible employees as presented in the following table. Terms of these grants and the Company’s method of determining grant-date fair value were consistent with that described within the stock compensation footnote in the Company’s 2015 Annual Report on Form 10-K.

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Year-to-date period ended October 1, 2016:

Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	806		$	58
Granted	589		70
Vested	(68	)	56
Forfeited	(85	)	62
Non-vested, end of period	1,242		$	63

Year-to-date period ended October 3, 2015:

Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	346		$	54
Granted	587		59
Vested	(90	)	50
Forfeited	(28	)	57
Non-vested, end of period	815		$	57

Note 9 Employee benefits

The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 2015 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

Pension

	Quarter ended							Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015
Service cost	$	25		$	28			$	74		$	84
Interest cost	43			50				131			156
Expected return on plan assets	(87		)	(100		)		(266		)	(300		)
Amortization of unrecognized prior service cost	3			4				10			10
Recognized net loss	28			—				28			—
Total pension (income) expense	$	12		$	(18	)		$	(23	)	$	(50	)

Other nonpension postretirement

	Quarter ended							Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015
Service cost	$	5		$	7			$	15		$	24
Interest cost	10			11				29			36
Expected return on plan assets	(22		)	(25		)		(67		)	(75		)
Amortization of unrecognized prior service cost (credit)	(2		)	(2		)		(7		)	(3		)
Total postretirement benefit (income) expense	$	(9	)	$	(9	)		$	(30	)	$	(18	)

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Postemployment

	Quarter ended							Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015
Service cost	$	1		$	2			$	5		$	5
Interest cost	1			1				3			3
Recognized net loss	1			1				3			3
Total postemployment benefit expense	$	3		$	4			$	11		$	11

During the quarter ended October 1, 2016, the Company recognized expense of $28 million related to the remeasurement of a U.S. pension plan as current year distributions exceeded service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurement loss recognized during the quarter was due to an unfavorable change in the discount rate relative to prior year.

Company contributions to employee benefit plans are summarized as follows:

(millions)	Pension			Nonpension postretirement			Total
Quarter ended:
October 1, 2016	$	3		$	3		$	6
October 3, 2015	$	1		$	3		$	4
Year-to-date period ended:
October 1, 2016	$	18		$	11		$	29
October 3, 2015	$	11		$	10		$	21
Full year:
Fiscal year 2016 (projected)	$	28		$	15		$	43
Fiscal year 2015 (actual)	$	19		$	14		$	33

Plan funding strategies may be modified in response to management’s evaluation of tax deductibility, market conditions, and competing investment alternatives.

Note 10 Income taxes

The consolidated effective tax rate for the quarter ended October 1, 2016 was 18% as compared to the prior year’s rate of 24%. For the quarter ended October 1, 2016, the effective tax rate benefited from excess tax benefits from share-based compensation totaling $16 million. See Note 1 for further discussion regarding the ASU adoption. Additionally, the effective tax rate for the quarter benefited from the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.

The consolidated effective tax rates for the year-to-date periods ended October 1, 2016 and October 3, 2015 were 22% and 26%, respectively. The current year-to-date period effective tax rate benefited from excess tax benefits from share-based compensation totaling $34 million as well as the completion of certain tax examinations.

The effective tax rate for 2015 benefited from a reduction in tax related to current year remitted and unremitted earnings and the completion of certain tax examinations.

As of October 1, 2016, the Company classified $16 million of unrecognized tax benefits as a net current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance expected to be settled within one year, offset by approximately $8 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.

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Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year-to-date period ended October 1, 2016; $49 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

(millions)
January 2, 2016	$	73
Tax positions related to current year:
Additions	6
Reductions	—
Tax positions related to prior years:
Additions	1
Reductions	(4		)
Settlements	1
Lapse in statute of limitations	(2		)
October 1, 2016	$	75

The accrual balance for tax-related interest was $19 million at October 1, 2016.

Note 11 Derivative instruments and fair value measurements

The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.

The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Total notional amounts of the Company’s derivative instruments as of October 1, 2016 and January 2, 2016 were as follows:

(millions)	October 1, 2016			January 2, 2016
Foreign currency exchange contracts	$	1,276		$	1,210
Interest rate contracts	1,769			—
Commodity contracts	453			470
Total	$	3,498		$	1,680

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at October 1, 2016 and January 2, 2016, measured on a recurring basis.

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract

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rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of October 1, 2016 or January 2, 2016.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of October 1, 2016 and January 2, 2016:

Derivatives designated as hedging instruments

	October 1, 2016										January 2, 2016
(millions)	Level 1			Level 2			Total				Level 1			Level 2			Total
Assets:
Foreign currency exchange contracts:
Other prepaid assets	$	—		$	12		$	12			$	—		$	11		$	11
Interest rate contracts:
Other assets (a)	—			5			5				—			—			—
Total assets	$	—		$	17		$	17			$	—		$	11		$	11
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—		$	(7	)	$	(7	)		$	—		$	(10	)	$	(10	)
Interest rate contracts:
Other liabilities (a)	—			(2		)	(2		)		—			—			—
Commodity contracts:
Other current liabilities	—			(3		)	(3		)		—			(14		)	(14		)
Total liabilities	$	—		$	(12	)	$	(12	)		$	—		$	(24	)	$	(24	)

(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.7 billion as of October 1, 2016.

Derivatives not designated as hedging instruments

	October 1, 2016										January 2, 2016
(millions)	Level 1			Level 2			Total				Level 1			Level 2			Total
Assets:
Foreign currency exchange contracts:
Other prepaid assets	$	—		$	15		$	15			$	—		$	18		$	18
Commodity contracts:
Other prepaid assets	6			—			6				4			—			4
Total assets	$	6		$	15		$	21			$	4		$	18		$	22
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—		$	(9	)	$	(9	)		$	—		$	(6	)	$	(6	)
Commodity contracts:
Other current liabilities	(23		)	—			(23		)		$	(33	)	$	—		$	(33	)
Total liabilities	$	(23	)	$	(9	)	$	(32	)		$	(33	)	$	(6	)	$	(39	)

The Company has designated a portion of its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying value of this debt was approximately $1.9 billion and $1.2 billion as of October 1, 2016 and January 2, 2016, respectively.

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The Company has elected not to offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of October 1, 2016 and January 2, 2016 would be adjusted as detailed in the following table:

As of October 1, 2016:
				Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted			Net Amount
Total asset derivatives	$	38		$	(6	)	$	—		$	32
Total liability derivatives	$	(44	)	$	6		$	38		$	—

As of January 2, 2016:
				Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted			Net Amount
Total asset derivatives	$	33		$	(12	)	$	—		$	21
Total liability derivatives	$	(63	)	$	12		$	51		$	—

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The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended October 1, 2016 and October 3, 2015 was as follows:

Derivatives in fair value hedging relationships

(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income (a)
		October 1, 2016				October 3, 2015
Interest rate contracts	Interest expense	$	6			$	6
Total		$	6			$	6

(a)	Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in cash flow hedging relationships

(millions)	Gain (loss) recognized in AOCI							Location of gain (loss) reclassified from AOCI	Gain (loss) reclassified from AOCI into income							Location of gain (loss) recognized in income (a)	Gain (loss) recognized in income (a)
	October 1, 2016				October 3, 2015				October 1, 2016				October 3, 2015				October 1, 2016				October 3, 2015
Foreign currency  exchange contracts	$	1			$	9		COGS	$	4			$	11		Other income (expense), net	$	(1	)		$	—
Foreign currency exchange contracts	1				—			SGA  expense	1				—			Other income (expense), net	—				—
Interest rate contracts	1				—			Interest  expense	(2		)		(1		)	N/A	—				—
Commodity contracts	—				(2		)	COGS	(3		)		(3		)	Other income (expense), net	—				—
Total	$	3			$	7			$	—			$	7			$	(1	)		$	—

(a)	Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives and non-derivatives in net investment hedging relationships

(millions)	Gain (loss) recognized in AOCI
	October 1, 2016				October 3, 2015
Foreign currency denominated long-term debt	$	(19	)		$	(13	)
Total	$	(19	)		$	(13	)

Derivatives not designated as hedging instruments

(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income
		October 1, 2016				October 3, 2015
Foreign currency exchange contracts	COGS	$	3			$	5
Foreign currency exchange contracts	Other income (expense), net	(1		)		(3		)
Commodity contracts	COGS	(14		)		(47		)
Commodity contracts	SGA	—				(2		)
Total		$	(12	)		$	(47	)

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The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended October 1, 2016 and October 3, 2015 was as follows:

Derivatives in fair value hedging relationships

(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income (a)
		October 1, 2016				October 3, 2015
Foreign currency exchange contracts	Other income (expense), net	$	—			$	(4	)
Interest rate contracts	Interest expense	15				13
Total		$	15			$	9

(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in cash flow hedging relationships

(millions)	Gain (loss) recognized in AOCI							Location of gain (loss) reclassified from AOCI	Gain (loss) reclassified from AOCI into income							Location of gain (loss) recognized in income (a)	Gain (loss) recognized in income (a)
	October 1, 2016				October 3, 2015				October 1, 2016				October 3, 2015				October 1, 2016				October 3, 2015
Foreign currency  exchange contracts	$	10			$	28		COGS	$	11			$	27		Other income (expense), net	$	(2	)		$	(2	)
Foreign currency exchange contracts	1				(6		)	SGA  expense	1				(2		)	Other income (expense), net	—				—
Interest rate contracts	(68		)		(9		)	Interest expense	(10		)		(2		)	N/A	—				—
Commodity contracts	—				(2		)	COGS	(10		)		(9		)	Other income (expense), net	—				—
Total	$	(57	)		$	11			$	(8	)		$	14			$	(2	)		$	(2	)

(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives and non-derivatives in net investment hedging relationships

(millions)	Gain (loss) recognized in AOCI
	October 1, 2016				October 3, 2015
Foreign currency denominated long-term debt	$	(31	)		$	30
Foreign currency exchange contracts	(23		)		—
Total	$	(54	)		$	30

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Derivatives not designated as hedging instruments

(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income
		October 1, 2016				October 3, 2015
Foreign currency exchange contracts	COGS	$	(7	)		$	6
Foreign currency exchange contracts	Other income (expense), net	9				4
Interest rate contracts	Interest expense	—				—
Commodity contracts	COGS	(4		)		(45		)
Commodity contracts	SGA	2				(1		)
Total		$	—			$	(36	)

During the next 12 months, the Company expects $9 million of net deferred losses reported in AOCI at October 1, 2016 to be reclassified to income, assuming market rates remain constant through contract maturities.

Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating is at or below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on October 1, 2016 was $3 million. If the credit-risk-related contingent features were triggered as of October 1, 2016, the Company would be required to post collateral of $3 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of October 1, 2016 triggered by credit-risk-related contingent features.

2016 fair value measurements on a nonrecurring basis

As part of Project K, the Company will be consolidating the usage of and disposing certain long-lived assets, including manufacturing facilities and Corporate owned assets over the term of the program. See Note 5 for more information regarding Project K.

During the year-to-date period ended October 1, 2016, long-lived assets of $26 million related to a manufacturing facility in the Company's US Snacks reportable segment, were written down to an estimated fair value of $10 million due to Project K activities. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.

2015 fair value measurements on a nonrecurring basis

During the year-to-date period ended October 3, 2015, as part of Project K, long-lived assets of $31 million related to a manufacturing facility in the Company's North America Other reportable segment, were written down to an estimated fair value of $13 million due to Project K activities. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.

During the year-to-date period ended October 3, 2015, the Company moved from the CENCOEX foreign currency official exchange rate to the SIMADI foreign currency exchange rate for purposes of remeasuring the financial statements of its Venezuelan subsidiary. In connection with this change in foreign currency exchange rates, the Company also evaluated the carrying value of the long lived assets related to its Venezuelan subsidiary. See Note 13 for more information regarding Venezuela. During the year-to-date period ended October 3, 2015 long-lived assets with a carrying value of $51 million were written down to an estimated fair value of $2 million. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.

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Financial instruments

The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $6,863 million and $6,296 million, respectively, as of October 1, 2016.

Counterparty credit risk concentration and collateral requirements

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company. As of October 1, 2016, the Company was not in a significant net asset position with any counterparties with which a master netting agreement would apply.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of October 1, 2016, the Company had no collateral posting requirements related to reciprocal collateralization agreements. As of October 1, 2016 the Company posted $38 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 25% of consolidated trade receivables at October 1, 2016.

Note 12 Contingencies

In connection with the Company’s previous labor negotiations with the union representing the work-force at its Memphis, TN cereal production facility, the National Labor Relations Board (NLRB) filed a complaint alleging unfair labor practices under the National Labor Relations Act in March 2014. In July 2014, a U.S. District Court judge ruled that the Memphis employees were entitled to return to work while the underlying litigation continues and employees subsequently returned to work. In August 2014, an NLRB Administrative Law Judge dismissed the complaint that initiated the underlying litigation. In May 2015, the NLRB reversed the decision of the Administrative Law Judge in favor of the union. In August 2016, the Sixth Circuit Court of Appeals vacated the NLRB’s order and found that the Company’s actions were lawful. This litigation is not expected to have a material effect on the production or distribution of products from the Memphis, TN facility or a material financial impact on the Company. As of October 1, 2016, the Company has not recorded a liability related to this matter as an adverse outcome is considered remote.

Note 13 Venezuela

Venezuela is considered a highly inflationary economy. As such, the functional currency for the Company's operations in Venezuela is the U.S. dollar, which in turn, requires bolivar denominated monetary assets and liabilities to be remeasured into U.S. dollars using an exchange rate at which such balances could be settled as of the balance sheet date. In addition, revenues and expenses are recorded in U.S. dollars at an appropriate rate on the date of the transaction. Gains and losses resulting from the remeasurement of the bolivar denominated monetary assets and liabilities are recorded in earnings.

From February 2013 through July 4, 2015, the Company used the CENCOEX, official rate, which was 6.3 bolivars to the U.S. dollar, to remeasure its Venezuelan subsidiary’s financial statements to U.S. dollars. The CENCOEX

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official rate was restricted toward goods and services for industry sectors considered essential, which are primarily food, medicines and a few others. In February 2015, the Venezuelan government announced the addition of a new foreign currency exchange system referred to as the Marginal Currency System, or SIMADI.

During 2015, the Company experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the CENCOEX exchange. Due to this reduced availability of U.S. dollars and upon review of U.S. dollar cash needs in the Company's Venezuela operations as of the quarter ended July 4, 2015, the Company concluded that it was no longer able to obtain sufficient U.S. dollars on a timely basis through the CENCOEX exchange resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the SIMADI rate.

In connection with the change in rates, the Company evaluated the carrying value of its non-monetary assets for impairment and lower of cost or market adjustments. As a result of moving from the CENCOEX official rate to the SIMADI rate, the Company recorded pre-tax charges totaling $152 million in the quarter ended July 4, 2015. Of the total charges, $100 million was recorded in COGS, $3 million was recorded in SGA, and $49 million was recorded in Other income (expense), net. These charges consist of $47 million related to the remeasurement of net monetary assets denominated in Venezuelan bolivar at the SIMADI exchange rate (recorded in Other income (expense), net), $56 million related to reducing inventory to the lower of cost or market (recorded in COGS) and $49 million related to the impairment of long-lived assets in Venezuela (recorded primarily in COGS).

In February 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including a 59% devaluation of the CENCOEX (now named DIPRO) official rate from 6.3 bolivars to 10.0 bolivars to the U.S. dollar.  Additionally the SIMADI exchange rate was replaced by the DICOM exchange rate, a new floating exchange rate for non-essential imports. The DICOM exchange rate was introduced at 206 bolivars to the U.S. dollar and the Venezuelan government has reported that the DICOM exchange rate will be allowed to float to meet market needs.

The Company has evaluated all of the facts and circumstances surrounding its Venezuelan business and determined that as of October 1, 2016, the DICOM (formerly SIMADI) rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements.

As of October 1, 2016, the published DIPRO and DICOM rates offered were 10.0 and 657.9 bolivars to the U.S. dollar, respectively.

For the year-to-date periods ended October 1, 2016 and October 3, 2015, Venezuela represented less than 1% and approximately 2% of total net sales, respectively. The Company’s net monetary assets denominated in the Venezuelan bolivar were immaterial after applying the DICOM and SIMADI exchange rates as of October 1, 2016 and January 2, 2016, respectively.

The Company continues to monitor and actively manage its investment and exposure in Venezuela. The Company’s Venezuelan business does not rely heavily on imports and when items are imported, they are largely exchanged at the DIPRO official rate; however, the Company considers it reasonably possible to utilize alternate exchange mechanisms in the future. The Company is continuing to take actions to further reduce its reliance on imports in order to run its operations without the need for U.S. dollars, including the elimination of imported ingredients where possible and developing a local supply for parts and materials. Less than 2% of the total raw material needs of the Company's Venezuela operations are imported. The Company will continue to monitor local conditions and its ability to obtain U.S. dollars through the various exchange mechanisms available to determine the appropriate rate for remeasurement.

Note 14 Reportable segments

Kellogg Company is the world’s leading producer of cereal, second largest producer of cookies and crackers, and a leading producer of savory snacks and frozen foods. Additional product offerings include toaster pastries, cereal bars, fruit-flavored snacks and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom.

The Company manages its operations through nine operating segments that are based on product category or geographic location. These operating segments are evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. The reportable segments are discussed in greater detail below.

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The U.S. Morning Foods operating segment includes cereal, toaster pastries, and health and wellness beverages and bars.

U.S. Snacks includes cookies, crackers, cereal bars, savory snacks and fruit-flavored snacks.

U.S. Specialty primarily represents food away from home channels, including food service, convenience, vending, Girl Scouts and food manufacturing. The food service business is mostly non-commercial, serving institutions such as schools and hospitals. The convenience business includes traditional convenience stores as well as alternate retail outlets.

North America Other includes the U.S. Frozen, Kashi and Canada operating segments. As these operating segments are not considered economically similar enough to aggregate with other operating segments and are immaterial for separate disclosure, they have been grouped together as a single reportable segment.

The three remaining reportable segments are based on geographic location – Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and Asia Pacific which consists of Sub-Saharan Africa, Australia and other Asian and Pacific markets.

The measurement of reportable segment results is based on segment operating profit which is generally consistent with the presentation of operating profit in the Consolidated Statement of Income. Intercompany transactions between operating segments were insignificant in all periods presented.

 

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	Quarter ended							Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015
Net sales
U.S. Morning Foods	$	733		$	762			$	2,227		$	2,280
U.S. Snacks	796			795				2,431			2,484
U.S. Specialty	284			281				931			912
North America Other	402			426				1,222			1,298
Europe	594			628				1,821			1,885
Latin America	197			202				593			825
Asia Pacific	248			235				692			699
Consolidated	$	3,254		$	3,329			$	9,917		$	10,383
Operating profit
U.S. Morning Foods	$	144		$	110			$	457		$	368
U.S. Snacks (a)	78			62				230			302
U.S. Specialty	68			63				214			200
North America Other	43			44				135			140
Europe	78			73				216			191
Latin America (b)	27			7				70			2
Asia Pacific	21			14				50			36
Total Reportable Segments	459			373				1,372			1,239
Corporate (c)	(49		)	(39		)		(75		)	(109		)
Consolidated	$	410		$	334			$	1,297		$	1,130

(a)	Includes a non-cash gain of $67 million associated with the deconsolidation of a VIE during the year-to-date period ended October 3, 2015.

(b)

Includes non-cash losses totaling $13 million associated with the remeasurement of the financial statements of the Company's Venezuela subsidiary during the quarter ended October 3, 2015. Includes a non-cash loss of $13 million and $115 million associated with the remeasurement of the financial statements of the Company's Venezuela subsidiary during the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively.

(c)

Includes mark-to-market adjustments for pension plans, commodity and foreign currency contracts totaling $(31) million and ($27) million for the quarters ended October 1, 2016 and October 3, 2015, respectively. Includes mark-to-market adjustments for pension plans, commodity and foreign currency contracts totaling ($35) million and ($59) million for the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively.

Note 15 Subsequent events

In October 2016, the Company announced that it entered into an agreement to acquire Ritmo Investimentos, the controlling shareholder of Parati, a manufacturer of biscuit, powdered beverage and pasta brands in Brazil for R$1.38 billion ($424 million USD at October 1, 2016).  The agreement is subject to customary closing conditions, is expected to close in the fourth quarter of 2016 and be funded through anticipated reductions in share repurchases increasing cash on hand and short term borrowings.

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KELLOGG COMPANY

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Kellogg Company, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this report.

For more than 100 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. Kellogg is the world’s leading producer of cereal, second largest producer of cookies and crackers, and a leading producer of savory snacks and frozen foods. Additional product offerings include toaster pastries, cereal bars, fruit-flavored snacks and veggie foods. Kellogg products are manufactured and marketed globally.

Segments and growth targets

We manage our operations through nine operating segments that are based on product category or geographic location. These operating segments are evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. We report results of operations in the following reportable segments: U.S. Morning Foods; U.S. Snacks; U.S. Specialty; North America Other; Europe; Latin America; and Asia Pacific. The reportable segments are discussed in greater detail in Note 14 within Notes to Consolidated Financial Statements.

We manage our Company for sustainable performance as defined by our long-range annual growth targets. Our targeted long-range annual growth is low-single-digit (1 to 3%) for currency-neutral comparable net sales, mid-single-digit (4 to 6%) for currency-neutral comparable operating profit, and high-single-digit (7 to 9%) for currency-neutral comparable diluted net earnings per share (EPS).

Operating Margin Expansion by 2018

We have recently announced a plan to expand our currency-neutral comparable operating margin excluding Venezuela by 350 basis points during 2016 through 2018, reaching approximately 18%.  This is an increase and acceleration from our previous guidance, which targeted a 17-18% currency-neutral comparable operating margin excluding Venezuela by 2020. 

There are four elements to this accelerated margin expansion plan:

•	Productivity and savings - In addition to annual productivity savings to offset inflation, we will expand our zero-based budgeting initiative in the U.S. and our international regions.  We also are working on additional Project K initiatives.  The result of these initiatives should be higher annual savings.

•	Price Realization - We will establish a more formal Revenue Growth Management discipline around the world, to help us realize price in a more effective way.

•	Investing for Impact - We are updating our investment model to align with today's consumer and technology in order to optimize the return on investment in our brands.

•	On-Trend Foods - We are adopting a more impactful approach to renovation and innovation of our foods.

While we intend to return to growth during the execution of this initiative, we believe it is prudent to moderate our currency-neutral comparable net sales growth excluding Venezuela outlook to approximately flat.  This reflects both the current industry dynamics as well as the result of some of the operating margin expansion efforts which could impact price elasticity and portfolio optimization.  Nevertheless, these margin-expansion actions are expected to drive accelerated growth in currency-neutral comparable operating profit excluding Venezuela and earnings growth in 2017 and 2018. 

In the third quarter our brand building declined approximately 1 point as a percent to net sales and we expect a similar level of reduction for the full year.  This was driven by the evolution of the model to build brands from traditional TV media to digital and social media as well as efficiency and effectiveness benefits associated with our zero-based budgeting initiative.  We remain committed to investing behind our brands and ensuring our investment has the appropriate impact and return on investment to drive profitable revenue growth.

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Guidance on operating profit margin expansion and net sales growth outlook is provided on a non-GAAP, currency-neutral comparable basis excluding Venezuela only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. Please refer to the "Non-GAAP Financial Measures" section for a further discussion of our use of non-GAAP measures, including quantification of known expected adjustment items.

  

Non-GAAP Financial Measures

This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.

Non-GAAP financial measures used include comparable net sales, comparable gross margin, comparable SGA, comparable operating profit, comparable operating profit margin, comparable effective tax rate, comparable net income attributable to Kellogg Company, comparable diluted EPS, and cash flow. These non-GAAP financial measures are also evaluated for year-over-year growth and on a currency-neutral basis to evaluate the underlying growth of the business and to exclude the effect of foreign currency. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.

•

Comparable net sales: We adjust the GAAP financial measures to exclude the pre-tax effect of acquisitions, divestitures, and shipping day differences. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing this non-GAAP net sales measure, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses this non-GAAP measure to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. This non-GAAP measure is also used to make decisions regarding the future direction of our business, and for resource allocation decisions. Currency-neutral comparable net sales represents comparable net sales excluding the impact of foreign currency.

•

Comparable gross profit, comparable gross margin, comparable SGA, comparable SGA%, comparable operating profit, comparable operating profit margin, comparable net income attributable to Kellogg Company, and comparable diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, acquisitions, divestitures, integration costs, mark-to-market adjustments for pension plans, commodities and certain foreign currency contracts, costs associated with the VIE deconsolidation, costs associated with the early redemption of debt outstanding, and costs associated with the Venezuela remeasurement. We excluded the items which we believe may obscure trends in our underlying profitability. The impact of acquisitions and divestitures are not excluded from comparable diluted EPS. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, such as Project K, ZBB and Revenue Growth Management, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments. Currency-neutral comparable represents comparable excluding foreign currency impact.

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Comparable effective tax rate: We adjust the GAAP financial measure to exclude tax effect of Project K and cost reduction activities, integration costs, mark-to-market adjustments for pension plans, commodities and certain foreign currency contracts, costs associated with the Venezuela remeasurement, costs associated with the VIE deconsolidation, and costs associated with the early redemption of debt outstanding. We excluded the items which we believe may obscure trends in our underlying tax rate. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.

•

Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.

These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.

Significant items impacting comparability

Project K and cost reduction activities

During 2013, we announced Project K, a four-year efficiency and effectiveness program. The program is expected to generate a significant amount of savings that may be invested in key strategic areas of focus for the business. We expect that this investment will drive future growth in revenues, gross margin, operating profit, and cash flow. We recorded pre-tax charges related to this program of $36 million and $143 million for the quarter and year-to-date periods ended October 1, 2016, respectively. We also recorded charges of $85 million and $243 million for the quarter and year-to-date periods ended October 3, 2015, respectively.

In 2015 we initiated the implementation of a zero-based budgeting (ZBB) program in our North America business. During 2016 ZBB is being expanded to include the international segments of the business. In support of the ZBB initiative, we incurred pre-tax charges of $4 million and $21 million for the quarter and year-to-date periods ended October 1, 2016.

See the Restructuring and cost reduction activities section for more information.

Acquisitions

In September 2015, we completed the acquisition of Mass Foods, Egypt's leading cereal company for $46 million, or $44 million net of cash and cash equivalents acquired. The quarter ended October 1, 2016 represented the final reporting period in which year-over-year comparability was impacted for this acquisition. In our European reportable segment, for the quarter ended October 1, 2016 the acquisition added $6 million in net sales and less than $1 million of operating profit (before integration costs) that impacted the comparability of our reported results. For the year-to-date period ended October 1, 2016 the acquisition added $16 million in net sales and approximately $2 million in operating profit (before integration costs) that impacted comparability of our reported results.

In January 2015, we completed the acquisition of a majority interest in Bisco Misr, the number one packaged biscuits company in Egypt for $125 million, or $117 million net of cash and cash equivalents acquired. The quarter ended April 2, 2016 represented the final reporting period in which year-over-year comparability was impacted for this acquisition. In our European reportable segment, the acquisition added $9 million in net sales and less than $1 million of operating profit (before integration costs) that impacted the comparability of our reported results for the year-to-date period ended October 1, 2016.

Integration costs

We have incurred integration costs related to the integration of the 2015 acquisitions of Bisco Misr and Mass Foods, the 2015 entry into a joint venture with Tolaram Africa, and the 2012 acquisition of Pringles (integration completed in 2015) as we move these businesses into the Kellogg business model. We recorded pre-tax integration costs that were approximately $2 million and $3 million for the quarter and year-to-date periods ended October 1, 2016, respectively. We also recorded integration costs of $8 million and $22 million for the quarter and year-to-date periods ended October 3, 2015, respectively.

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Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts

We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans are recognized in the year they occur. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur. During the quarter and year-to-date periods ended October 1, 2016, we recognized a pre-tax mark-to-market charge of $28 million related to the remeasurement of a U.S. pension plan as a result of current year distributions in excess of service and interest costs. The amount of the remeasurement loss recognized during the quarter was due to an unfavorable change in the discount rate relative to prior year.

We also recorded a pre-tax mark-to-market charge of $3 million and $7 million for the quarter and year-to-date periods ended October 1, 2016, respectively. We also recorded a pre-tax mark-to-market charge of $27 million and $59 million for the quarter and year-to-date periods ended October 3, 2015, respectively.

Other costs impacting comparability

During the quarter ended April 2, 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031. During that same quarter, in connection with the debt redemption, we incurred $153 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees related to the tender offer. Refer to Note 7 within the Notes to Consolidated Financial Statements for further information.

During the quarter ended July 4, 2015, a series of previously executed agreements between Kellogg's and a third party variable interest entity (VIE) were terminated resulting in our determination that we were no longer the primary beneficiary of the VIE. Accordingly, we deconsolidated the financial statements of the VIE as of the end of the quarter. As a result of the agreement terminations and related settlements, we recognized a gain of $6 million in Other income (expense), net during the quarter. This gain, in combination with a related $25 million charge that was recorded during the quarter ended April 4, 2015, resulted in a net loss of $19 million in Other income (expense), net for the year-to-date period ended July 4, 2015.

In connection with the deconsolidation that occurred during the quarter, we derecognized all assets and liabilities of the VIE, including an allocation of a portion of goodwill from the U.S. Snacks operating segment, resulting in a $67 million non-cash gain, which was recorded within operating profit. Refer to Note 6 within the Notes to Consolidated Financial Statements for further information.

Venezuela remeasurement

During 2015 we experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the DIPRO (formerly CENCOEX) exchange. Due to this reduced availability of U.S. dollars and upon review of U.S. dollar cash needs in our Venezuela operations as of the quarter ended July 4, 2015, we concluded that we were no longer able to obtain sufficient U.S. dollars on a timely basis through the DIPRO exchange resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the DICOM (formerly SIMADI) rate. In connection with the change in rates, we evaluated the carrying value of our non-monetary assets for impairment and lower of cost or market adjustments. As a result of moving from the CENCOEX official rate to the SIMADI rate, we recorded pre-tax charges totaling $152 million in the quarter ended July 4, 2015, including $112 million in the Latin America operating segment and $40 million in the Corporate operating segment. Of the total charges, $100 million was recorded in COGS, $3 million was recorded in SGA, and $49 million was recorded in Other income (expense), net. These charges consisted of $47 million related to the remeasurement of net monetary assets denominated in Venezuelan bolivar at the SIMADI exchange rate (recorded in Other income (expense), net), $56 million related to reducing inventory to the lower of cost or market (recorded in COGS) and $49 million related to the impairment of long-lived assets in Venezuela (recorded primarily in COGS).

We have evaluated all of the facts and circumstances surrounding our Venezuelan business and determined that as of October 1, 2016 the DICOM rate continues to be the appropriate rate to use for remeasuring our Venezuelan subsidiary’s financial statements.

Following the change to the SIMADI rate as of July 4, 2015, certain non-monetary assets related to our Venezuelan subsidiary continued to be remeasured at historical exchange rates. As these assets were utilized by our Venezuelan subsidiary during the second half of 2015 and first quarter of 2016 they were recognized in the income statement at historical exchange rates resulting in an unfavorable impact. We experienced an unfavorable pre-tax impact of approximately $4 million in the year-to-date period ended October 1, 2016 and $13 million during the

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quarter and year-to-date periods ended October 3, 2015 related to the utilization of these remaining non-monetary assets.

Additionally, with the introduction of the new DICOM floating rate in February 2016 we experienced an unfavorable pre-tax impact of approximately $7 million in the year-to-date period ended October 1, 2016 related to the utilization of non-monetary assets. These non-monetary assets were recognized in the income statement at historical exchange rates and primarily impacted COGS.

  

Foreign currency translation and the impact of Venezuela

We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period.

As a result of our decision to change the exchange rate that we use to remeasure our Venezuela subsidiary from DIPRO (formerly CENCOEX) to the DICOM (formerly SIMADI) exchange rate beginning mid-2015, the methodology we use to calculate the impact of foreign currency translation, as described above, results in certain key performance metrics that are difficult to interpret when Venezuela is included in the financial results. The impact of this change in Venezuela exchange rates on year-over-year performance metrics is anticipated to be most significant for the four quarters ended July 2, 2016. To provide additional visibility to our business performance, we have also included key performance metrics excluding our Venezuela business. We believe the use of our standard currency-neutral methodology in combination with the additional visibility provided by excluding Venezuela from our key performance metrics provides important information to more fully understand currency-neutral operating results during this four-quarter transition.

Financial results

For the quarter ended October 1, 2016, our reported net sales declined by 2.2% due to the translational impact of foreign currency and lower volume as a result of trade-inventory reductions in U.S. cereal and toaster pastries, softness in U.K. cereal, and the portfolio transitions in our U.S. Frozen and Kashi businesses. These declines were partially offset by growth in several businesses including U.S. Snacks, U.S. Specialty, Asia-Pacific and Latin America. Currency-neutral comparable net sales were down 1.0% after eliminating the impact of foreign currency, and down 1.6% excluding the impact of Venezuela.

Reported operating profit increased by 22.9%, primarily the result of reduced restructuring charges, expanded margins across all regions resulting from Project K and ZBB savings. Currency-neutral comparable operating profit increased by 6.8% after eliminating the impact of lower restructuring charges, and increased by 5.0% after excluding the favorable impact of Venezuela.

Reported operating margin for the quarter was favorable 260 basis points due to the favorable impact to brand-building investment from ZBB efficiencies, savings realized from Project K and ZBB, and lower restructuring costs, integration costs, and Venezuela remeasurement. Currency-neutral comparable operating margin was favorable 110 basis points after excluding the year-over-year impact of restructuring, integration costs, Venezuela remeasurement, and foreign currency.

Reported diluted EPS of $.82 for the quarter was up 41.4% compared to the prior year of $.58. Reported diluted EPS for the quarter was impacted favorably by lower restructuring charges, higher profit margins and a lower effective tax rate. Currency-neutral comparable diluted EPS of $1.00 increased by 17.6% compared to prior year of $.85, ahead of our expectations, due to higher profit margins driven by ZBB savings and a lower effective tax rate mainly due to the windfall tax benefit realized from stock option exercise activity in the quarter.

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Reconciliation of certain non-GAAP Financial Measures

	Quarter ended						Year-to-date period ended
Consolidated results (dollars in millions, except per share data)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015
Reported net income attributable to Kellogg Company	$	292		$	205		$	747		$	655
Mark-to-market (pre-tax)	(31		)	(27		)	(35		)	(59		)
Project K and cost reduction activities (pre-tax)	(40		)	(85		)	(164		)	(243		)
Other costs impacting comparability (pre-tax)	—			—			(153		)	48
Integration costs (pre-tax)	(1		)	(7		)	(1		)	(19		)
Venezuela remeasurement (pre-tax)	—			(13		)	(11		)	(165		)
Income tax benefit applicable to adjustments, net*	24			36			109			115
Comparable net income attributable to Kellogg Company	$	340		$	301		$	1,002		$	978
Foreign currency impact	(16		)				(179		)
Currency-neutral comparable net income attributable to Kellogg Company	$	356					$	1,181
Reported diluted EPS	$	0.82		$	0.58		$	2.11		$	1.84
Mark-to-market (pre-tax)	(0.09		)	(0.08		)	(0.10		)	(0.17		)
Project K and cost reduction activities (pre-tax)	(0.11		)	(0.24		)	(0.46		)	(0.68		)
Other costs impacting comparability (pre-tax)	—			—			(0.43		)	0.13
Integration costs (pre-tax)	(0.01		)	(0.01		)	(0.01		)	(0.05		)
Venezuela remeasurement (pre-tax)	—			(0.04		)	(0.03		)	(0.46		)
Income tax benefit applicable to adjustments, net*	0.07			0.10			0.31			0.32
Comparable diluted EPS	$	0.96		$	0.85		$	2.83		$	2.75
Foreign currency impact	(0.04		)				(0.50		)
Currency-neutral comparable diluted EPS	$	1.00					$	3.33
Currency-neutral comparable diluted EPS growth	17.6		%	2.1		%	21.1		%	(0.3		)%

* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

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Net sales and operating profit

The following tables provide an analysis of net sales and operating profit performance for the third quarter of 2016 versus 2015:

 

Quarter ended October 1, 2016
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported net sales		$	733			$	796			$	284			$	402			$	594			$	197			$	248			$	—			$	3,254
Project K and cost reduction activities		—				—				—				—				—				—				—				—				—
Integration costs and acquisitions/divestitures		—				—				—				1				6				—				—				—				7
Differences in shipping days		—				—				—				—				—				—				—				—				—
Comparable net sales		$	733			$	796			$	284			$	401			$	588			$	197			$	248			$	—			$	3,247
Comparable net sales excluding Venezuela																						$	190											$	3,240
Foreign currency impact		—				—				—				1				(33		)		(29		)		12				—				(49		)
Currency-neutral comparable net sales		$	733			$	796			$	284			$	400			$	621			$	226			$	236			$	—			$	3,296
Currency-neutral comparable net sales excluding Venezuela																						$	200											$	3,270
Quarter ended October 3, 2015
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported net sales		$	762			$	795			$	281			$	426			$	628			$	202			$	235			$	—			$	3,329
Project K and cost reduction activities		—				—				—				—				(2		)		—				—				—				(2		)
Integration costs and acquisitions/divestitures		—				—				—				—				—				—				2				—				2
Differences in shipping days		—				—				—				—				—				—				—				—				—
Comparable net sales		$	762			$	795			$	281			$	426			$	630			$	202			$	233			$	—			$	3,329
Comparable net sales excluding Venezuela																						$	198											$	3,325
% change - 2016 vs. 2015:
Reported growth		(3.8		)%		0.1		%		1.1		%		(5.7		)%		(5.4		)%		(2.2		)%		5.4		%		—		%		(2.2		)%
Project K and cost reduction activities		—		%		—		%		—		%		—		%		0.3		%		—		%		—		%		—		%		0.1		%
Integration costs and acquisitions/divestitures		—		%		—		%		—		%		0.2		%		0.9		%		—		%		(0.7		)%		—		%		0.2		%
Differences in shipping days		—		%		—		%		—		%		—		%		—		%		—		%		—		%		—		%		—		%
Comparable growth		(3.8		)%		0.1		%		1.1		%		(5.9		)%		(6.6		)%		(2.2		)%		6.1		%		—		%		(2.5		)%
Comparable growth excluding Venezuela																						(3.8		)%										(2.6		)%
Foreign currency impact		—		%		—		%		—		%		0.3		%		(5.2		)%		(14.2		)%		5.1		%		—		%		(1.5		)%
Currency-neutral comparable growth		(3.8		)%		0.1		%		1.1		%		(6.2		)%		(1.4		)%		12.0		%		1.0		%		—		%		(1.0		)%
Currency-neutral comparable growth excluding Venezuela																						1.8		%										(1.6		)%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

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Quarter ended October 1, 2016
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported operating profit		$	144			$	78			$	68			$	43			$	78			$	27			$	21			$	(49	)		$	410
Mark-to-market		—				—				—				—				—				—				—				(31		)		(31		)
Project K and cost reduction activities		(4		)		(8		)		(1		)		(7		)		(6		)		(2		)		(2		)		(10		)		(40		)
Other costs impacting comparability		—				—				—				—				—				—				—				—				—
Integration costs and acquisitions/divestitures		—				—				—				—				—				1				—				(2		)		(1		)
Differences in shipping days		—				—				—				—				—				—				—				—				—
Venezuela remeasurement		—				—				—				—				—				—				—				—				—
Comparable operating profit		$	148			$	86			$	69			$	50			$	84			$	28			$	23			$	(6	)		$	482
Comparable operating profit excluding Venezuela																						$	25							$	(6	)		$	479
Foreign currency impact		—				—				—				1				(8		)		(9		)		2				(3		)		(17		)
Currency-neutral comparable operating profit		$	148			$	86			$	69			$	49			$	92			$	37			$	21			$	(3	)		$	499
Currency-neutral comparable operating profit excluding Venezuela																						$	28							$	(4	)		$	489
Quarter ended October 3, 2015
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported operating profit		$	110			$	62			$	63			$	44			$	73			$	7			$	14			$	(39	)		$	334
Mark-to-market		—				—				—				—				—				—				—				(27		)		(27		)
Project K and cost reduction activities		(30		)		(15		)		(1		)		(11		)		(12		)		(1		)		(2		)		(13		)		(85		)
Other costs impacting comparability		—				—				—				—				—				—				—				—				—
Integration costs and acquisitions/divestitures		—				—				—				—				—				(2		)		(4		)		(1		)		(7		)
Differences in shipping days		—				—				—				—				—				—				—				—				—
Venezuela remeasurement		—				—				—				—				—				(13		)		—				—				(13		)
Comparable operating profit		$	140			$	77			$	64			$	55			$	85			$	23			$	20			$	2			$	466
Comparable operating profit excluding Venezuela																						$	22							$	2			$	465
% change - 2016 vs. 2015:
Reported growth		31.8		%		26.7		%		7.8		%		(5.2		)%		8.8		%		255.8		%		59.2		%		(28.6		)%		22.9		%
Mark-to-market		—		%		—		%		—		%		—		%		—		%		—		%		—		%		45.0		%		0.9		%
Project K and cost reduction activities		25.8		%		14.5		%		0.3		%		7.3		%		9.2		%		(13.5		)%		11.3		%		420.8		%		14.4		%
Other costs impacting comparability		—		%		—		%		—		%		—		%		—		%		—		%		—		%		—		%		—		%
Integration costs and acquisitions/divestitures		—		%		—		%		—		%		(0.1		)%		0.4		%		34.3		%		29.1		%		(124.2		)%		1.2		%
Differences in shipping days		—		%		—		%		—		%		—		%		—		%		—		%		—		%		—		%		—		%
Venezuela remeasurement		—		%		—		%		—		%		—		%		—		%		206.6		%		—		%		—		%		3.1		%
Comparable growth		6.0		%		12.2		%		7.5		%		(12.4		)%		(0.8		)%		28.4		%		18.8		%		(370.2		)%		3.3		%
Comparable growth excluding Venezuela																						20.8		%						(360.3		)%		2.9		%
Foreign currency impact		—		%		—		%		—		%		0.4		%		(9.0		)%		(40.4		)%		12.4		%		(96.7		)%		(3.5		)%
Currency-neutral comparable growth		6.0		%		12.2		%		7.5		%		(12.8		)%		8.2		%		68.8		%		6.4		%		(273.5		)%		6.8		%
Currency-neutral comparable growth excluding Venezuela																						30.8		%						(262.3		)%		5.0		%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

U.S. Morning Foods

As Reported and Currency-neutral comparable net sales declined 3.8% as a result of decreased volume and unfavorable pricing/mix. This segment consists of cereal, toaster pastries, and health and wellness bars.

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As a result of a slight category decline and a sharp reduction in trade inventories, net sales decreased. Despite lower sales, we gained 20 basis points of share in the quarter led by our six core brands due to focused investment activity.

We have many of the highest velocity 2016 innovations, maintaining innovation share leadership, led by Special K

Nourish, Smorz, and our Finding Dory licensed cereal. In addition, we executed well during the key Back-to-School period, which coincided with our Olympics activation. This year’s Olympics program generated over 1.8 billion impressions at 30% less cost than our prior summer Olympics programs – this was driven by a greater focus on social activation and it demonstrates our new marketing model at work.

Toaster pastries grew share 50 basis points during the quarter. However, net sales declined for the quarter due to a reduction in trade inventories.

As Reported operating profit increased 31.8% due to Project K savings, brand-building efficiencies resulting from ZBB, and reduced restructuring charges. This was partially offset by unfavorable sales performance. Currency-neutral comparable operating profit increased 6.0%, less than As Reported after eliminating the benefit of reduced restructuring charges.

U.S. Snacks

As Reported and Currency-neutral comparable net sales were approximately flat as a result of increased volume partially offset by unfavorable pricing/mix. This segment consists of crackers, cereal bars, cookies, savory snacks, and fruit-flavored snacks.

Crackers posted net sales growth for the quarter. Our big-three brands (Cheez-it^®, Club^®, and Townhouse^®) in combination continued to post good consumption growth and improved share.

     

The Wholesome Snacks business posted a decline in net sales primarily due to certain lines of Special K^® bars and cracker-chips. However, Rice Krispies Treats^® posted sales gains and grew share during the quarter.

The cookies business posted a sales decline for the quarter as a result of decreased brand-building activity compared to the prior year.

The savory snacks business posted a sales decline. However, core products and our single-serve offerings reported consumption growth. During the remainder of the year, we expect a reduced impact from the elimination of certain non-core products.

Single-serve, a key element of our growth strategy, performed well with double-digit consumption gains in cookie/cracker caddy packs and in Pringles^® snack stacks.

As Reported operating profit improved 26.7% due to Project K and brand-building efficiencies resulting from ZBB as well as lower restructuring charges in the current year. Currency-neutral comparable operating profit increased 12.2% after excluding the impact of restructuring charges.

U.S. Specialty

As Reported and Currency-neutral comparable net sales improved 1.1% as a result of improved pricing/mix which was partially offset by lower volume.

Our three core channels, Foodservice, Convenience, and Vending, posted sales growth for the quarter. We held or gained share in most categories during the quarter driven by increased distribution, effective promotions around the Olympics, and strong innovation performance in K-12. This is a critical business for our strategic priority to "Win Where the Shopper Shops".

As Reported operating profit increased 7.8% due to the favorable sales performance and ZBB savings. Currency-neutral comparable operating profit increased 7.5% after excluding the impact of restructuring charges.

North America Other

As Reported net sales declined 5.7% due to decreased volume and unfavorable pricing/mix as each of the businesses in this segment progressed through transitions. Currency-neutral comparable net sales declined 6.2% after excluding the impact of foreign currency.

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The U.S. Frozen business saw a decline in sales in the quarter. Eggo^® posted sales growth for the quarter, with particular success with Disney-licensed products, more than offset by the impact of distribution lost on Morningstar Farms^® as we transitioned to new packaging over the past few quarters. Even as we made these significant changes, the business posted improvement in profit margins, driven by Project K and ZBB.

In Canada, net sales were down, as expected, resulting from volume declines, partially offset by improved pricing/mix. Beginning in the second quarter, we increased prices to help offset higher input costs due to significant transactional foreign exchange pressure.

Kashi posted lower sales in the quarter, as the business continues to go through the transition of its portfolio. Cereal saw flat share in measured channels and 5% growth in the natural channel. Our substantial innovation and renovation efforts are starting to take hold, and we haven't turned on broad-scale consumer communication yet. Wholesome Snacks sales continue to decline as consumption declined as distribution losses have continued prior to renovation and innovation initiatives planned for 2017.

As Reported operating profit declined 5.2% due to unfavorable sales performance partially offset by lower restructuring charges in addition to Project K and ZBB savings realized in the U.S. Frozen and Canada businesses. Currency-neutral comparable operating profit declined 12.8% after excluding the impact of restructuring charges and translational foreign currency.

Europe

As Reported net sales declined 5.4% due to unfavorable foreign currency and unfavorable pricing/mix which was partially offset by a slight increase in volume resulting from an acquisition. Currency-neutral comparable net sales declined 1.4% after excluding the impact of foreign currency and the acquisition.

Currency neutral comparable net sales were off slightly, almost solely due to our cereal business in the U.K. In the rest of Europe, we posted growth in virtually all of our sub-regions: France/Benelux grew high single-digits, Southern Europe and Mediterrannean/Middle East posted low single-digit growth, and Russia recorded a double-digit gain. We are holding or gaining share in over half of our Cereal markets, while sustaining strong Pringles^® momentum.

As Reported operating profit increased 8.8% due to a reduction in restructuring charges as well as incremental Project K savings and brand-building efficiencies. This was partially offset by unfavorable foreign currency impact. Currency-neutral comparable operating profit improved 8.2% after excluding the impact of restructuring charges and foreign currency.

Latin America

As Reported net sales declined 2.2% due to unfavorable foreign currency and a decline in volume. This was partially offset by the favorable impact of pricing/mix, as a result of the inflationary environment in Venezuela. Excluding Venezuela, As Reported net sales declined 3.8% due to unfavorable foreign currency. Currency-neutral comparable net sales increased 12.0%, due to the impact of inflation in Venezuela. Excluding Venezuela, currency-neutral comparable net sales improved 1.8%.

We continue to manage well through a difficult business environment. The economic environment throughout the region, including Venezuela, is challenging. We are working through these challenges, and in the quarter we saw broad-based growth across the region in both cereal and snacks. Excluding Venezuela, cereal category share was flat compared to the prior year, with share gains posted in Brazil, Colombia and Puerto Rico.

As Reported operating profit increased 255.8% due to the year-over-year change in Venezuela remeasurement impact, inflation within Venezuela, the favorable impact of brand-building efficiencies, and our productivity efforts and price realization which are starting to flow through to profit margin. This was partially offset by unfavorable foreign currency impact. Currency-neutral comparable operating profit improved 68.8% after excluding the impact of the Venezuela remeasurement and foreign currency. Excluding Venezuela, currency-neutral comparable operating profit improved 30.8%.

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Asia Pacific

As Reported net sales improved 5.4% due to favorable foreign currency and favorable pricing/mix partially offset by a slight decrease in volume. Currency-neutral comparable net sales increased 1.0%, after excluding the impact of foreign currency.

Our Australia business continued to stabilize, as cereal category share grew slightly versus the same quarter last year as a result of Nutri-Grain renovation, the launch of gluten free products, and improved store execution. Additionally, growth in emerging markets has reduced the region's dependence on Australia, as Sub-Saharan Africa posted double-digit net sales growth for the quarter.

Pringles^® share in the region grew at a double-digit rate during the quarter, including strong performance in Japan, Korea, Thailand, Indonesia and South Africa. Share growth was driven by distribution expansion in emerging markets, and innovation, including the introduction of sweet flavors in Korea and the launch of Pringles^® Tortilla across the region.

As Reported operating profit increased 59.2% due to improved sales performance, lower integration costs, and brand-building efficiencies. Currency-neutral comparable operating profit improved 6.4% after excluding the impact of integration costs and foreign currency.

Corporate

As Reported operating profit declined $10 million due to increased pension costs partially offset by favorable year-over-year mark-to-market adjustments related to commodity and foreign currency contracts. Currency-neutral comparable operating profit declined $5 million after excluding the impact of mark-to-market, restructuring charges, integration costs and foreign currency.

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The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods of 2016 as compared to 2015:

Year-to-date period ended October 1, 2016
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported net sales		$	2,227			$	2,431			$	931			$	1,222			$	1,821			$	593			$	692			$	—			$	9,917
Project K and cost reduction activities		—				—				—				—				—				—				—				—				—
Integration costs and acquisitions/divestitures		—				—				—				2				25				—				—				—				27
Differences in shipping days		—				—				—				—				—				—				—				—				—
Comparable net sales		$	2,227			$	2,431			$	931			$	1,220			$	1,796			$	593			$	692			$	—			$	9,890
Comparable net sales excluding Venezuela																						$	570											$	9,867
Foreign currency impact		—				—				—				(14		)		(80		)		(889		)		(10		)		—				(993		)
Currency-neutral comparable net sales		$	2,227			$	2,431			$	931			$	1,234			$	1,876			$	1,482			$	702			$	—			$	10,883
Currency-neutral comparable net sales excluding Venezuela																						$	630											$	10,031
Year-to-date period ended October 3, 2015
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported net sales		$	2,280			$	2,484			$	912			$	1,298			$	1,885			$	825			$	699			$	—			$	10,383
Project K and cost reduction activities		—				—				—				(2		)		(2		)		—				—				—				(4		)
Integration costs and acquisitions/divestitures		—				—				—				—				—				—				10				—				10
Differences in shipping days		—				—				—				—				(3		)		—				—				—				(3		)
Comparable net sales		$	2,280			$	2,484			$	912			$	1,300			$	1,890			$	825			$	689			$	—			$	10,380
Comparable net sales excluding Venezuela																						$	635											$	10,190
% change - 2016 vs. 2015:
Reported growth		(2.3		)%		(2.1		)%		2.1		%		(5.8		)%		(3.4		)%		(28.1		)%		(1.1		)%		—		%		(4.5		)%
Project K and cost reduction activities		—		%		—		%		—		%		0.2		%		0.1		%		—		%		—		%		—		%		—		%
Integration costs and acquisitions/divestitures		—		%		—		%		—		%		0.2		%		1.3		%		—		%		(1.4		)%		—		%		0.2		%
Differences in shipping days		—		%		—		%		—		%		—		%		0.2		%		—		%		—		%		—		%		—		%
Comparable growth		(2.3		)%		(2.1		)%		2.1		%		(6.2		)%		(5.0		)%		(28.1		)%		0.3		%		—		%		(4.7		)%
Comparable growth excluding Venezuela																						(10.1		)%										(3.2		)%
Foreign currency impact		—		%		—		%		—		%		(1.1		)%		(4.2		)%		(107.9		)%		(1.5		)%		—		%		(9.5		)%
Currency-neutral comparable growth		(2.3		)%		(2.1		)%		2.1		%		(5.1		)%		(0.8		)%		79.8		%		1.8		%		—		%		4.8		%
Currency-neutral comparable growth excluding Venezuela																						(0.5		)%										(1.6		)%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

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Year-to-date period ended October 1, 2016
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported operating profit		$	457			$	230			$	214			$	135			$	216			$	70			$	50			$	(75	)		$	1,297
Mark-to-market		—				—				—				—				—				—				—				(35		)		(35		)
Project K and cost reduction activities		(13		)		(62		)		(4		)		(20		)		(34		)		(6		)		(6		)		(19		)		(164		)
Other costs impacting comparability		—				—				—				—				—				—				—				—				—
Integration costs and acquisitions/divestitures		—				—				—				—				1				1				—				(2		)		—
Differences in shipping days		—				—				—				—				—				—				—				—				—
Venezuela remeasurement		—				—				—				—				—				(13		)		—				—				(13		)
Comparable operating profit		$	470			$	292			$	218			$	155			$	249			$	88			$	56			$	(19	)		$	1,509
Comparable operating profit excluding Venezuela																						$	80							$	(19	)		$	1,501
Foreign currency impact		—				—				—				(2		)		(17		)		(246		)		2				3				(260		)
Currency-neutral comparable operating profit		$	470			$	292			$	218			$	157			$	266			$	334			$	54			$	(22	)		$	1,769
Currency-neutral comparable operating profit excluding Venezuela																						$	87							$	(13	)		$	1,531
Year-to-date period ended October 3, 2015
(millions)		U.S. Morning Foods				U.S. Snacks				U.S. Specialty				North America Other				Europe				Latin America				Asia Pacific				Corporate				Kellogg Consolidated
Reported operating profit		$	368			$	302			$	200			$	140			$	191			$	2			$	36			$	(109	)		$	1,130
Mark-to-market		—				—				—				—				—				—				—				(59		)		(59		)
Project K and cost reduction activities		(51		)		(34		)		(3		)		(40		)		(56		)		(2		)		(10		)		(47		)		(243		)
Other costs impacting comparability		—				67				—				—				—				—				—				—				67
Integration costs and acquisitions/divestitures		—				—				—				—				(8		)		(2		)		(6		)		(2		)		(18		)
Differences in shipping days		—				—				—				—				—				—				—				—				—
Venezuela remeasurement		—				—				—				—				—				(115		)		—				(1		)		(116		)
Comparable operating profit		$	419			$	269			$	203			$	180			$	255			$	121			$	52			$	—			$	1,499
Comparable operating profit excluding Venezuela																						$	90							$	5			$	1,473
% change - 2016 vs. 2015:
Reported growth		24.3		%		(23.7		)%		6.9		%		(4.1		)%		13.6		%		2,892.2		%		40.0		%		31.4		%		14.8		%
Mark-to-market		—		%		—		%		—		%		—		%		—		%		—		%		—		%		11.3		%		2.7		%
Project K and cost reduction activities		12.1		%		(10.6		)%		(0.7		)%		10.3		%		12.2		%		1,004.8		%		18.4		%		848.9		%		7.6		%
Other costs impacting comparability		—		%		(21.5		)%		—		%		—		%		—		%		—		%		—		%		—		%		(5.1		)%
Integration costs and acquisitions/divestitures		—		%		—		%		—		%		(0.1		)%		3.8		%		433.7		%		12.8		%		N/M				1.4		%
Differences in shipping days		—		%		—		%		—		%		—		%		0.2		%		—		%		—		%		—		%		—		%
Venezuela remeasurement		—		%		—		%		—		%		—		%		—		%		1,480.3		%		—		%		N/M				7.5		%
Comparable growth		12.2		%		8.4		%		7.6		%		(14.3		)%		(2.6		)%		(26.6		)%		8.8		%		(2,069.2		)%		0.7		%
Comparable growth excluding Venezuela																						(11.0		)%						(434.7		)%		1.9		%
Foreign currency impact		—		%		—		%		—		%		(1.3		)%		(6.8		)%		(205.4		)%		4.3		%		473.4		%		(17.2		)%
Currency-neutral comparable growth		12.2		%		8.4		%		7.6		%		(13.0		)%		4.2		%		178.8		%		4.5		%		(2,542.6		)%		17.9		%
Currency-neutral comparable growth excluding Venezuela																						(2.5		)%						(337.9		)%		3.9		%

N/M = Not meaningful

U.S. Morning Foods

As Reported and Currency-neutral comparable net sales declined 2.3% as a result of unfavorable pricing/mix and a reduction in volume. This segment consists of cereal, toaster pastries, health and wellness bars, and beverages.

The cereal category is down slightly as were several of our non-core brands resulting in overall net sales decline for our cereal business. However, our six core cereals in combination gained share.

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Toaster pastries posted an increase in net sales and share gains, with good contribution from the new Orange Crush^® and A&W^® root beer flavors.

As Reported operating profit increased 24.3% due to Project K savings, brand-building efficiencies resulting from ZBB, net deflation of input costs and reduced restructuring charges. This was partially offset by the unfavorable sales performance. Currency-neutral comparable operating profit increased 12.2%, after eliminating the benefit of reduced restructuring charges.

U.S. Snacks

As Reported and Currency-neutral comparable net sales declined 2.1% as a result of decreased volume and unfavorable pricing/mix. This segment consists of crackers, cereal bars, cookies, savory snacks, and fruit-flavored snacks.

The net sales decline was primarily due to the reorganization of our sales force and the continued decline of the bars business.

We reorganized the U.S. Snacks DSD sales force to create more clearly defined roles for selling, merchandising, and support. We did see some disruption in our sales and display activity as we transitioned employees to new roles, zones, and customer responsibilities. The impact was most visible in Cookies and Crackers during the first half of the year. The impact is behind us now and we’ve already started to see signs of improved effectiveness.

Crackers posted an increase in sales. Our big-three brands (Cheez-it^®, Club^®, and Townhouse^®) in combination posted good consumption growth and share gains, led by accelerated base consumption. We have continued to invest in these brands, both in brand-building and innovations, and it continues to drive results.

     

The bars business posted a decline in net sales as Special K^® bars continued to decline as the change in weight-management trends away from counting calories. We have plans in 2017 to reposition the brand with Snacks. Rice Krispies Treats^® grew share during the year-to-date period.

The cookies business posted a sales decline. This category was the most affected by our DSD sales force reorganization and is impacted by a tail of smaller and regional brands. Advertising behind the Keebler^® brand has returned after several years without advertising support. With these investments, we anticipate improved performance in future periods.

The savory snacks business posted a slight decline as a result of lower volume. During the fourth quarter, we expect a reduced impact from the elimination of certain non-core products.

As Reported operating profit declined 23.7% due to the prior-year benefit of the VIE deconsolidation, increased restructuring charges in the current year, and the unfavorable sales performance. This was partially offset by net deflation of input costs, Project K savings, and brand-building efficiencies resulting from ZBB. Currency-neutral comparable operating profit increased 8.4% after excluding the impact of the prior-year VIE deconsolidation and the impact of restructuring charges.

U.S. Specialty

As Reported and Currency-neutral comparable net sales improved 2.1% as a result of improved pricing/mix which was partially offset by reduced volume.

Sales growth was posted by each of our three core channels: Foodservice, Convenience, and Vending. In Foodservice, we sustained growth in the categories in which we have leading shares. In Convenience, we gained share in cereal, salty snacks and crackers. Share gains were driven by increased distribution, effective promotions, and strong innovation.

As Reported operating profit increased 6.9% due to the favorable sales performance and ZBB savings. Currency-neutral comparable operating profit increased 7.6% after excluding the minor impact of restructuring charges.

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North America Other

As Reported net sales declined 5.8% due to decreased volume and the unfavorable impact of foreign currency which was partially offset by favorable pricing/mix. Currency-neutral comparable net sales declined 5.1% after excluding the impact of foreign currency.

The U.S. Frozen business saw a decline in sales. During the first half of the year we reshaped the portfolio for Eggo^® and transitioned packaging for Morningstar Farms^®. Despite the impact of these significant changes, the business posted improvement in profit margins, driven by Project K and ZBB.

In Canada, net sales were down as a result of volume declines and unfavorable foreign currency impact, partially offset by improved pricing/mix. Beginning in the second quarter, we increased prices to help offset higher input costs due to significant foreign exchange pressure. These pricing actions have resulted in lower volume. We continue to see share gains in our renovated and repositioned Special K^®.

Kashi posted lower sales during the period, as the business continues to go through the transition of its portfolio. We have exited several non-core product lines, including frozen pizza, hot cereal, and trail mix. While these exits negatively impacted sales, they provide tighter focus and better economics going forward. We are investing heavily in our food. During the period, we completed an overhaul of our portfolio, making every product Non-GMO Project Verified. We also launched several new products. Finally, we have redesigned our packaging across our Kashi portfolio. Our substantial innovation and renovation efforts are starting to take hold, and we haven't turned on broad-scale consumer communication yet.

As Reported operating profit decreased 4.1% due to the sales decline, unfavorable foreign currency impact, and investments in food and packaging in the Kashi business. This was partially offset by a reduction in restructuring charges in addition to Project K and brand-building efficiencies resulting from ZBB realized in the U.S. Frozen and Canada businesses. Currency-neutral comparable operating profit declined 13.0% after excluding the impact of restructuring charges and foreign currency.

Europe

As Reported net sales declined 3.4% due to unfavorable foreign currency and pricing/mix offset by a slight increase in volume resulting from an acquisition. Currency-neutral comparable net sales declined 0.8% after excluding the impact of foreign currency and the acquisition.

The Pringles^® business posted net sales growth due to sustained momentum in key markets and expansion of Pringles^® Tortilla into new markets. The business also benefited from an effective soccer-themed promotion. The wholesome snacks business returned to growth in most of Europe, driven by the introduction of on-trend food and packaging on Special K^® bars and new Kellogg-branded Fruit and Nut bars.

Cereal sales remained soft in most markets in the region. Over the balance of the year we plan to invest in our food. Specifically, we have new innovation launches including Ancient Legends^® and Special K^® Nourish, which is similar to the product that recently launched in the United States. In the U.K., the category remains very soft in a difficult economic and retailer environment. We lost share as we work to reposition and renovate Special K^®.

As Reported operating profit increased 13.6% due to a reduction in restructuring charges and integration costs, as well as incremental Project K savings and brand-building efficiencies. This was partially offset by unfavorable foreign currency impact and net inflation of input costs. Currency-neutral comparable operating profit improved 4.2% after excluding the impact of restructuring charges, integration costs and foreign currency.

Latin America

As Reported net sales declined 28.1% due to unfavorable foreign currency and a decline in volume. This was partially offset by the favorable impact of pricing/mix, primarily due to Venezuela. Excluding Venezuela, As Reported net sales declined 10.1% due to unfavorable foreign currency. Currency-neutral comparable net sales increased 79.8%, due to the impact of Venezuela. Excluding Venezuela, currency-neutral comparable net sales declined 0.5%.

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The reduction in sales is primarily due to the impact of the recessionary environment in the region. However, we continue to see good results in Mexico, our largest business in the region, due to strong innovation and commercial activities. Innovations like Special K Protein cereal are helping to stabilize that key brand. We have realized price across the region, particularly as we are impacted by adverse transactional foreign currency.

As Reported operating profit increased 2,892.2% due to the year-over-year change in Venezuela remeasurement impact, the favorable impact of pricing actions in Venezuela, and the favorable impact of brand-building efficiencies. This was partially offset by unfavorable foreign currency impact. Currency-neutral comparable operating profit improved 178.8% after excluding the impact of the Venezuela remeasurement and foreign currency. Excluding Venezuela, currency-neutral comparable operating profit declined 2.5%.

Asia Pacific

As Reported net sales declined 1.1% due to unfavorable foreign currency, disposition of a small business, and unfavorable pricing/mix. This was partially offset by improved volume resulting in a strong increase in sales in Asia, Sub-Saharan Africa and Pringles^®. Currency-neutral comparable net sales increased 1.8%, after excluding the impact of foreign currency and the disposition of a small business.

Our Australia business continued to stabilize, as we continue to execute a cereal recovery plan similar to what we’ve done for cereal in the U.S. and Canada. The business is focusing media behind our priority brands, executing big “tent-pole” promotions during key shopper weeks, and launching consumer-driven innovation and renovation. Our largest cereal brand in Australia, Nutri-Grain^®, has recently returned to growth as a result of these efforts.

In Asia, modest growth was led by Southeast Asia and Korea. The Sub-Saharan Africa business continued to perform well. Pringles grew at a mid-single-digit rate on the strength of effective promotions as well as renovations like the re-stage of sweet flavors in Korea and the roll-out of Tortilla in Australia and South Africa.

As Reported operating profit increased 40.0% due to improved sales performance, Project K savings, reduced restructuring charges, reduced integration costs, and brand-building efficiencies. Currency-neutral comparable operating profit improved 4.5% after excluding the impact of restructuring charges, integration costs and foreign currency.

Corporate

As Reported operating profit improved $34 million due to favorable year-over-year impact of mark-to-market charges for certain commodity and foreign exchange contracts, and lower restructuring charges. This was partially offset by a current year mark-to-market charge related to the remeasurement of a U.S. pension plan. Currency-neutral comparable operating profit decreased $22 million after excluding the impact of mark-to-market, restructuring charges, and foreign currency.

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Margin performance

Margin performance for the quarter and year-to-date periods of 2016 versus 2015 is as follows:

Quarter	2016		2015		Change vs. prior year (pts.)
Reported gross margin (a)	38.9	%	37.0	%	1.9
Mark-to-market (COGS)	(0.1	)	(0.8	)	0.7
Project K and cost reduction activities (COGS)	(0.4	)	(1.7	)	1.3
Other costs impacting comparability (COGS)	—		—		—
Integration costs and acquisitions/divestitures (COGS)	—		(0.2	)	0.2
Venezuela remeasurement (COGS)	—		(0.3	)	0.3
Comparable gross margin	39.4	%	40.0	%	(0.6	)
Comparable gross margin excluding Venezuela	39.4	%	40.0	%	(0.6	)
Foreign currency impact	—				—
Currency-neutral comparable gross margin	39.4	%			(0.6	)
Currency-neutral comparable gross margin excluding Venezuela	39.4	%			(0.6	)
Reported SGA%	(26.3	)%	(27.0	)%	0.7
Mark-to-market (SGA)	(0.8	)	—		(0.8	)
Project K and cost reduction activities (SGA)	(0.9	)	(0.9	)	—
Other costs impacting comparability (SGA)	—		—		—
Integration costs and acquisitions/divestitures (SGA)	—		—		—
Venezuela remeasurement (SGA)	—		(0.1	)	0.1
Comparable SGA%	(24.6	)%	(26.0	)%	1.4
Comparable SGA% excluding Venezuela	(24.6	)%	(26.0	)%	1.4
Foreign currency impact	(0.3	)			(0.3	)
Currency-neutral comparable SGA%	(24.3	)%			1.7
Currency-neutral comparable SGA% excluding Venezuela	(24.5	)%			1.5
Reported operating margin	12.6	%	10.0	%	2.6
Mark-to-market	(0.9	)	(0.8	)	(0.1	)
Project K and cost reduction activities	(1.3	)	(2.6	)	1.3
Other costs impacting comparability	—		—		—
Integration costs and acquisitions/divestitures	—		(0.2	)	0.2
Venezuela remeasurement	—		(0.4	)	0.4
Comparable operating margin	14.8	%	14.0	%	0.8
Comparable operating margin excluding Venezuela	14.8	%	14.0	%	0.8
Foreign currency impact	(0.3	)			(0.3	)
Currency-neutral comparable operating margin	15.1	%			1.1
Currency-neutral comparable operating margin excluding Venezuela	14.9	%			0.9

Reported gross margin for the quarter was favorable 190 basis points due to Project K and ZBB savings initiatives, as well as the year-over-year benefit of mark-to-market, restructuring, integration costs, and Venezuela remeasurement. This was partially offset by the impact of investments we are making in our food and packaging at Kashi, unfavorable transactional foreign currency impact, adverse mix in Snacks resulting from softness in our Wholesome Snacks business, and a deflationary retailer environment in Europe. Currency-neutral comparable gross margin was down 60 basis points after eliminating the impact of mark-to-market, restructuring, integration costs, Venezuela remeasurement, and foreign currency.

Reported SGA% for the quarter was favorable 70 basis points due to overhead savings realized from Project K and ZBB, the impact to brand-building investment from ZBB efficiencies, and Venezuela remeasurement. This was partially offset by mark-to-market charges related to the remeasurement of a U.S. pension plan. Currency-neutral comparable SGA% was favorable 170 basis points after excluding the impact of mark-to-market, Venezuela remeasurement, and foreign currency.

Reported operating margin for the quarter was favorable 260 basis points due to the favorable impact to brand-building investment from ZBB efficiencies, and savings realized from Project K and ZBB, restructuring costs, integration costs, and Venezuela remeasurement. This was partially offset by the impact of investments in our food

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and packaging, mark-to-market charges related to the remeasurement of a U.S. pension plan, and unfavorable transactional foreign currency impact. Currency-neutral comparable operating margin was favorable 110 basis points after excluding the year-over-year impact of restructuring, integration costs, Venezuela remeasurement, and foreign currency.

Year-to-date	2016		2015		Change vs. prior year (pts.)
Reported gross margin (a)	38.1	%	35.8	%	2.3
Mark-to-market (COGS)	(0.1	)	(0.6	)	0.5
Project K and cost reduction activities (COGS)	(0.7	)	(1.5	)	0.8
Other costs impacting comparability (COGS)	—		—		—
Integration costs and acquisitions/divestitures (COGS)	—		(0.2	)	0.2
Differences in shipping days (COGS)	—		—		—
Venezuela remeasurement (COGS)	(0.1	)	(1.0	)	0.9
Comparable gross margin	39.0	%	39.1	%	(0.1	)
Comparable gross margin excluding Venezuela	39.0	%	39.4	%	(0.4	)
Foreign currency impact	0.3				0.3
Currency-neutral comparable gross margin	38.7	%			(0.4	)
Currency-neutral comparable gross margin excluding Venezuela	39.0	%			(0.4	)
Reported SGA%	(25.0	)%	(24.9	)%	(0.1	)
Mark-to-market (SGA)	(0.2	)	—		(0.2	)
Project K and cost reduction activities (SGA)	(1.0	)	(0.8	)	(0.2	)
Other costs impacting comparability (SGA)	—		0.6		(0.6	)
Integration costs and acquisitions/divestitures (SGA)	—		—		—
Differences in shipping days (SGA)	—		—		—
Venezuela remeasurement (SGA)	(0.1	)	(0.1	)	—
Comparable SGA%	(23.7	)%	(24.6	)%	0.9
Comparable SGA% excluding Venezuela	(23.8	)%	(24.9	)%	1.1
Foreign currency impact	(1.3	)			(1.3	)
Currency-neutral comparable SGA%	(22.4	)%			2.2
Currency-neutral comparable SGA% excluding Venezuela	(23.7	)%			1.2
Reported operating margin	13.1	%	10.9	%	2.2
Mark-to-market	(0.3	)	(0.6	)	0.3
Project K and cost reduction activities	(1.7	)	(2.3	)	0.6
Other costs impacting comparability	—		0.6		(0.6	)
Integration costs and acquisitions/divestitures	—		(0.2	)	0.2
Differences in shipping days	—		—		—
Venezuela remeasurement	(0.2	)	(1.1	)	0.9
Comparable operating margin	15.3	%	14.5	%	0.8
Comparable operating margin excluding Venezuela	15.2	%	14.5	%	0.7
Foreign currency impact	(1.0	)			(1.0	)
Currency-neutral comparable operating margin	16.3	%			1.8
Currency-neutral comparable operating margin excluding Venezuela	15.3	%			0.8

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

(a) Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold.

Reported gross margin for the year-to-date period was favorable 230 basis points due to savings realized from Project K and ZBB, Venezuela remeasurement, restructuring costs, mark-to-market and integration costs. This was partially offset by the impact of investments we are making in our food and packaging, unfavorable transactional foreign currency impact, and unfavorable mix. Currency-neutral comparable gross margin declined 40 basis points, after excluding the impact of market-to-market, restructuring, integration costs, Venezuela remeasurement, and foreign currency.

Reported SGA% for the year-to-date period was unfavorable 10 basis points primarily due to mark-to-market charges related to the remeasurement of a U.S. pension plan and the unfavorable year-over-year impact of a VIE

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deconsolidation, continued reinvestment of Project K savings into sales capabilities including adding sales representatives and re-establishing the Kashi business, and foreign currency. This was partially offset by the favorable year-over-year impact to brand-building investment from ZBB efficiencies, and overhead savings realized from Project K and ZBB. Currency-neutral comparable SGA% was favorable 220 basis points, after excluding the impact of mark-to-market, VIE deconsolidation, and foreign currency.

Reported operating margin for the year-to-date period was favorable 220 basis points due to the favorable year-over-year impact to brand-building investment from ZBB efficiencies and overhead savings realized from Project K and ZBB, Venezuela remeasurement, mark-to-market, restructuring costs, and integration costs. This was partially offset by the impact of investments we are making in our food and packaging, unfavorable transactional foreign currency impact, the continued reinvestment of Project K savings into sales capabilities including adding sales representatives and re-establishing the Kashi business, the unfavorable year-over-year impact of foreign currency, and VIE deconsolidation. Currency-neutral comparable operating margin was favorable 180 basis points, after excluding the year-over-year impact of restructuring, integration costs, Venezuela remeasurement, VIE deconsolidation, and foreign currency.

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Our currency-neutral comparable gross profit, currency-neutral comparable SGA, and currency-neutral comparable operating profit measures are reconciled to the directly comparable GAAP measures as follows:

	Quarter ended						Year-to-date period ended
(dollars in millions)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015
Reported gross profit (a)	$	1,264		$	1,233		$	3,779		$	3,719
Mark-to-market (COGS)	(3		)	(26		)	(12		)	(60		)
Project K and cost reduction activities (COGS)	(12		)	(59		)	(66		)	(158		)
Other costs impacting comparability (COGS)	—			—			—			—
Integration costs and acquisitions/divestitures (COGS)	3			(2		)	8			(8		)
Venezuela remeasurement (COGS)	—			(10		)	(12		)	(110		)
Comparable gross profit	$	1,276		$	1,330		$	3,861		$	4,055
Comparable gross profit excluding Venezuela	$	1,275		$	1,329		$	3,852		$	4,006
Foreign currency impact	(24		)				(346		)
Currency-neutral comparable gross profit	$	1,300					$	4,207
Currency-neutral comparable gross profit excluding Venezuela	$	1,288					$	3,915
Reported SGA	$	854		$	899		$	2,482		$	2,589
Mark-to-market (SGA)	28			1			23			(1		)
Project K and cost reduction activities (SGA)	28			26			98			85
Other costs impacting comparability (SGA)	—			—			—			(67		)
Integration costs and acquisitions/divestitures (SGA)	4			5			8			10
Venezuela remeasurement (SGA)	—			3			1			6
Comparable SGA	$	794		$	864		$	2,352		$	2,556
Comparable SGA excluding Venezuela	$	796		$	864		$	2,351		$	2,533
Foreign currency impact	(7		)				(86		)
Currency-neutral comparable SGA	$	801					$	2,438
Currency-neutral comparable SGA excluding Venezuela	$	799					$	2,384
Reported operating profit	$	410		$	334		$	1,297		$	1,130
Mark-to-market	(31		)	(27		)	(35		)	(59		)
Project K and cost reduction activities	(40		)	(85		)	(164		)	(243		)
Other costs impacting comparability	—			—			—			67
Integration costs and acquisitions/divestitures	(1		)	(7		)	—			(18		)
Venezuela remeasurement	—			(13		)	(13		)	(116		)
Comparable operating profit	$	482		$	466		$	1,509		$	1,499
Comparable operating profit excluding Venezuela	$	479		$	465		$	1,501		$	1,473
Foreign currency impact	(17		)				(260		)
Currency-neutral comparable operating profit	$	499					$	1,769
Currency-neutral comparable operating profit excluding Venezuela	$	489					$	1,531

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

(a) Gross profit is equal to net sales less cost of goods sold.

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Restructuring and cost reduction activities

We view our continued spending on restructuring and cost reduction activities as part of our ongoing operating principles to provide greater visibility in achieving our long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.

We continue to deliver our original expectations for Project K pre-tax charges, after-tax cash costs, and savings to be realized. In addition we are now working on additional Project K initiatives that will help us achieve our 350-basis-point currency-neutral comparable profit margin improvement plan, with the potential for further savings beyond 2018.

Project K

Project K, a four-year efficiency and effectiveness program, was announced in November 2013, and is expected to continue generating a significant amount of savings that may be invested in key strategic areas of focus for the business. We expect that these savings will drive future growth in the business.

The focus of the program is to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation. The program is expected to continue to provide a number of benefits, including an optimized supply chain infrastructure, the implementation of global business services, and a new global focus on categories.

We currently anticipate that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.2 to $1.4 billion, with after-tax cash costs, including incremental capital investments, estimated to be $900 million to $1.1 billion. Cash expenditures of approximately $625 million have been incurred through the end of fiscal year 2015. Total cash expenditures, as defined, are expected to be approximately $150 million for 2016 and the balance of $125 to $325 million thereafter. Total charges for Project K in 2016 are expected to be approximately $175 to $200 million.

We expect annual cost savings generated from Project K will be approximately $425 to $475 million by 2018, with approximately two-thirds of the cost savings to be realized in cost of goods sold. We have realized approximately $180 million of annual savings through the end of fiscal 2015. We expect approximately $100 million of incremental savings in 2016, approximately 75 to 80 percent of which will come from cost of goods sold. Cost savings will continue to be utilized to increase margins and be strategically invested in areas such as in-store execution, sales capabilities, including adding sales representatives, re-establishing the Kashi business unit, and in the design and quality of our products. We have also invested in production capacity in developing and emerging markets, and in global category teams.

As a result of Project K, capital spending levels were increased to 4% of net sales during both 2014 and 2015. Our long-term targets assume capital spending to be approximately 3-4% of net sales annually.

Thus far, we have funded much of the cash requirements for Project K through the cash benefits of our supplier financing initiative. Due to the difference in timing between expected cash costs for the project and expected future cash savings, we anticipate funding the project through a combination of cash on hand and short-term debt.

We also expect that the project will have an impact on our consolidated effective income tax rate during the execution of the project due to the timing of charges being taken in different tax jurisdictions. The impact of this project on our consolidated effective income tax rate will be excluded from the comparable income tax rate that will be disclosed on a quarterly basis.

Refer to Note 5 within Notes to Consolidated Financial Statements for further information related to Project K and other restructuring activities.

Other Projects

In 2015 we initiated the implementation of a zero-based budgeting (ZBB) program in our North America business and during the first half of 2016 the program was expanded into our international businesses. This ZBB program is now expected to deliver visibility to $150 to $180 million in annual savings in 2016. Our North America business is finding more savings than anticipated at inception of the program and our international businesses now have savings commencing in the second half of 2016.

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In support of the ZBB initiative, we incurred pre-tax charges of approximately $4 million and $21 million in the quarter and year-to-date period ended October 1, 2016, respectively. We anticipate that ZBB will result in total cumulative pre-tax charges up to approximately $50 million through 2016 which will consist primarily of the design and implementation of business capabilities.

Foreign currency translation

The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar, including the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Venezuelan bolivar fuerte and Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have a significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.

Interest expense

For the year-to-date periods ended October 1, 2016 and October 3, 2015, interest expense was $343 million and $168 million, respectively. Current year interest expense includes $153 million charge to redeem $475 million of 7.45% U.S. Dollar Debentures due 2031. The charge consisted primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees. Additionally, increased weighting of fixed rate debt versus the prior year as well as higher average debt levels resulted in higher interest expense.

For the full year 2016, we expect gross interest expense to be approximately $400 million, including $153 million related to the first quarter tender offer. Full year interest expense for 2015 was $231 million.

Income taxes

Our reported effective tax rate for the quarters ended October 1, 2016 and October 3, 2015 was 18% and 24%, respectively. The reported effective tax rate for the year-to-date periods ended October 1, 2016 and October 3, 2015 was 22% and 26%, respectively.

For the quarter ended October 1, 2016, the effective tax rate benefited from excess tax benefits from share-based compensation totaling $16 million. Additionally, the effective tax rate for the quarter benefited from the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.

The effective tax rate for the year-to-date period ended October 1, 2016, benefited from excess tax benefits from share-based compensation totaling $34 million, the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.

The effective tax rate for the year-to-date period ended October 3, 2015, benefited from a reduction in tax related to current year remitted and unremitted earnings and the completion of certain tax examinations.

The comparable effective tax rate for the year-to-date periods ended October 1, 2016 and October 3, 2015 was 24% and 26%, respectively. Refer to Note 10 within Notes to Consolidated Financial Statements for further information.

For the full year 2016, we currently expect the comparable effective tax rate to be approximately 25%. Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted by tax legislation and if pending uncertain tax matters, including tax positions that could be affected by planning initiatives, are resolved more or less favorably than we currently expect.

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The following table provides a reconciliation of as reported to currency-neutral comparable income taxes and effective tax rate for the quarter and year-to-date periods ended October 1, 2016 and October 3, 2015.

	Quarter ended						Year-to-date period ended
Consolidated results (dollars in millions, except per share data)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015
Reported income taxes	$	62		$	66		$	215		$	227
Mark-to-market	(13		)	(10		)	(11		)	(18		)
Project K and cost reduction activities	(11		)	(22		)	(43		)	(69		)
Other costs impacting comparability	—			—			(54		)	(2		)
Integration costs	—			(4		)	(1		)	(6		)
Venezuela remeasurement	—			—			—			(20		)
Comparable income taxes	$	86		$	102		$	324		$	342
Reported effective income tax rate	17.5		%	24.2		%	22.3		%	25.7		%
Mark-to-market	(1.8		)%	(1.1		)%	(0.3		)%	(0.3		)%
Project K and cost reduction activities	(0.8		)%	(0.2		)%	(0.5		)%	(0.5		)%
Other costs impacting comparability	—		%	—		%	(1.4		)%	(1.2		)%
Integration costs	—		%	(0.5		)%	(0.1		)%	(0.1		)%
Venezuela remeasurement	—		%	0.8		%	0.2		%	2.0		%
Comparable effective income tax rate	20.1		%	25.2		%	24.4		%	25.8		%

				2016 full year guidance
Reported effective income tax rate				*
Mark-to-market				*
Project K and cost reduction activities				—	%
Other costs impacting comparability				(1	)%
Integration costs				*
Venezuela remeasurement				*
Comparable effective income tax rate			Approx.	25	%
* Full year guidance for this measure cannot be reasonably estimated as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.

Liquidity and capital resources

Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.

We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables.  In addition, we have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments.  These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts. We had negative working capital of $1.7 billion as of October 1, 2016 and October 3, 2015.

We believe that our operating cash flows, together with our credit facilities and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.

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The following table sets forth a summary of our cash flows:

	Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015
Net cash provided by (used in):
Operating activities	$	1,021		$	969
Investing activities	(381		)	(963		)
Financing activities	(521		)	(110		)
Effect of exchange rates on cash and cash equivalents	(24		)	(40		)
Net increase (decrease) in cash and cash equivalents	$	95		$	(144	)

Operating activities

The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture and market our products.

Net cash provided by our operating activities for the year-to-date ended October 1, 2016, totaled $1.0 billion, an increase of $52 million over the same period in 2015. The increase compared to the prior year is primarily due to lower after-tax Project K payments, lower tax payments, and changes in other working capital mitigated somewhat by $97 million of after-tax cash costs related to the $475 million redemption of our 7.45% U.S. Dollar Debentures due 2031 in the first quarter of 2016.

After-tax Project K cash payments were $112 million and $164 million for the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively. Core working capital includes the positive impact of a supplier financing initiative of approximately $183 million and $161 million for the quarters ended October 1, 2016 and October 3, 2015, respectively.

Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average) is relatively short, equating to approximately 3 days and 19 days for the 12 month periods ended October 1, 2016 and October 3, 2015, respectively. Compared with the 12 month period ended October 3, 2015, the 2016 cash conversion cycle was positively impacted by an increase in the days of trade payables outstanding attributable to a supplier financing initiative.

Our pension and other postretirement benefit plan contributions amounted to $29 million and $21 million for the year-to-date periods ended October 1, 2016 and October 3, 2015, respectively. For the full year 2016, we currently expect that our contributions to pension and other postretirement plans will total approximately $43 million. Plan funding strategies may be modified in response to our evaluation of tax deductibility, market conditions and competing investment alternatives.

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We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:

	Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015			Approximate 2016 full year guidance
Net cash provided by operating activities	$	1,021		$	969		$	1,600
Additions to properties	(376		)	(389		)	(500		)
Cash flow	$	645		$	580		$	1,100

Investing activities

Our net cash used in investing activities totaled $381 million for the year-to-date period ended October 1, 2016 compared to $963 million in the same period of 2015. The decrease was primarily due to acquisitions in the year-to-date period ended October 3, 2015. In the first quarter of 2015, we acquired Bisco Misr for $117 million. In the third quarter of 2015, we acquired a 50% interest in Multipro for $445 million.

Financing activities

Our net cash used in financing activities for the year-to-date period ended October 1, 2016 totaled $521 million compared to $110 million in the same period of 2015.

In May 2016, we issued €600 million of eight-year 1.00% Euro Notes due 2024 and repaid our 4.45% fixed rate $750 million U.S. Dollar Notes due 2016 at maturity.

In March 2016, we issued $750 million of ten-year 3.25% U.S. Dollar Notes and $650 million of thirty-year 4.50% U.S. Dollar Notes. Also in March 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031.

In February 2015, we repaid our floating-rate $250 million U.S. Dollar Notes due 2015 at maturity and in March 2015, we issued €600 million of ten-year 1.25% Euro Notes due 2025.

In February 2014, the board of directors approved a share repurchase program authorizing us to repurchase up to $1.5 billion in shares through December 2015. In December 2015, the board of directors approved a new authorization to repurchase up to $1.5 billion in shares beginning in 2016 through December 2017. Total purchases for the year-to-date period ended October 1, 2016, were 6 million shares for $426 million. Total purchases for the year-to-date period ended October 3, 2015, were 6 million shares for $381 million.

The Company expects lower share repurchases for the remainder of 2016 to fund, in part, the anticipated acquisition of Ritmo Investimentos, the controlling shareholder of Parati, a manufacturer of biscuit, powdered beverage and pasta brands in Brazil.

We paid cash dividends of $533 million in the year-to-date period ended October 1, 2016, compared to $523 million during the same period in 2015. The increase in dividends paid reflects our third quarter 2015 increase in the quarterly dividend to $.50 per common share from the previous $.49 per common share. In October 2016, the board of directors declared a dividend of $.52 per common share, payable on December 15, 2016 to shareholders of record at the close of business on December 1, 2016.  The dividend is broadly in line with our current plan to maintain our long-term dividend pay-out of approximately 50% of comparable net income.

In February 2014, we entered into an unsecured five year credit agreement expiring in 2019, which allows us to borrow, on a revolving credit basis, up to $2.0 billion.

We are in compliance with all debt covenants. We continue to believe that we will be able to meet our interest and principal repayment obligations and maintain our debt covenants for the foreseeable future. We expect our access to public debt and commercial paper markets, along with operating cash flows, will be adequate to meet future operating, investing and financing needs, including the pursuit of selected acquisitions.

During the first half of 2016, we executed a discrete customer program to extend customer payment terms.  In order to mitigate the net working capital impact of the extended terms, we entered into an agreement to sell, on a revolving basis, certain trade accounts receivable balances to a third party financial institution. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from our

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Consolidated Balance Sheet.  The agreement provides for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum funding from receivables that may be sold at any time is currently $550 million, but may be increased as additional financial institutions are added to the agreement.  We currently estimate that the amount of these receivables held at any time by the financial institution(s) will be approximately $550 to $650 million.  During the year-to-date period ended October 1, 2016, approximately $1.0 billion million of accounts receivable have been sold via this arrangement. Accounts receivable sold of $546 million remained outstanding under this arrangement as of October 1, 2016.

In addition to the discrete customer program above, in the quarter-ended October 1, 2016 we established an accounts receivable securitization program for certain customers which allows for extended customer payment terms.  In order to mitigate the net working capital impact of the extended terms, we entered into an agreement with a financial institution to sell these receivables resulting in the receivables being de-recognized from our consolidated balance sheet.  The maximum funding from receivables that may be sold at any time is currently $400 million, but may be increased as additional financial institutions are added to the agreement. We currently estimate that the amount of these receivables held at any time by the financial institution(s) will be up to approximately $1 billion.  During the year-to-date period ended October 1, 2016, $341 million of accounts receivable have been sold through this program. As of October 1, 2016, approximately $260 million of accounts receivable sold under the securitization program remained outstanding, for which we received cash of approximately $222 million and a deferred purchase price asset of approximately $38 million.

Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.

Accounting standards to be adopted in future periods

In October 2016, the Financial Accounting Standards Board (FASB), as part of their simplification initiative, issued an ASU to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current Generally Accepted Accounting Principles (GAAP) prohibit recognition of current and deferred income taxes for intra-entity asset transfers until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendments in the ASU eliminate the exception, such that entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. That is, early adoption should be the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the period of adoption.  We are currently assessing the impact and timing of adoption of the ASU.

In August 2016, the FASB issued an ASU to provide cash flow statement classification guidance for certain cash receipts and payments including (a) debt prepayment or extinguishment costs; (b) contingent consideration payments made after a business combination; (c) insurance settlement proceeds; (d) distributions from equity method investees; (e) beneficial interests in securitization transactions and (f) application of the predominance principle for cash receipts and payments with aspects of more than one class of cash flows.  The ASU is  effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, in which case adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.   The amendments in this ASU should be applied retrospectively.  We are currently assessing the impact and timing of adoption of the ASU.

In February 2016, the FASB issued an ASU which will require the recognition of lease assets and lease liabilities by lessees for all leases with terms greater than 12 months. The distinction between finance leases and operating leases will remain, with similar classification criteria as current Generally Accepted Accounting Principles (GAAP) to distinguish between capital and operating leases. The principal difference from current guidance is that the lease assets and lease liabilities arising from operating leases will be recognized on the Consolidated Balance Sheet. Lessor accounting remains substantially similar to current GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact that implementing this ASU will have on our financial statements and disclosures, as well as timing of implementation.

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In January 2016, the FASB issued an ASU which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. Entities should apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We will adopt the updated standard in the first quarter of 2018. We do not expect the adoption of this guidance to have a significant impact on our financial statements.

In May 2014, the FASB issued an ASU which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity would be required to apply the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. When the ASU was originally issued it was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption was not permitted. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The updated standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Entities will be permitted to adopt the new revenue standard early, but not before the original effective date.  Entities will have the option to apply the final standard retrospectively or use a modified retrospective method, recognizing the cumulative effect of the ASU in retained earnings at the date of initial application. An entity will not restate prior periods if it uses the modified retrospective method, but will be required to disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the ASU as compared to the guidance in effect prior to the change, as well as reasons for significant changes. We will adopt the updated standard in the first quarter of 2018. We are currently evaluating the impact that implementing this ASU will have on our financial statements and disclosures, as well as whether we will use the retrospective or modified retrospective method of adoption.

Forward-looking statements

This Report contains “forward-looking statements” with projections concerning, among other things, the Company’s global growth and efficiency program (Project K), the integration of acquired businesses, our strategy, zero-based budgeting, financial principles, and plans; initiatives, improvements and growth; sales, gross margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures; asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction; effective income tax rate; cash flow and core working capital improvements; interest expense; commodity, and energy prices; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “can,” “anticipate,” “project,” “should,” “estimate,” or words or phrases of similar meaning. For example, forward-looking statements are found in Item 1 and in several sections of Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions. Our future results could be affected by a variety of factors, including:

•	the ability to implement Project K as planned, whether the expected amount of costs associated with Project K will exceed forecasts, whether the Company will be able to realize the anticipated benefits from Project K in the amounts and times expected;

•	the ability to realize the benefits we expect from the adoption of zero-based budgeting in the amounts and at the times expected;

•	the ability to realize the anticipated benefits and synergies from acquired businesses in the amounts and at the times expected;

•	the impact of competitive conditions;

•	the effectiveness of pricing, advertising, and promotional programs;

•	the success of innovation, renovation and new product introductions;

•	the recoverability of the carrying value of goodwill and other intangibles;

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•	the success of productivity improvements and business transitions;

•	commodity and energy prices;

•	labor costs;

•	disruptions or inefficiencies in supply chain;

•	the availability of and interest rates on short-term and long-term financing;

•	actual market performance of benefit plan trust investments;

•	the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs;

•	changes in consumer behavior and preferences;

•	the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability;

•	legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations;

•	the ultimate impact of product recalls;

•	adverse changes in global climate or extreme weather conditions;

•	business disruption or other losses from natural disasters, war, terrorist acts, or political unrest; and,

•	the risks and uncertainties described herein under Part II, Item 1A.

Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our Company is exposed to certain market risks, which exist as a part of our ongoing business operations. We use derivative financial and commodity instruments, where appropriate, to manage these risks. Refer to Note 11 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.

Refer to disclosures contained within Item 7A of our 2015 Annual Report on Form 10-K. Other than changes noted here, there have been no material changes in the Company’s market risk as of October 1, 2016.

During 2016, we entered into forward starting interest swaps with notional amounts totaling $1.6 billion and €600 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate U.S, Dollar and Euro debt, respectively, to be used for general corporate purposes. These swaps were designated as cash flow hedges. Approximately $1.4 billion of the U.S. Dollar forward starting interest rate swaps were settled during the quarter ended April 2, 2016, upon the issuance of fixed rate U.S. Dollar debt. A resulting aggregate loss of $59 million was recorded in accumulated other comprehensive income (loss) and will be amortized as interest expense over the life of the related fixed rate debt. The Euro forward starting interest rate swaps were settled during the quarter ended July 2, 2016 upon issuance of fixed rate Euro debt. A resulting aggregate loss of $10 million was recorded in accumulated other comprehensive income (loss) and will be amortized as interest expense over the life of the related fixed rate debt. Refer to Note 7 within Notes to Consolidated Financial Statements for further information related to the fixed rate debt issuance.

The total notional amount of forward starting interest rate swaps outstanding at October 1, 2016 was $200 million, with a related asset with a fair value of $1 million. We had no forward starting interest rate swaps outstanding at January 2, 2016.

During 2016 we entered into interest rate swaps with notional amounts totaling approximately $2.5 billion and €600 million that are designated as fair value hedges of certain U.S. Dollar and Euro debt, respectively. Approximately $958 million of the U.S. Dollar interest rate swaps were settled during the quarter ended July 2, 2016 for an aggregate gain of $12 million that will be amortized as interest expense over the life of the related fixed rate debt. The Euro interest rate swaps were settled during the quarter ended October 1, 2016 for an aggregate gain of $13 million that will be amortized as interest expense over the life of the related fixed rate debt. Refer to Note 7 within Notes to Consolidated Financial Statements.

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The total notional amount of interest rate swaps outstanding at October 1, 2016 was approximately $1.6 billion, with a related net asset with a fair value of $2 million. We had no interest rate swaps outstanding at January 2, 2016. Assuming average variable rate debt levels during the year, a one percentage point increase in interest rates would have increased annual interest expense by approximately $14 million at October 1, 2016. As there were no interest rate swaps or variable rate debt outstanding at January 2, 2016 changes in interest rates would have no impact to annual interest expense.

Venezuela is considered a highly inflationary economy. As such, the functional currency for our operations in Venezuela is the U.S. dollar, which in turn, requires bolivar denominated monetary assets and liabilities to be remeasured into U.S. dollars using an exchange rate at which such balances could be settled as of the balance sheet date. In addition, revenues and expenses are recorded in U.S. dollars at an appropriate rate on the date of the transaction. Gains and losses resulting from the remeasurement of the bolivar denominated monetary assets and liabilities are recorded in earnings.

During 2015 we experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the CENCOEX exchange. Due to this reduced availability of U.S. dollars and upon review of current U.S. dollar cash needs in our Venezuela operations as of the quarter ended July 4, 2015, we concluded that we are no longer able to obtain sufficient U.S. dollars on a timely basis through the CENCOEX exchange, resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the SIMADI rate.

In February 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including a 59% devaluation of the CENCOEX (now named DIPRO) official rate from 6.3 bolivars to 10.0 bolivars to the U.S. dollar.  Additionally the SIMADI exchange rate was replaced by the DICOM exchange rate, a new floating exchange rate for non-essential imports. The DICOM exchange rate was introduced at 206 bolivars to the U.S. dollar and the Venezuelan government has reported that the DICOM exchange rate will be allowed to float to meet market needs.

Please refer to Note 13 for more information regarding our operations in Venezuela and our change in foreign exchange rates.

Following the change to the SIMADI rate as of July 4, 2015, certain non-monetary assets related to our Venezuelan subsidiary continued to be remeasured at historical exchange rates. As these assets were utilized by our Venezuelan subsidiary during the second half of 2015 and first quarter of 2016 they were recognized in the income statement at historical exchange rates resulting in an unfavorable impact. During 2015, we recognized expense related to the utilization of a portion of these non-monetary assets, resulting in an unfavorable impact of approximately $17 million. We experienced an additional unfavorable impact of approximately $4 million in the year-to-date ended October 1, 2016 related to the utilization of these remaining non-monetary assets.

Additionally, with the introduction of the new DICOM floating rate we experienced an unfavorable impact, primarily in COGS, of approximately $7 million in the year-to-date period ended October 1, 2016 related to the utilization of non-monetary assets that were originally acquired after our conversion to the SIMADI rate at July 4, 2015.  These non-monetary assets were recognized in the income statement at historical exchange rates during the quarter. 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.

As of October 1, 2016, we carried out an evaluation under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

During the third quarter of 2014, we went live with the first phase of our Global Business Services (GBS) initiative, in conjunction with Project K, which includes the reorganization and relocation of certain financial service processes, internal to the organization. This initiative is expected to continue through 2016 and will impact the

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design of our control framework. During the transition to GBS, we have put additional controls in place to monitor and maintain appropriate internal controls impacting financial reporting.

There have been no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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KELLOGG COMPANY

PART II — OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended January 2, 2016. The risk factors disclosed under those Reports in addition to the other information set forth in this Report, could materially affect our business, financial condition, or results. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

(millions, except per share data)

 

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month #7:
7/03/2016 - 7/30/2016	—		$	—		—		$	1,114
Month #8:
7/31/2016 - 8/27/2016	—		$	—		—		$	1,114
Month #9:
8/28/2016 - 10/01/2016	0.5		$	78.41		0.5		$	1,074
Total	0.5		$	78.41		0.5

In December 2015, our board of directors approved a share repurchase program authorizing us to repurchase shares of our common stock amounting to $1.5 billion beginning in January 2016 through December 2017. This authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.

Item 6. Exhibits

(a)	Exhibits:

31.1	Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant
31.2	Rule 13a-14(e)/15d-14(a) Certification from Ronald L. Dissinger
32.1	Section 1350 Certification from John A. Bryant
32.2	Section 1350 Certification from Ronald L. Dissinger
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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KELLOGG COMPANY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

KELLOGG COMPANY

/s/ Ronald L. Dissinger

Ronald L. Dissinger

Principal Financial Officer; Senior Vice President and Chief Financial Officer

/s/ Donald O. Mondano

Donald O. Mondano

Principal Accounting Officer; Vice President and Corporate Controller

Date: November 7, 2016

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KELLOGG COMPANY

EXHIBIT INDEX

 

Exhibit No.	Description	Electronic (E) Paper (P) Incorp. By Ref. (IBRF)
31.1	Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant	E
31.2	Rule 13a-14(e)/15d-14(a) Certification from Ronald L. Dissinger	E
32.1	Section 1350 Certification from John A. Bryant	E
32.2	Section 1350 Certification from Ronald L. Dissinger	E
101.INS	XBRL Instance Document	E
101.SCH	XBRL Taxonomy Extension Schema Document	E
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	E
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	E
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	E
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	E

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