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Section 1: 10-Q (10-Q)

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Table of Contents

 
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 September 29, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting  company  ¨
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
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 27, 2018 — 347,021,144 shares
 


Table of Contents

KELLOGG COMPANY
INDEX
 
 
 
Page
 
 
 
 
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Controls and Procedures
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Exhibits
 
 



Table of Contents

Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
 
September 29,
2018 (unaudited)
December 30,
2017
Current assets
 
 
Cash and cash equivalents
$
309

$
281

Accounts receivable, net
1,612

1,389

Inventories
1,319

1,217

Other current assets
163

149

Total current assets
3,403

3,036

Property, net
3,639

3,716

Goodwill
6,055

5,504

Other intangibles, net
3,372

2,639

Investments in unconsolidated entities
422

429

Other assets
1,223

1,027

Total assets
$
18,114

$
16,351

Current liabilities
 
 
Current maturities of long-term debt
$
6

$
409

Notes payable
202

370

Accounts payable
2,367

2,269

Other current liabilities
1,455

1,474

Total current liabilities
4,030

4,522

Long-term debt
8,715

7,836

Deferred income taxes
752

355

Pension liability
513

839

Other liabilities
489

605

Commitments and contingencies


Equity
 
 
Common stock, $.25 par value
105

105

Capital in excess of par value
883

878

Retained earnings
7,929

7,069

Treasury stock, at cost
(4,357
)
(4,417
)
Accumulated other comprehensive income (loss)
(1,512
)
(1,457
)
Total Kellogg Company equity
3,048

2,178

Noncontrolling interests
567

16

Total equity
3,615

2,194

Total liabilities and equity
$
18,114

$
16,351

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
 
Quarter ended
 
Year-to-date period ended
(Results are unaudited)
September 29,
2018
September 30,
2017
 
September 29,
2018
September 30,
2017
Net sales
$
3,469

$
3,246

 
$
10,230

$
9,669

Cost of goods sold
2,293

2,074

 
6,593

6,112

Selling, general and administrative expense
780

839

 
2,257

2,559

Operating profit
396

333

 
1,380

998

Interest expense
72

64

 
213

188

Other income (expense), net
130

117

 
269

268

Income before income taxes
454

386

 
1,436

1,078

Income taxes
69

101

 
206

246

Earnings (loss) from unconsolidated entities
(2
)
3

 
196

5

Net income
383

288

 
1,426

837

Net income (loss) attributable to noncontrolling interests
3


 
6


Net income attributable to Kellogg Company
$
380

$
288

 
$
1,420

$
837

Per share amounts:
 
 
 
 
 
Basic earnings
$
1.10

$
0.83

 
$
4.10

$
2.40

Diluted earnings
$
1.09

$
0.83

 
$
4.07

$
2.38

Dividends
$
0.56

$
0.54

 
$
1.64

$
1.58

Average shares outstanding:
 
 
 
 
 
Basic
347

345

 
346

348

Diluted
349

348

 
349

351

Actual shares outstanding at period end
 
 
 
347

345

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)

Quarter ended
September 29, 2018

Year-to-date period ended
September 29, 2018
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount

Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
383

 
 
 
$
1,426

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(5
)
$
(7
)
(12
)
 
$
(29
)
$
(34
)
(63
)
Cash flow hedges:
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges



 
3

(1
)
2

Reclassification to net income
2

(1
)
1

 
6

(2
)
4

Postretirement and postemployment benefits:
 
 
 
 
 
 
 
Reclassification to net income:
 
 
 
 
 
 
 
Net experience loss
(1
)

(1
)
 
(3
)

(3
)
Prior service cost
(1
)

(1
)
 
(1
)

(1
)
Other comprehensive income (loss)
$
(5
)
$
(8
)
$
(13
)
 
$
(24
)
$
(37
)
$
(61
)
Comprehensive income
 
 
$
370

 
 
 
$
1,365

Net Income (loss) attributable to noncontrolling interests

 
 
3

 
 
 
6

Other comprehensive income (loss) attributable to noncontrolling interests
 
 
(2
)
 
 
 
(6
)
Comprehensive income attributable to Kellogg Company
 
 
$
369

 
 
 
$
1,365















 
Quarter ended
September 30, 2017

Year-to-date period ended
September 30, 2017
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount

Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
288

 
 
 
$
837

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(6
)
$
33

27

 
$
4

$
99

103

Cash flow hedges:
 
 
 
 
 
 
 
Reclassification to net income
3

(1
)
2

 
7

(2
)
5

Postretirement and postemployment benefits:
 
 
 
 
 
 
 
Reclassification to net income:
 
 
 
 
 
 
 
Net experience loss



 
1


1

Other comprehensive income (loss)
$
(3
)
$
32

$
29

 
$
12

$
97

$
109

Comprehensive income
 
 
$
317

 
 
 
$
946

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

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, December 31, 2016
420

$
105

$
806

$
6,552

69

$
(3,997
)
$
(1,575
)
$
1,891

$
16

$
1,907

Common stock repurchases
 
 


 
7

(516
)
 
(516
)
 
(516
)
Net income
 
 
 
1,254

 
 
 
1,254


1,254

Dividends
 
 
 
(736
)
 
 
 
(736
)


(736
)
Other comprehensive income
 
 
 
 
 
 
118

118


118

Stock compensation
 
 
66

 
 
 
 
66

 
66

Stock options exercised and other
1

 
6

(1
)
(1
)
96

 
101

 
101

Balance, December 30, 2017
421

$
105

$
878

$
7,069

75

$
(4,417
)
$
(1,457
)
$
2,178

$
16

$
2,194

Common stock repurchases
 
 


 
2

(120
)
 
(120
)
 
(120
)
Net income
 
 
 
1,420

 
 
 
1,420

6

1,426

Acquisition of noncontrolling interest - Multipro
 
 
 
 
 
 
 

552

552

Dividends
 
 
 
(568
)
 
 
 
(568
)
(1
)
(569
)
Other comprehensive income
 
 
 
 
 
 
(55
)
(55
)
(6
)
(61
)
Stock compensation
 
 
42

 
 
 
 
42

 
42

Stock options exercised and other
 
 
(37
)
8

(3
)
180

 
151



151

Balance, September 29, 2018
421

$
105

$
883

$
7,929

74

$
(4,357
)
$
(1,512
)
$
3,048

$
567

$
3,615

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
 
Year-to-date period ended
(unaudited)
September 29,
2018
September 30,
2017
Operating activities
 
 
Net income
$
1,426

$
837

Adjustments to reconcile net income to operating cash flows:
 
 
Depreciation and amortization
374

366

Postretirement benefit plan expense (benefit)
(188
)
(191
)
Deferred income taxes
99

(21
)
Stock compensation
42

53

Gain on unconsolidated entities, net
(200
)

Other
(91
)
46

Postretirement benefit plan contributions
(279
)
(33
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
Trade receivables
(139
)
(1,168
)
Inventories
(67
)
78

Accounts payable
103

135

All other current assets and liabilities
(154
)
88

Net cash provided by (used in) operating activities
926

190

Investing activities
 
 
Additions to properties
(389
)
(374
)
Collections of deferred purchase price on securitized trade receivables

945

Acquisitions, net of cash acquired
(28
)
4

Investments in unconsolidated entities

(389
)

Acquisition of cost method investments
(6
)
(6
)
Other
27

(1
)
Net cash provided by (used in) investing activities
(785
)
568

Financing activities
 
 
Net issuances (reductions) of notes payable
(198
)
134

Issuances of long-term debt
993

656

Reductions of long-term debt
(401
)
(626
)
Net issuances of common stock
160

87

Common stock repurchases
(120
)
(516
)
Cash dividends
(568
)
(550
)
Other
(2
)

Net cash provided by (used in) financing activities
(136
)
(815
)
Effect of exchange rate changes on cash and cash equivalents
23

44

Increase (decrease) in cash and cash equivalents
28

(13
)
Cash and cash equivalents at beginning of period
281

280

Cash and cash equivalents at end of period
$
309

$
267

 
 
 
Supplemental cash flow disclosures
 
 
Interest paid
$
153

$
149

Income taxes paid
$
163

$
279

 
 
 
Supplemental cash flow disclosures of non-cash investing activities:
 
 
Beneficial interests obtained in exchange for securitized trade receivables
$

$
951

   Additions to properties included in accounts payable
$
98

$
85

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

Notes to Consolidated Financial Statements
for the quarter ended September 29, 2018 (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 2017 Annual Report on Form 10-K.

The condensed balance sheet information at December 30, 2017 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 September 29, 2018 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 September 29, 2018, $889 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $664 million of those payment obligations to participating financial institutions. As of December 30, 2017, $850 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $674 million of those payment obligations to participating financial institutions.

Revenue
The Company recognizes revenue from the sale of food products which are sold to retailers through direct sales forces, broker and distributor arrangements. The Company also recognizes revenue from the license of our trademarks granted to third parties who uses these trademarks on their merchandise. Revenue from these licenses are not material to the Company. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable discounts, returns, allowances, and various government withholding taxes.

Contract balances where revenue is recognized in the current period that is not a result of current period performance is not material to the Company. The Company also does not incur costs to obtain or fulfill contracts.

Performance obligations

The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. At the time of delivery, the customer is invoiced with payment terms which are commensurate with the customer’s credit profile. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.

The Company assesses the goods and services promised in its customers’ purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised, whether explicitly stated or implied based on customary business practices. For a purchase order that has more

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Table of Contents

than one performance obligation, the Company allocates the total consideration to each distinct performance obligation on a relative standalone selling price basis.

Significant Judgments

The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Where applicable, future provisions are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.

Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally insignificant and recognized as a change in management estimate in a subsequent period.

Practical expedients

The Company elected the following practical expedients in accordance with ASU 2014-09:

Significant financing component - The Company elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Shipping and handling costs - The Company elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service.
Measurement of transaction price - The Company has elected to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.

New accounting standards

Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued an ASU intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. The new guidance is effective on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company adopted the ASU in the first quarter of 2018. The impact of adoption was immaterial to the financial statements.

Improving the Presentation of net Periodic Pension Cost and net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company adopted the ASU in the first quarter of 2018.


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Table of Contents

Simplifying the test for goodwill impairment. In January 2017, the FASB issued an ASU to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The ASU is effective for an entity's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU should be applied on a prospective basis. The Company adopted the ASU in the first quarter of 2018 with no impact.

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 adopted the new ASU in the first quarter of 2018.

Recognition and measurement of financial assets and liabilities. In January 2016, the FASB issued an ASU which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and which updates certain presentation and disclosure requirements. 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 adopted the updated standard in the first quarter of 2018. The impact of adoption was immaterial to the 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. The Company adopted the updated standard in the first quarter of 2018 using the full retrospective method and restated previously reported amounts. In connection with the adoption, the Company made reclassification of certain customer allowances. The adoption effects relate to the timing of recognition and classification of certain promotional allowances. The updated revenue standard also required additional disaggregated revenue disclosures. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.
Impacts to Previously Reported Results
Adoption of the standards related to revenue recognition, pension and cash flow impacted our previously reported results as follows:
(Dollars in millions, except per share data)
As of December 30, 2017
Consolidated Balance Sheet
Previously Reported
Revenue Recognition ASU
Restated
Other assets
$
1,026

$
1

$
1,027

Other current liabilities
$
1,431

$
43

$
1,474

Deferred income taxes
$
363

$
(8
)
$
355

Retained earnings
$
7,103

$
(34
)
$
7,069



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Table of Contents

(Dollars in millions, except per share data)
Quarter ended September 30, 2017
Consolidated Statement of Income
Previously Reported
Revenue Recognition ASU
Pension ASU
Restated
Net sales
$
3,273

$
(27
)
$

$
3,246

Cost of goods sold
$
2,041

$
(21
)
$
54

$
2,074

Selling, general and administrative expense
$
768

$
6

$
65

$
839

Other income (expense), net
$
(2
)
$

$
119

$
117

Income taxes
$
104

$
(3
)
$

$
101

Net income
$
297

$
(9
)
$

$
288

Per share amounts:
 
 
 
 
Basic earnings
$
0.86

$
(0.03
)
$

$
0.83

Diluted earnings
$
0.85

$
(0.02
)
$

$
0.83


(Dollars in millions, except per share data)
Year-to-date period ended September 30, 2017
Consolidated Statement of Income
Previously Reported
Revenue Recognition ASU
Pension ASU
Restated
Net sales
$
9,714

$
(45
)
$

$
9,669

Cost of goods sold
$
6,013

$
(54
)
$
153

$
6,112

Selling, general and administrative expense
$
2,424

$
15

$
120

$
2,559

Other income (expense), net
$
(5
)
$

$
273

$
268

Income taxes
$
248

$
(2
)
$

$
246

Net income
$
841

$
(4
)
$

$
837

Per share amounts:
 
 
 
 
Basic earnings
$
2.41

$
(0.01
)
$

$
2.40

Diluted earnings
$
2.39

$
(0.01
)
$

$
2.38



(Dollars in millions, except per share data)
Year-to-date period ended September 30, 2017
Consolidated Statement of Cash Flows
Previously Reported
Revenue Recognition ASU
Cash Flow ASU
Restated
Net income
$
841

$
(4
)
$

$
837

Deferred income taxes
$
(20
)
$
(1
)
$

$
(21
)
Other
$
32

$

$
14

$
46

Trade receivables
$
(223
)
$

$
(945
)
$
(1,168
)
All other current assets and liabilities, net
$
83

$
5

$

$
88

Net cash provided by (used in) operating activities
$
1,121

$

$
(931
)
$
190

Collections of deferred purchase price on securitized trade receivables
$

$

$
945

$
945

Investment in unconsolidated entities, net proceeds
$
14

$

$
(14
)
$

Net cash provided by (used in) investing activities
$
(363
)
$

$
931

$
568

 

11

Table of Contents

Accounting standards to be adopted in future periods

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued an ASU permitting a company to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income (AOCI). The reclassification is optional. Regardless of whether or not a company opts to make the reclassification, the new guidance requires all companies to include certain disclosures in their financial statements. The guidance is effective for all fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing when to adopt the ASU and the impact of adoption.

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 will adopt the ASU in the first quarter of 2019, and is currently evaluating the impact that implementing this ASU will have on its financial statements.

Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company is currently assessing when to adopt the ASU and the impact of adoption.


Note 2 Sale of accounts receivable

During 2016, The Company initiated a program in which a customer could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).

The Company has two Receivable Sales Agreements (Monetization Programs) and previously had a separate U.S. accounts receivable securitization program (Securitization Program), both described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Company terminated the Securitization Program at the end of 2017 and entered into the second monetization program during the quarter ended March 31, 2018. The impact on working capital of the Extended Terms Program is effectively offset by the Monetization and Securitization Programs.

The Company has no retained interest in the receivables sold, 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 September 29, 2018 and December 30, 2017 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.

12

Table of Contents

Monetization Programs
The Company has two Monetization Programs, for a discrete group of customers, to sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide 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 $1,033 million (increased from $988 million as of March 31, 2018, reflecting the execution of an amendment to the second monetization program on June 26, 2018).  Accounts receivable sold of $942 million and $601 million remained outstanding under these arrangements as of September 29, 2018 and December 30, 2017, respectively. 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 was $7 million and $20 million for the quarter and year-to-date periods ended September 29, 2018, respectively and was $3 million and $8 million for the quarter and year-to-date periods ended September 30, 2017, respectively. The recorded loss is included in Other income and expense.
Securitization Program
Between July 2016 and December 2017, the Company had a Securitization Program with a third party financial institution. Under the program, the Company received cash consideration of up to $600 million and a deferred purchase price asset for the remainder of the purchase price. Transfers under the Securitization Program were accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. This Securitization Program utilized Kellogg Funding Company (Kellogg Funding), a wholly-owned subsidiary of the Company. Kellogg Funding's sole business consisted 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 the Company's 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. The Securitization Program was structured to expire in July 2018, but was terminated at the end of 2017. In March 2018 the Company substantially replaced the securitization program with the second monetization program. Kellogg Funding had no creditors and held no assets at September 29, 2018.

As of December 30, 2017, approximately $433 million of accounts receivable sold to Kellogg Funding under the Securitization Program remained outstanding, for which the Company received net cash proceeds of approximately $412 million and a deferred purchase price asset of approximately $21 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 current assets on the Consolidated Balance Sheet. Upon final settlement of the program in March 2018, the outstanding deferred purchase price asset of $21 million was exchanged for previously sold trade accounts receivable.

The recorded net loss on sale of receivables for the year-to-date period ended September 30, 2017 is included in Other income and expense and is not material.

Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $23 million and $86 million remained outstanding under these programs as of September 29, 2018 and December 30, 2017, respectively. 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 the sale of these receivables is included in Other income and expense and is not material.


13

Table of Contents

Note 3 Acquisitions, West Africa investments, goodwill and other intangible assets

Multipro acquisition
On May 2, 2018, the Company (i) acquired an incremental 1% ownership interest in Multipro, a leading distributor of a variety of food products in Nigeria and Ghana, and (ii) exercised its call option (Purchase Option) to acquire a 50% interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer. The aggregate cash consideration paid was approximately $419 million and was funded through cash on hand and short-term borrowings, which was refinanced with long-term borrowings in May 2018. As part of the consideration for the acquisition, an escrow established in connection with the original Multipro investment in 2015, which represented a significant portion of the amount paid for the Company’s initial investment, was released by the Company. The amount paid to exercise the Purchase Option was subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the exercise date compared to targeted amounts. These adjustments were finalized during the quarter ended September 29, 2018 and resulted in an increase in the purchase price of $1 million.

As a result of the Company’s incremental ownership interest in Multipro and concurrent changes to the shareholders' agreement, the Company now has a 51% controlling interest in and began consolidating Multipro. Accordingly, the acquisition was accounted for as a business combination and the assets and liabilities of Multipro were included in the September 29, 2018 Consolidated Balance Sheet and the results of its operations have been included in the Consolidated Statement of Income subsequent to the acquisition date. The aggregate of the consideration paid and the fair value of previously held equity interest totaled $626 million, or $617 million net of cash acquired. The Multipro investment was previously accounted for under the equity method of accounting and the Company recorded our share of equity income or loss from Multipro within Earnings (loss) from unconsolidated entities. In connection with the business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of $245 million, which is included within Earnings (loss) from unconsolidated entities.  

The assets and liabilities are included in the Consolidated Balance Sheet as of September 29, 2018 within the Asia-Pacific reporting segment. The acquired assets and assumed liabilities include the following:
(millions)
 
 
May 2, 2018
Current assets
 
 
$
118

Property
 
 
41

Goodwill
 
 
612

Intangible assets subject to amortization, primarily customer relationships
 
 
425

Intangible assets not subject to amortization, primarily distribution rights
 
 
373

Deferred tax liability
 
 
(252
)
Other liabilities
 
 
(148
)
Noncontrolling interest
 
 
(552
)
 
 
 
$
617


The amounts in the above table represent the preliminary allocation of purchase price and are subject to revision when valuations are finalized for intangible assets, which are expected in 2018. The goodwill from the acquisition is not expected to be deductible for income tax purposes. During the quarter ended September 29, 2018, goodwill and deferred tax liabilities were decreased by $4 million in conjunction with an updated allocation of the purchase price.

Multipro contributed net sales of $328 million and net earnings of $6 million since the acquisition, including transaction fees and integration costs. The Company's consolidated unaudited pro forma historical net sales and net income, as if Multipro had been acquired at the beginning of 2017, exclusive of the non-cash $245 million gain on the disposition of the equity interest recognized in the second quarter of 2018, are estimated as follows:
 
Quarter ended
Year-to-date period ended
(millions)
September 29, 2018
September 30, 2017
September 29, 2018
September 30, 2017
Net sales
$
3,469

$
3,412

$
10,511

$
10,151

Net Income attributable to Kellogg Company
$
380

$
289

$
1,420

$
837


14

Table of Contents


Investment in TAF
The investment in TAF, our interest in an affiliated food manufacturer, is accounted for under the equity method of accounting with the Company’s share of equity income or loss being recognized within Earnings (loss) from unconsolidated entities. The $458 million aggregate of the consideration paid upon exercise and the historical cost value of the Put Option was compared to the estimated fair value of the Company’s ownership percentage of TAF and the Company recognized a one-time, non-cash loss of $45 million within Earnings (loss) from unconsolidated entities, which represents an other than temporary excess of cost over fair value of the investment. The difference between the carrying amount of TAF and the underlying equity in net assets is primarily attributable to brand and customer list intangible assets, a portion of which is being amortized over future periods, and goodwill.

RX acquisition
In October 2017, the Company completed its acquisition of Chicago Bar Co., LLC, the manufacturer of RXBAR, for $600 million, or $596 million net of cash and cash equivalents. The purchase price was subject to certain working capital adjustments based on the actual working capital on the acquisition date compared to targeted amounts. These adjustments were finalized during the quarter ended March 31, 2018 and resulted in a purchase price reduction of $1 million. The acquisition was accounted for under the purchase price method and was financed with short-term borrowings.

For the year-to-date period ended September 29, 2018, the acquisition added $167 million of net sales and an immaterial profitability impact to the Company's North America Other reporting segment.

The assets and liabilities are included in the Consolidated Balance Sheet as of September 29, 2018 within the North America Other reporting segment. The acquired assets and assumed liabilities include the following:
(millions)
 
 
October 27, 2017
Current assets
 
 
$
42

Goodwill
 
 
373

Intangible assets, primarily indefinite-lived brands
 
 
203

Current liabilities
 
 
(23
)
 
 
 
$
595


The amounts in the above table represent the final allocation of purchase price as of September 29, 2018, which resulted in a $2 million increase in amortizable intangible assets with a corresponding reduction of goodwill during the first quarter of 2018.

Goodwill and Intangible Assets
Changes in the carrying amount of goodwill, intangible assets subject to amortization, consisting primarily of customer lists, and indefinite-lived intangible assets, consisting of brands and distribution agreements, are presented in the following tables:

Carrying amount of goodwill
(millions)
U.S.
Snacks
U.S.
Morning
Foods
U.S.
Specialty Channels
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 30, 2017
$
3,568

$
131

$
82

$
836

$
414

$
244

$
229

$
5,504

Additions






616

616

Purchase price allocation adjustment



(1
)


(4
)
(5
)
Purchase price adjustment



(1
)



(1
)
Currency translation adjustment



(1
)
(15
)
(30
)
(13
)
(59
)
September 29, 2018
$
3,568

$
131

$
82

$
833

$
399

$
214

$
828

$
6,055



15

Table of Contents

Intangible assets subject to amortization
Gross carrying amount
 
 
 
 
 
 
 
 
(millions)
U.S.
Snacks
U.S.
Morning
Foods
U.S.
Specialty Channels
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 30, 2017
$
42

$
8

$

$
22

$
45

$
74

$
10

$
201

Additions






425

425

Purchase price allocation adjustment



2




2

Currency translation adjustment




(1
)
(13
)
(5
)
(19
)
September 29, 2018
$
42

$
8

$

$
24

$
44

$
61

$
430

$
609

 
 
 
 
 
 
 
 
 
Accumulated Amortization
 
 
 
 
 
 
 
 
December 30, 2017
$
22

$
8

$

$
5

$
18

$
10

$
4

$
67

Amortization
2



1

2

3

8

16

Currency translation adjustment





(2
)

(2
)
September 29, 2018
$
24

$
8

$

$
6

$
20

$
11

$
12

$
81

 
 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
 
 
 
 
 
 
December 30, 2017
$
20

$

$

$
17

$
27

$
64

$
6

$
134

Additions






425

425

Purchase price allocation adjustment



2




2

Amortization
(2
)


(1
)
(2
)
(3
)
(8
)
(16
)
Currency translation adjustment




(1
)
(11
)
(5
)
(17
)
September 29, 2018
$
18

$

$

$
18

$
24

$
50

$
418

$
528

For intangible assets in the preceding table, amortization was $16 million and $8 million for the year-to-date periods ended September 29, 2018 and September 30, 2017, respectively. The currently estimated aggregate annual amortization expense for full-year 2018 is approximately $23 million.
Intangible assets not subject to amortization
(millions)
U.S.
Snacks
U.S.
Morning
Foods
U.S.
Specialty Channels
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 30, 2017
$
1,625

$

$

$
360

$
434

$
86

$

$
2,505

Additions






373

373

Currency translation adjustment




(13
)
(16
)
(5
)
(34
)
September 29, 2018
$
1,625

$

$

$
360

$
421

$
70

$
368

$
2,844


Note 4 Restructuring and cost reduction activities
The Company views its restructuring and cost reduction activities as part of its 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.


16

Table of Contents

Total Projects
During the quarter ended September 29, 2018, the Company recorded total net charges of $34 million across all restructuring and cost reduction activities. The charges were comprised of a $49 million expense recorded in cost of goods sold (COGS), a $15 million expense recorded in selling, general and administrative (SG&A) expense and a $(30) million net curtailment gain related to the freeze of certain European pension plans recorded in other (income) expense, net (OIE). During the year-to-date period ended September 29, 2018, the Company recorded total net charges of $59 million across all restructuring and cost reduction activities. The charges were comprised of $58 million recorded in COGS, $31 million recorded in SG&A expense and a net gain of $(30) million recorded in OIE.
During the quarter ended September 30, 2017, the Company recorded total charges of $1 million across all restructuring and cost reduction activities. The charges were comprised of $49 million recorded in COGS, $86 million recorded in SG&A expense and $(134) million net gain recorded in OIE. During the year-to-date period ended September 30, 2017, the Company recorded total charges of $239 million across all restructuring and cost reduction activities. The charges were comprised of $85 million recorded in COGS, $287 million recorded in SG&A expense and $(133) million net gain recorded in OIE.
Project K
Project K is expected to continue generating savings that may be invested in key strategic areas of focus for the business or utilized to achieve our growth initiatives.

Since inception, Project K has reduced the Company’s cost structure, and is expected to provide enduring benefits, including an optimized supply chain infrastructure, an efficient global business services model, a global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market models.  These benefits are intended to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation.

The Company currently anticipates that the program will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be approximately $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 of approximately $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $500 million which will include severance, pension and other termination benefits; and other costs of approximately $600 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.
The Company currently expects that total pre-tax charges related to Project K will impact reportable segments as follows: U.S. Snacks (approximately 32%), U.S. Morning Foods (approximately 17%), U.S. Specialty Channels (approximately 1%), North America Other (approximately 15%), Europe (approximately 22%), Latin America (approximately 3%), Asia-Pacific (approximately 6%), and Corporate (approximately 4%).

Since the inception of Project K, the Company has recognized charges of $1,436 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $852 million recorded in COGS, $745 million recorded in SG&A, and $(167) million recorded in OIE.

The tables below provide the details for charges incurred during the quarters and year-to-date periods ended September 29, 2018 and September 30, 2017 and program costs to date for programs currently active as of

17

Table of Contents

September 29, 2018.
 
Quarter ended
 
Year-to-date period ended
 
Program costs to date
(millions)
September 29, 2018
September 30, 2017
 
September 29, 2018
September 30, 2017
 
September 29, 2018
Employee related costs
$
17

$
31

 
$
22

$
166

 
$
556

Pension curtailment (gain) loss, net
(30
)
(134
)
 
(30
)
(133
)
 
(167
)
Asset related costs
10

38

 

68

 
269

Asset impairment
14


 
14


 
169

Other costs
23

66

 
53

138

 
609

Total
$
34

$
1

 
$
59

$
239

 
$
1,436

 
 
 
 
 
 
 
 
 
Quarter ended
 
Year-to-date period ended
 
Program costs to date
(millions)
September 29, 2018
September 30, 2017
 
September 29, 2018
September 30, 2017
 
September 29, 2018
U.S. Snacks
$
4

$
106

 
13

$
305

 
$
516

U.S. Morning Foods
19

14

 
31

16

 
282

U.S. Specialty Channels
1


 
1

1

 
22

North America Other
20

4

 
21

13

 
161

Europe
(16
)
13

 
(22
)
21

 
308

Latin America
3

2

 
7

6

 
34

Asia Pacific
2

1

 
5

5

 
92

Corporate
1

(139
)
 
3

(128
)
 
21

Total
$
34

$
1

 
$
59

$
239

 
$
1,436

Employee related costs consist primarily of severance and related benefits. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives. Asset related costs consist primarily of accelerated depreciation. During the year-to-date period ended ended September 29, 2018, a gain was recognized related to the sale of a manufacturing facility in Europe that was previously impacted as part of Project K. Asset impairments were recorded for fixed assets that were determined to be impaired and were written down to their estimated fair value. Other costs consist of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.
At September 29, 2018 total project reserves were $83 million, related to severance payments and other costs of which a substantial portion will be paid in 2018 and 2019. The following table provides details for exit cost reserves.
 
Employee
Related
Costs
Pension curtailment (gain) loss, net
Asset
Impairment
Asset
Related
Costs
Other
Costs
Total
Liability as of December 31, 2017
$
97

$

$

$

$
63

$
160

2018 restructuring charges
22

(30
)
14


53

59

Cash payments
(52
)


(3
)
(103
)
(158
)
Non-cash charges and other

30

(14
)
6


22

Liability as of September 29, 2018
$
67

$

$

$
3

$
13

$
83


18

Table of Contents

Note 5 Equity
Earnings per share
Basic earnings per share is determined by dividing net income 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, restricted stock units, 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 7 million and 6 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended September 29, 2018, respectively. There were 5 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended September 30, 2017, respectively.

Quarters ended September 29, 2018 and September 30, 2017:
 
 
 
 
(millions, except per share data)
Net income

Average
shares
outstanding
Earnings
per share
2018
 
 
 
Basic
$
380

347

$
1.10

Dilutive potential common shares
 
2

(0.01
)
Diluted
$
380

349

$
1.09

2017
 
 
 
Basic
$
288

345

$
0.83

Dilutive potential common shares
 
3


Diluted
$
288

348

$
0.83


Year-to-date periods ended September 29, 2018 and September 30, 2017:
 
 
 
 
(millions, except per share data)
Net income

Average
shares
outstanding
Earnings
per share
2018
 
 
 
Basic
$
1,420

346

$
4.10

Dilutive potential common shares
 
3

(0.03
)
Diluted
$
1,420

349

$
4.07

2017
 
 
 
Basic
$
837

348

$
2.40

Dilutive potential common shares
 
3

(0.02
)
Diluted
$
837

351

$
2.38


In December 2017, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock beginning in January 2018 through December 2019. As of September 29, 2018, $1.4 billion remains available under the authorization.
During the year-to-date period ended September 29, 2018, the Company repurchased approximately 2 million shares of common stock for a total of $120 million. During the year-to-date period ended September 30, 2017, the Company repurchased approximately 7 million shares of common stock for a total of $516 million.

19

Table of Contents

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, net of related tax effects.
Reclassifications out of AOCI for the quarter and year-to-date periods ended September 29, 2018 and September 30, 2017, consisted of the following:
(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
September 29, 2018
Year-to-date period ended
September 29, 2018
  
(Gains) losses on cash flow hedges:
 
 
 
Foreign currency exchange contracts
$

$

COGS
Interest rate contracts
2

6

Interest expense
 
$
2

$
6

Total before tax
 
(1
)
(2
)
Tax expense (benefit)
 
$
1

$
4

Net of tax
Amortization of postretirement and postemployment benefits:
 
 
 
Net experience loss
$
(1
)
$
(3
)
OIE
 
$
(1
)
$
(3
)
Total before tax
 


Tax expense (benefit)
 
$
(1
)
$
(3
)
Net of tax
Total reclassifications
$

$
1

Net of tax

20

Table of Contents

 
 
 
 
(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
September 30, 2017
Year-to-date period ended
September 30, 2017
  
(Gains) losses on cash flow hedges:
 
 
 
Foreign currency exchange contracts
$

$
(1
)
COGS
Interest rate contracts
3

8

Interest expense
 
$
3

$
7

Total before tax
 
(1
)
(2
)
Tax expense (benefit)
 
$
2

$
5

Net of tax
Amortization of postretirement and postemployment benefits:
 
 
 
Net experience loss
$

$
1

See Note 8 for further details
 
$

$
1

Total before tax
 


Tax expense (benefit)
 
$

$
1

Net of tax
Total reclassifications
$
2

$
6

Net of tax

Accumulated other comprehensive income (loss), net of tax, as of September 29, 2018 and December 30, 2017 consisted of the following:
(millions)
September 29,
2018
December 30, 2017
Foreign currency translation adjustments
$
(1,483
)
$
(1,426
)
Cash flow hedges — unrealized net gain (loss)
(55
)
(61
)
Postretirement and postemployment benefits:
 
 
Net experience loss
31

34

Prior service cost
(5
)
(4
)
Total accumulated other comprehensive income (loss)
$
(1,512
)
$
(1,457
)
Note 6 Debt
The following table presents the components of notes payable at September 29, 2018 and December 30, 2017:
 
September 29, 2018
 
December 30, 2017
(millions)
Principal
amount
Effective
interest rate
 
Principal
amount
Effective
interest rate (a)
U.S. commercial paper
$
76

2.29
%
 
$
196

1.76
 %
Europe commercial paper

%
 
96

(0.32
)%
Bank borrowings
126

 
 
78

 
Total
$
202

 
 
$
370

 
(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 May 2018, the Company issued $600 million of ten-year 4.30% Senior Notes due 2028 and $400 million of three-year 3.25% Senior Notes due 2021, resulting in aggregate net proceeds after debt discount of $994 million. The proceeds from these Notes were used for general corporate purposes, including the repayment of the Company's $400 million, seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of ownership interests in TAF and Multipro. 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.

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In May 2017, the Company issued €600 million (approximately $697 million USD at September 29, 2018, which reflects the discount and translation adjustments) of five-year 0.80% Euro Notes due 2022, resulting in aggregate net proceeds after debt discount of $656 million. The proceeds from these Notes were used for general corporate purposes, including repayment of the Company's $400 million, five-year 1.75% U.S. Dollar Notes due 2017 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.

During the second quarter of 2017, the Company repaid its Cdn.$300 million three year 2.05% Canadian Dollar Notes.

As of September 29, 2018, the Company has entered into interest rate swaps with notional amounts totaling $1.3 billion, which effectively converts a portion of the associated U.S. Dollar Notes and Euro Notes from fixed rate to floating rate obligations. These derivative instruments are designated as fair value hedges. The effective interest rates on debt obligations resulting from the Company’s interest rate swaps as of September 29, 2018 were as follows: (a) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.48%; (b) ten-year 4.00% U.S. Dollar Notes due 2020 – 3.41%; (c) ten-year 3.125% U.S. Dollar Notes due 2022 – 3.88%; (d) ten-year 2.75% U.S. Dollar Notes due 2023 – 4.02%; (e) seven-year 2.65% U.S. Dollar Notes due 2023 – 3.42%; (f) eight-year 1.00% Euro Notes due 2024 – 0.71%; (g) ten-year 1.25% Euro Notes due 2025 - 1.31% and (h) ten-year 3.25% U.S. Notes due 2026 – 4.07%.
Note 7 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 2017 Annual Report on Form 10-K.
The Company classifies pre-tax stock compensation expense in COGS and SG&A expense principally within its Corporate segment. 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)
September 29, 2018
September 30, 2017
 
September 29, 2018
September 30, 2017
Pre-tax compensation expense
$
13

$
18

 
$
46

$
57

Related income tax benefit
$
3

$
7

 
$
11

$
21

As of September 29, 2018, total stock-based compensation cost related to non-vested awards not yet recognized was $101 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 September 29, 2018 and September 30, 2017, 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 2017 Annual Report on Form 10-K.

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Table of Contents

Year-to-date period ended September 29, 2018:
 
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
14

$
64

 
 
 
Granted
3

70

 
 
 
Exercised
(2
)
58

 
 
 
Forfeitures and expirations
(1
)
71

 
 
 
Outstanding, end of period
14

$
66

6.6
$
77

 
Exercisable, end of period
10

$
63

5.6
$
76

Year-to-date period ended September 30, 2017:
 
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
15

$
62

 
 
 
Granted
2

73

 
 
 
Exercised
(1
)
57

 
 
 
Forfeitures and expirations
(1
)
70

 
 
 
Outstanding, end of period
15

$
64

6.8
$
37

 
Exercisable, end of period
10

$
60

5.8
$
37


The weighted-average grant date fair value of options granted was $10.00 per share and $10.14 per share for the year-to-date periods ended September 29, 2018 and September 30, 2017, 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 year-to-date period ended September 29, 2018:
18
%
6.6
2.82
%
3.00
%
Grants within the year-to-date period ended September 30, 2017:
18
%
6.6
2.26
%
2.80
%
The total intrinsic value of options exercised was $33 million and $21 million for the year-to-date periods ended September 29, 2018 and September 30, 2017, respectively.
Performance shares
In the first quarter of 2018, 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 adjusted net sales 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 adjusted net sales growth achievement. Compensation cost related to adjusted net sales growth performance is revised for changes in the expected outcome. The 2018 target grant currently corresponds to approximately 175,000 shares, with a grant-date fair value of $72 per share.

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Based on the market price of the Company’s common stock at September 29, 2018, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:
(millions)
September 29, 2018
2016 Award
$
18

2017 Award
$
15

2018 Award
$
25

The 2015 performance share award, payable in stock, was settled at 75% of target in February 2018 for a total dollar equivalent of $8 million.
Other stock-based awards
During the year-to-date period ended September 29, 2018, 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 2017 Annual Report on Form 10-K.
Year-to-date period ended September 29, 2018:
Employee restricted stock units
Shares (thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
1,673

$
65

Granted
729

63

Vested
(451
)
59

Forfeited
(203
)
64

Non-vested, end of period
1,748

$
66

Year-to-date period ended September 30, 2017:
Employee restricted stock and restricted stock units
Shares (thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
1,166

$
63

Granted
666

67

Vested
(76
)
57

Forfeited
(125
)
65

Non-vested, end of period
1,631

$
65

Note 8 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 2017 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

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Table of Contents

Pension
 
Quarter ended
 
Year-to-date period ended
(millions)
September 29, 2018
September 30, 2017
 
September 29, 2018
September 30, 2017
Service cost
$
22

$
22

 
$
66

$
72

Interest cost
41

40

 
124

123

Expected return on plan assets
(91
)
(97
)
 
(273
)
(277
)
Amortization of unrecognized prior service cost
2

3

 
6

7

Recognized net (gain) loss
(36
)
83

 
(47
)
84

Net periodic benefit cost
(62
)
51

 
(124
)
9

Curtailment (gain) loss
(30
)
(134
)
 
(30
)
(136
)
Total pension (income) expense
$
(92
)
$
(83
)
 
$
(154
)
$
(127
)
Other nonpension postretirement
 
Quarter ended
 
Year-to-date period ended
(millions)
September 29, 2018
September 30, 2017
 
September 29, 2018
September 30, 2017
Service cost
$
5

$
5

 
$
14

$
14

Interest cost
10

10

 
28

28

Expected return on plan assets
(22
)
(24
)
 
(69
)
(73
)
Amortization of unrecognized prior service (gain)
(3
)
(3
)
 
(7
)
(7
)
Recognized net (gain) loss


 

(29
)
Net periodic benefit cost
(10
)
(12
)
 
(34
)
(67
)
Curtailment loss


 

3

Total postretirement benefit (income) expense
$
(10
)
$
(12
)
 
$
(34
)
$
(64
)
Postemployment
 
Quarter ended
 
Year-to-date period ended
(millions)
September 29, 2018
September 30, 2017
 
September 29, 2018
September 30, 2017
Service cost
$
1

$
1

 
$
3

$
4

Interest cost


 

2

Recognized net (gain) loss
(1
)

 
(3
)
1

Total postemployment benefit expense
$

$
1

 
$

$
7


During the third quarter of 2018, the Company recognized a curtailment gain of $30 million as certain European pension plans were frozen as of December 31, 2018 in conjunction with Project K restructuring activity. The Company remeasured the benefit obligation for the impacted pension plan resulting in a mark-to-market gain of $33 million. The gain was due primarily to plan asset returns in excess of the expected rate of return and a favorable change in the discount rate relative to prior year end.

For the year-to-date period ended September 29, 2018, the Company recognized a gain of $14 million related to the remeasurement of a U.S. pension plan as current year distributions are expected to exceed service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurement gain recognized was due primarily to a favorable change in the discount rate.

During the third quarter of 2017, the Company recognized pension plan curtailment gains totaling $134 million in conjunction with Project K restructuring activity which resulted from the amendment of certain defined benefit pension plans in the U.S. and Canada and workforce reductions. The Company remeasured the benefit obligation for the impacted pension plans resulting in a mark-to-market loss of $83 million. The loss was due primarily to changes in discount rates, partially offset by plan asset returns in excess of the expected rate of return.

For the year-to-date period ended September 30, 2017, the Company recognized pension plan curtailment gains totaling $136 million and a curtailment loss of $3 million within a nonpension postretirement plan, in conjunction with

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Table of Contents

Project K restructuring activity. The curtailment gains and losses resulted from the amendment of certain defined benefit pension plans in the U.S. and Canada and global workforce reductions. In addition, the Company remeasured the benefit obligation for impacted pension and nonpension postretirement plans. The remeasurement resulted in a mark-to-market loss of $84 million on pension plans due primarily to a lower discount rate and a $29 million gain on a nonpension postretirement plan primarily due to plan asset investment returns slightly offset by the impact of a lower discount rate.
Company contributions to employee benefit plans are summarized as follows:
(millions)
Pension
Nonpension postretirement
Total
Quarter ended:
 
 
 
September 29, 2018
$

$
5

$
5

September 30, 2017
$
2

$
3

$
5

Year-to-date period ended:
 
 
 
September 29, 2018
$
266

$
13

$
279

September 30, 2017
$
25

$
8

$
33

Full year:
 
 
 
Fiscal year 2018 (projected)
$
274

$
17

$
291

Fiscal year 2017 (actual)
$
31

$
13

$
44


During the second quarter of 2018, the Company made discretionary contributions to certain U.S. pension plans totaling $250 million. Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.

Additionally, during the first quarter of 2017, the Company recognized expense totaling $26 million related to the exit of several multi-employer plans associated with Project K restructuring activity. This amount represents management's best estimate, actual results could differ. The cash obligation is payable over a maximum 20-year period; management has not determined the actual period over which the payments will be made.
Note 9 Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code including but not limited to, reducing the corporate tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may be electively paid over eight years, and accelerating first year expensing of certain capital expenditures.

The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company may complete the accounting for the impacts of the Tax Act under ASC Topic 740. Per SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a Company cannot determine a provisional estimate to be included in the financial statements, the Company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a Company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.

The transition tax is on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. The Company updated its estimate during the third quarter

26