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Section 1: 10-K (10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 29, 2018
¨
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
(Exact name of registrant as specified in its charter)
Delaware
 
38-0710690
(State or other jurisdiction of Incorporation
or organization)
 
(I.R.S. Employer Identification No.)
 
 One Kellogg Square
Battle Creek, Michigan 49016-3599
(Address of Principal Executive Offices)
Registrant’s telephone number: (269) 961-2000
 
Securities registered pursuant to Section 12(b) of the Securities Act:
Title of each class:
  
Name of each exchange on which registered:
Common Stock, $.25 par value per share
  
New York Stock Exchange
1.750% Senior Notes due 2021
 
New York Stock Exchange
0.800% Senior Notes due 2022
 
New York Stock Exchange
1.000% Senior Notes due 2024
 
New York Stock Exchange
1.250% Senior Notes due 2025
 
New York Stock Exchange
 
 Securities registered pursuant to Section 12(g) of the Securities Act: None
 
 Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.    Yes  ¨    No  þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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  þ
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
Emerging growth company  ¨
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 Act).    Yes  ¨    No  þ
The aggregate market value of the common stock held by non-affiliates of the registrant (assuming for purposes of this computation only that the W. K. Kellogg Foundation Trust, directors and executive officers may be affiliates) as of the close of business on June 30, 2018 was approximately $19.1 billion based on the closing price of $68.71 for one share of common stock, as reported for the New York Stock Exchange on that date.
As of January 26, 2019, 343,894,654 shares of the common stock of the registrant were issued and outstanding.
Parts of the registrant’s Proxy Statement for the Annual Meeting of Shareowners to be held on April 26, 2019 are incorporated by reference into Part III of this Report.






PART I
ITEM 1. BUSINESS
The Company. Kellogg Company, founded in 1906 and incorporated in Delaware in 1922, and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods.
The address of the principal business office of Kellogg Company is One Kellogg Square, P.O. Box 3599, Battle Creek, Michigan 49016-3599. Unless otherwise specified or indicated by the context, “Kellogg,” “we,” “us” and “our” refer to Kellogg Company, its divisions and subsidiaries.
Financial Information About Segments. Information on segments is located in Note 18 within Notes to the Consolidated Financial Statements.
Principal Products. Our principal products are snacks, such as crackers, cookies, savory snacks, toaster pastries, cereal bars, granola bars and bites, fruit-flavored snacks; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. These products were, as of February 25, 2019, manufactured by us in 21 countries and marketed in more than 180 countries. They are sold to retailers through direct sales forces for resale to consumers. We use broker and distributor arrangements for certain products and channels, as well as less-developed market areas or in those market areas outside of our focus.
Our snacks brands are marketed under brands such as Kellogg’s, Keebler, Cheez-It, Pringles, Murray, Austin, Famous Amos, Parati, and RXBAR.  Our cereals and cereal bars are generally marketed under the Kellogg’s name, with some under the Kashi and Bear Naked brands.  Our frozen foods are marketed under the Eggo and Morningstar Farms brands. 
We also market cookies, crackers, crisps, and other convenience foods, under brands such as Kellogg’s, Keebler, Cheez-It, Pringles, Murray, Austin and Famous Amos, to supermarkets in the United States through a variety of distribution methods.
Additional information pertaining to the relative sales of our products for the years 2016 through 2018 is located in Note 18 within Notes to the Consolidated Financial Statements, which are included herein under Part II, Item 8.

Corporate responsibility and sustainability. Climate change and food security are core business issues for Kellogg to ensure the long-term health and viability of the ingredients we use in our products. The Social Responsibility & Public Policy Committee of our Board of Directors oversees the company's sustainability efforts and climate policy. All four committee members are independent. At the executive level, environmental and social issues in our supply chain are overseen by our Chief Sustainability Officer and are aligned and included in parallel work streams within internal audit and audit committee. Policies and strategies regarding these topics are aligned in the organization’s lobbying, advocacy, and membership efforts. In multi-stakeholder initiatives, Kellogg partners with suppliers, customers, governments and non-governmental organizations, including the World Business Council for Sustainable Development and the Consumer Goods Forum.

Kellogg Company relies on natural capital including energy for product manufacturing and distribution, water as an ingredient, for facility cleaning and steam power, and food crops and commodities as an ingredient. These natural capital dependencies are at risk of shortage, price volatility, regulation, and quality impacts due to climate change which is assessed as part of Kellogg’s overall enterprise risk management approach. Specific risks including water stress and social accountability are specifically identified and assessed on a regular basis, especially in emerging market expansion that fuels company growth. Due to these risks, Kellogg has implemented major short- and long-term initiatives to mitigate and adapt to these environmental pressures, as well as the resulting challenge of food security.
Global sustainability commitments. Kellogg has committed to improving efficiency in its owned manufacturing footprint by reducing water use, total waste, energy use, and greenhouse gas (GHG) emissions by 15% per metric tonne of food produced by 2020 from a 2015 baseline. We will report 2018 energy, GHG, and water use reductions in our 2018/2019 Corporate Responsibility Report. The goal is to reduce the risk of disruptions from unexpected constraints in natural resource availability or impacts on raw material pricing. Additionally, Kellogg is committed to implement water reuse projects in at least 25% of our plants by 2020 from a 2015 baseline, with a specific focus on plants located in water stressed areas. Kellogg has committed to responsibly sourcing our ten priority ingredients as determined by environmental, social, and business risk by 2020 by partnering with suppliers and farmers to

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measure continuous improvement. In addition, Kellogg established third-party approved science-based targets to reduce absolute Scope 1 and 2 greenhouse emissions by 65% and Scope 3 greenhouse emissions by 50% by 2050 from a 2015 baseline. Through these commitments, Kellogg supports the United Nations Sustainable Development Goal #13 to take urgent action to combat climate change and its impacts.
In 2017, the manufacturing organization led sustainability efforts that resulted in a reduction in water use by 1.8%, energy use by 2.1%, and GHG emissions by 11.4% per metric tonne of food produce compared to a 2015 baseline. In the first year of our science-based targets, we’ve reduced absolute Scope 1 and 2 emissions by 13.6%. In September 2017, Kellogg joined RE100, an industry platform working together towards 100% renewable electricity. Increasing our use of renewable electricity will lower business risk and reduce GHG emissions.

Food Loss and Waste: As a global food company, Kellogg is committed to addressing the critical issues of climate and food security, and we’re committed to address food loss and waste. Kellogg supports the United Nations Sustainable Development Goal (SDG) 12.3, to halve per capita global food waste at the retail and consumer levels and reduce food losses along production and supply chains, including post-harvest losses, by 2030. These goals are aligned with Kellogg commitments to reduce waste, with a focus on food waste across our end-to-end supply chain. And through our global signature cause platform, Breakfasts for Better Days™ we’re donating food for hunger relief that may otherwise go to waste.

Breakfasts for Better Days: In 2016, this global social purpose platform expanded with the intent to contribute to food security - aligned to United Nations Sustainable Development Goal #2 (SDG 2): End hunger, achieve food security and improved nutrition, and promote sustainable agriculture. The goal of the program is to create 3 billion Better Days by 2025 to address food security risks that can impact the Company as well as create opportunity to engage consumers. The Company’s five key commitments include food donations, expansion of breakfast clubs, supporting 500,000 farmers, committing to 45,000 employee volunteer days, and engaging 300 million people to join Kellogg in its hunger relief efforts. Through Breakfasts for Better Days, Kellogg has helped make billions of days better for people in need, providing 2.5 billion servings of food since 2013.
As a grain-based food company, the success of Kellogg Company is dependent on having timely access to high quality, low cost ingredients, water and energy for manufacturing globally. Risks are identified annually through annual reporting and evaluated in the short (<3 years), medium (3 - 6 years) and long terms (>6 years). The Company has incorporated the risks and opportunities of climate change and food security as part of the Global 2020 Growth Strategy and global Heart and Soul Strategy by continuing to identify risk, incorporate sustainability indicators into strategic priorities, and report regularly to leadership, the Board, and publicly. While these risks are not currently impacting business growth, they must be monitored, evaluated, and mitigated.
Raw Materials. Agricultural commodities, including corn, wheat, potato flakes, vegetable oils, sugar and cocoa, are the principal raw materials used in our products. Cartonboard, corrugate, and plastic are the principal packaging materials used by us. We continually monitor world supplies and prices of such commodities (which include such packaging materials), as well as government trade policies. The cost of such commodities may fluctuate widely due to government policy and regulation, weather conditions, climate change or other unforeseen circumstances. Continuous efforts are made to maintain and improve the quality and supply of such commodities for purposes of our short-term and long-term requirements.
The principal ingredients in the products produced by us in the United States include corn grits, wheat and wheat derivatives, potato flakes, oats, rice, cocoa and chocolate, soybeans and soybean derivatives, various fruits, sweeteners, vegetable oils, dairy products, eggs, and other ingredients, which are obtained from various sources. While most of these ingredients are purchased from sources in the United States, some materials are imported due to regional availability and specification requirements.
We enter into long-term contracts for the materials described in this section and purchase these items on the open market, depending on our view of possible price fluctuations, supply levels, and our relative negotiating power. While the cost of some of these materials has, and may continue to increase over time, we believe that we will be able to purchase an adequate supply of these items as needed. As further discussed herein under Part II, Item 7A, we also use commodity futures and options to hedge some of our costs.
Raw materials and packaging needed for internationally based operations are available in adequate supply and are sourced both locally and imported from countries other than those where used in manufacturing.

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Natural gas and propane are the primary sources of energy used to power processing ovens at major domestic and international facilities, although certain locations may use electricity, oil, propane or solar cells on a back-up or alternative basis. In addition, considerable amounts of diesel fuel are used in connection with the distribution of our products.
Trademarks. Generally, our products are marketed under trademarks we own. Our principal trademarks are our housemarks, brand names, slogans, and designs related to cereals, snacks and various other foods manufactured and marketed by us, and we also grant licenses to third parties to use these marks on various goods. These trademarks include Kellogg’s for cereals, convenience foods and our other products, and the brand names of certain ready-to-eat cereals, including All-Bran, Apple Jacks, Choco Zucaritas, Cocoa Krispies, Kellogg’s Corn Flakes, Corn Pops, Cracklin’ Oat Bran, Crispix, Eggo, Froot Loops, Kellogg’s Frosted Flakes, Krave, Frosted Krispies, Frosted Mini-Wheats, Mueslix, Pops, Kellogg's Raisin Bran, Raisin Bran Crunch, Rice Krispies, Rice Krispies Treats, Smacks/Honey Smacks, Special K, Special K Nourish, Special K Red Berries and Zucaritas in the United States and elsewhere; Sucrilhos, Krunchy Granola, Kellogg's Extra, Kellness, Müsli, and Choco Krispis for cereals in Latin America; Vector in Canada; Ancient Legends, Coco Pops, Choco Krispies, Frosties, Fruit ‘N Fibre, Kellogg’s Crunchy Nut, Krave, Honey Loops, Kellogg’s Extra, Country Store, Smacks, Pops, Honey Bsss, Croco Copters, W.K. Kellogg, Toppas and Tresor for cereals in Europe; and Froot Ring, Guardian, Just Right, Sultana Bran, Frosties, Rice Bubbles, Nutri-Grain, and Sustain for cereals in Asia and Australia. Additional trademarks are the names of certain combinations of ready-to-eat Kellogg’s cereals, including Fun Pak and Variety.
Other brand names include Kellogg’s Corn Flake Crumbs; All-Bran, Choco Krispis, Crunchy Nut, Frutela, Special K, Squares, Zucaritas and Sucrilhos for cereal bars; Pop-Tarts for toaster pastries; Eggo and Nutri-Grain for frozen waffles and pancakes; Eggo, Special K and MorningStar Farms for breakfast sandwiches; Rice Krispies Treats for convenience foods; Special K protein shakes; Nutri-Grain cereal bars for convenience foods in the United States and elsewhere; K-Time, Split Stix, Be Natural, Sunibrite and LCMs for convenience foods in Australia; Choco Krispies, Coco Pops, and Rice Krispies Squares for convenience foods in Europe; Kashi for certain cereals, convenience foods, frozen foods, powders and pilaf; GoLean for cereals and nutrition bars; Special K and Vector for meal bars; Bear Naked for granola cereal and snack bites, Pringles for potato crisps, corn crisps, grain and vegetable crisps and potato sticks; and Morningstar Farms and Gardenburger for certain meat alternatives.
We also market convenience foods under trademarks and tradenames which include Keebler, Austin, Cheez-It, Chips Deluxe, Club, E. L. Fudge, Famous Amos, Fudge Shoppe, Gripz, Krispy, Minueto, Mother’s, Murray, Murray Sugar Free, Parati, Ready Crust, RXBAR, Sandies, Special K, Soft Batch, Simply Made, Stretch Island, Sunshine, Toasteds, Town House, Trink, Vienna Fingers, Zesta and Zoo Cartoon. One of our subsidiaries is also the exclusive licensee of the Carr’s cracker line in the United States.
Our trademarks also include logos and depictions of certain animated characters in conjunction with our products, including Snap! Crackle! Pop! for Cocoa Krispies and Rice Krispies cereals and Rice Krispies Treats convenience foods; Tony the Tiger for Kellogg’s Frosted Flakes, Zucaritas, Sucrilhos and Frosties cereals and convenience foods; Ernie Keebler for cookies, convenience foods and other products; the Hollow Tree logo for certain convenience foods; Toucan Sam for Froot Loops cereal; Dig ‘Em for Smacks/Honey Smacks cereal; Sunny for Kellogg’s Raisin Bran and Raisin Bran Crunch cereals; Coco the Monkey for Coco Pops and Chocos cereal; Cornelius (aka Cornelio) for Kellogg’s Corn Flakes; Melvin the Elephant for certain cereal and convenience foods; Chocovore and Sammy the Seal (aka Smaxey the Seal) for certain cereal products; and Mr. P or Julius Pringles for Pringles potato crisps, corn crisps, grain and vegetable crisps and potato sticks.
The slogans The Original & Best, They’re Gr-r-reat!, Show Your Stripes and Follow Your Nose, are used in connection with our ready-to-eat cereals, along with L’ Eggo my Eggo, used in connection with our frozen waffles, pancakes, French toast sticks and breakfast sandwiches, Uncommonly Good and It Takes Heart To Make a Good Cookie used in connection with convenience food products, Taste It To Believe It used in connection with meat alternatives and Pop Play Eat used in connection with potato crisps are also important Kellogg trademarks.
The trademarks listed above, among others, when taken as a whole, are important to our business. Certain individual trademarks are also important to our business. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use.

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We consider that, taken as a whole, the rights under our various patents, which expire from time to time, are a valuable asset, but we do not believe that our businesses are materially dependent on any single patent or group of related patents. Our activities under licenses or other franchises or concessions which we hold are similarly a valuable asset, but are not believed to be material.
Seasonality. Demand for our products has generally been approximately level throughout the year, although some of our convenience foods have a bias for stronger demand in the second half of the year due to events and holidays. We also custom-bake cookies under a trademark license agreement with the Girl Scouts of the U.S.A., which cookies are principally sold in the first quarter of the year.
Working Capital. A description of our working capital is included in the Liquidity section of MD&A within Item 7 of this report.
Customers. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19% of consolidated net sales during 2018, comprised principally of sales within the United States. No other customer accounted for greater than 10% of net sales in 2018. During 2018, our top five customers, collectively, including Wal-Mart, accounted for approximately 33% of our consolidated net sales and approximately 49% of U.S. net sales. There has been significant worldwide consolidation in the grocery industry and we believe that this trend is likely to continue. Although the loss of any large customer for an extended length of time could negatively impact our sales and profits, we do not anticipate that this will occur to a significant extent due to the consumer demand for our products and our relationships with our customers. Our products have been generally sold through our own sales forces and through broker and distributor arrangements, and have been generally resold to consumers in retail stores, restaurants, and other food service establishments.
Backlog. For the most part, orders are filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders at December 29, 2018 and December 30, 2017 was not material to us.
Competition. We have experienced, and expect to continue to experience, intense competition for sales of all of our principal products in our major product categories, both domestically and internationally. Our products compete with advertised and branded products of a similar nature as well as unadvertised and private label products, which are typically distributed at lower prices, and generally with other food products. Principal methods and factors of competition include new product introductions, product quality, taste, convenience, nutritional value, price, advertising and promotion.
Research and Development. Research to support and expand the use of our existing products and to develop new food products is carried on at the W. K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Michigan, and at other locations around the world. Our expenditures for research and development were approximately (in millions): 2018-$154; 2017-$148; 2016-$182.
Regulation. Our activities in the United States are subject to regulation by various government agencies, including the Food and Drug Administration, Federal Trade Commission and the Departments of Agriculture, Commerce and Labor, as well as voluntary regulation by other bodies. Various state and local agencies also regulate our activities. Other agencies and bodies outside of the United States, including those of the European Union and various countries, states and municipalities, also regulate our activities.
Environmental Matters. Our facilities are subject to various U.S. and foreign, federal, state, and local laws and regulations regarding the release of material into the environment and the protection of the environment in other ways. We are not a party to any material proceedings arising under these regulations. We believe that compliance with existing environmental laws and regulations will not materially affect our consolidated financial condition or our competitive position.
Employees. At December 29, 2018, we had approximately 34,000 employees.
Financial Information About Geographic Areas. Information on geographic areas is located in Note 18 within Notes to the Consolidated Financial Statements, which are included herein under Part II, Item 8.

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Executive Officers. The names, ages, and positions of our executive officers (as of February 25, 2019) are listed below, together with their business experience. Executive officers are elected annually by the Board of Directors.
 
 
Amit Banati
50

Senior Vice President, Kellogg Company
President, Asia Pacific
Mr. Banati assumed his current position in March 2012. Prior to joining Kellogg Company, he served in a variety of board and leadership roles at Kraft Foods, Cadbury Schweppes and Procter & Gamble. Mr. Banati has worked extensively across the Asia Pacific region, particularly in Australia, India, China, Japan, Korea, Southeast Asia and Singapore. At Kraft Foods, he was President, North Asia and Asia Pacific strategy, leading the company’s operations in Japan, Korea, Taiwan, Hong Kong and Singapore. Prior to that, Mr. Banati served as President, Pacific, for Cadbury Schweppes, leading its Australia, New Zealand, Japan and Singapore operations. He was also Chairman of Cadbury Schweppes Australia Limited.
 
 
Steven A. Cahillane
53

Chairman and Chief Executive Officer
Mr. Cahillane has been Chairman of the Board of Kellogg Company since March 2018, and President and Chief Executive Officer since October 2017. He has also served as a Kellogg Director since October 2017. Prior to joining Kellogg, Mr. Cahillane served as Chief Executive Officer and President, and as member of the board of directors, of Alphabet Holding Company, Inc., and its wholly-owned operating subsidiary, The Nature’s Bounty Co., until September 2014. Prior to that, Mr. Cahillane served as Executive Vice President of The Coca-Cola Company from February 2013 to February 2014 and President of Coca-Cola Americas, the global beverage maker’s largest business, with $25 billion in annual sales at that time, from January 2013 to February 2014. Mr. Cahillane served as President of various Coca-Cola operating groups from 2007 to 2012. He has also been a trustee of the W. K. Kellogg Foundation Trust since 2018.
 
 
Kurt D. Forche
49

Vice President and Corporate Controller
Mr. Forche was appointed Vice President and Corporate Controller, Kellogg Company, in July 2018. Previously, Mr. Forche served as Vice President, Assistant Corporate Controller since December 2016. Mr. Forche joined Kellogg as an internal auditor in 1997, subsequently holding a number of Finance roles in the North American business until being named Sr Director, Corporate Financial Reporting in April 2014.  Prior to joining Kellogg in 1997, he spent four years at Price Waterhouse as an auditor.
 
 
Alistair D. Hirst
59

Senior Vice President, Global Supply Chain
Mr. Hirst assumed his current position in April 2012. He joined the company in 1984 as a Food Technologist at the Springs, South Africa, plant. While at the facility, he was promoted to Quality Assurance Manager and Production Manager. From 1993 to 2001, Mr. Hirst held numerous positions in South Africa and Australia, including Production Manager, Plant Manager, and Director, Supply Chain. In 2001, Mr. Hirst was promoted to Director, Procurement at the Manchester, England, facility and was later named European Logistics Director. In 2005, he transferred to the U.S. when promoted to Vice President, Global Procurement. In 2008, he was promoted to Senior Vice President, Snacks Supply Chain and to Senior Vice President, North America Supply Chain, in October 2011.

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Christopher M. Hood
56

Senior Vice President, Kellogg Company
President, Kellogg North America
Mr. Hood assumed his current position in July 2018. He most recently served as President, Kellogg Europe. Mr. Hood joined Kellogg Company in 2012 as the Vice President of European Snacks. Prior to Kellogg, he served The Procter and Gamble Company in 1993, and had a distinguished 19-year career in Marketing and General Management, based in Cincinnati, Ohio. Mr. Hood has held a number of Board roles across the Food and Beverage Industry. He currently serves on the GMA Board of Directors and FMI Foundation Board of Trustees.
 
 
Melissa A. Howell
52

Senior Vice President, Global Human Services
Ms. Howell assumed her current position in June 2016. Prior to joining Kellogg, she was Chief Human Resource Officer for Rockford, Michigan-based Wolverine since 2014. Prior to Wolverine, Ms. Howell spent 24 years with General Motors where she led a team of 2,800 Human Resource professionals worldwide, supporting a global business at one of the top automotive companies in the world, and also among the largest public corporations. Ms. Howell joined General Motors as a Labor Relations Representative at its Ypsilanti, Michigan, assembly plant in 1990. Over the following years, she served in a series of key human resource leadership roles in Europe, Asia and U.S. leading teams on six continents across an array of functional areas. Ms. Howell was promoted to Executive Director of North American Human Resources in 2011 and subsequently promoted to Senior Vice President of Global Human Resources.
 
 
Fareed Khan
53

Senior Vice President and Chief Financial Officer
Mr. Khan has been Senior Vice President, Chief Financial Officer and Principal Financial Officer, Kellogg Company since February 22, 2017. Mr. Khan joined Kellogg in February 2017. Before joining the Company, he served as Chief Financial Officer of US Foods Holding Corp. since 2013. Prior to that, Mr. Khan had been Senior Vice President and Chief Financial Officer of United Stationers Inc. since July 2011. Prior to United Stationers Inc., he spent twelve years with USG Corporation, where he most recently served as Executive Vice President, Finance and Strategy. Before joining USG Corporation in 1999, Mr. Khan was a consultant with McKinsey & Company, where he served global clients on a variety of projects.
 
 
David Lawlor
51

Senior Vice President, Kellogg Company
President, Kellogg Europe
Mr. Lawlor assumed his current position in July 2018. He most recently served as Vice President, European Cereal from November 2017 to June 2018. Mr. Lawlor began his career at Kellogg in 1991, joining as a sales manager in its Dublin office. Following this, he held a number of senior roles, including running the company’s Middle Eastern business, setting up its Dubai office and helping to launch its joint venture in Turkey with domestic food company Ulker. Mr. Lawlor then served as General Manager of Kellogg Russia from October 2008 to August 2016 and led the integration of United Bakers Group, a local biscuit and cracker manufacturer. In August 2016, he was appointed Managing Director, UK/ROI where he refocused the company’s efforts to stabilize and grow its core cereal business.




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Maria Fernanda Mejia
55

Senior Vice President, Kellogg Company
President, Kellogg Latin America
Ms. Mejia assumed her current position in November 2011. She previously held a variety of global marketing and management roles at the Colgate-Palmolive Company, including Corporate Vice President and General Manager, Global Personal Care and Corporate Fragrance Development, Corporate Vice President of Marketing and Innovation for Europe/South Pacific, and President and CEO of Colgate-Palmolive Spain. She joined Colgate in 1989.
 
 
Monica H. McGurk
48

Senior Vice President, Kellogg Company
Chief Growth Officer
Ms. McGurk assumed her current position in January 2019. Ms. McGurk began her career at Kellogg in July 2018, serving as Chief Revenue and eCommerce Officer. Ms. McGurk was the Chief Growth Officer for Tyson Foods, Inc. through September 2017, having previously joined the company in 2016 as Executive Vice President of Strategy and New Ventures & President of Foodservice. Prior to joining Tyson Foods, Inc., Ms. McGurk worked for The Coca-Cola Company as Senior Vice President, Strategy, Decision Support and eCommerce, North America Group from 2014 to 2016, and as Vice President, Strategy & eCommerce from 2012 to 2014.
 
 
Gary H. Pilnick
54

Vice Chairman, Corporate Development
and Chief Legal Officer
Mr. Pilnick was appointed Vice Chairman, Corporate Development and Chief Legal Officer in January 2016. In August 2003, he was appointed Senior Vice President, General Counsel and Secretary and assumed responsibility for Corporate Development in June 2004. He joined Kellogg as Vice President — Deputy General Counsel and Assistant Secretary in September 2000 and served in that position until August 2003. Before joining Kellogg, he served as Vice President and Chief Counsel of Sara Lee Branded Apparel and as Vice President and Chief Counsel, Corporate Development and Finance at Sara Lee Corporation.
Availability of Reports; Website Access; Other Information. Our internet address is http://www.kelloggcompany.com. Through “Investor Relations” — “Financial Reports” — “SEC Filings” on our home page, we make available free of charge our proxy statements, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our reports filed with the Securities and Exchange Commission are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.
Copies of the Corporate Governance Guidelines, the Charters of the Audit, Compensation and Talent Management, and Nominating and Governance Committees of the Board of Directors, the Code of Conduct for Kellogg Company directors and Global Code of Ethics for Kellogg Company employees (including the chief executive officer, chief financial officer and corporate controller) can also be found on the Kellogg Company website. Any amendments or waivers to the Global Code of Ethics applicable to the chief executive officer, chief financial officer and corporate controller can also be found in the “Investor Relations” section of the Kellogg Company website. Shareowners may also request a free copy of these documents from: Kellogg Company, P.O. Box CAMB, Battle Creek, Michigan 49016-9935 (phone: (800) 961-1413), Investor Relations Department at that same address (phone: (269) 961-2800) or [email protected]
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

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growth; sales, 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,” “estimate,” “project,” “should,” or words or phrases of similar meaning. For example, forward-looking statements are found in this 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, including exiting our Direct-Store-Door distribution system, 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 anticipated benefits from revenue growth management, 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; 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 in Item 1A below. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
ITEM 1A. RISK FACTORS
In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially adversely affect our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition.

If we pursue strategic acquisitions, alliances, divestitures or joint ventures, we may not be able to successfully consummate favorable transactions or successfully integrate acquired businesses.
From time to time, we may evaluate potential acquisitions, alliances, divestitures or joint ventures that would further our strategic objectives. With respect to acquisitions, we may not be able to identify suitable candidates, consummate a transaction on terms that are favorable to us, or achieve expected returns, expected synergies and other benefits as a result of integration challenges, or may not achieve those objectives on a timely basis. Future acquisitions of foreign companies or new foreign ventures would subject us to local laws and regulations and could potentially lead to risks related to, among other things, increased exposure to foreign exchange rate changes, government price control, repatriation of profits and liabilities relating to the U.S. Foreign Corrupt Practices Act.
With respect to proposed divestitures of assets or businesses, we may encounter difficulty in finding acquirers or alternative exit strategies on terms that are favorable to us, which could delay the accomplishment of our strategic objectives, or our divestiture activities may require us to recognize impairment charges. Companies or operations acquired or joint ventures created may not be profitable or may not achieve sales levels and profitability that justify the investments made. Our corporate development activities may present financial and operational risks, including diversion of management attention from existing core businesses, integrating or separating personnel and financial and other systems, and adverse effects on existing business relationships with suppliers and customers. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to certain intangible assets and increased operating expenses, which could adversely affect our results of operations and financial condition.

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The proposed divestiture of our cookies and fruit snacks businesses is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all.
On November 12, 2018, we announced our intention to explore a sale of our cookies business (including the Keebler, Famous Amos, Mother’s and Murray brands), fruit snacks business (including the Stretch Island brand), and our pie crust and ice cream cone businesses. There can be no assurance of the terms, timing or structure of any transaction involving such businesses, whether we will be able to identify buyers for the businesses on favorable terms or at all, or whether any such transaction will take place at all. In addition, any such transaction is subject to risks and uncertainties, including unanticipated developments, regulatory approvals or clearances and uncertainty in the financial markets, that could delay or prevent the completion of any such transaction.
The proposed divestiture of our cookies and fruit snacks businesses may not achieve some or all of the anticipated benefits.
Executing the proposed divestiture of our cookies, fruit snacks, pie crust and ice cream cone businesses will require us to incur costs and will require the time and attention of our senior management and key employees, which could distract them from operating our business, disrupt operations, and result in the loss of business opportunities, each of which could adversely affect our business, financial condition, and results of operations. We may also experience increased difficulty in attracting, retaining and motivating key employees during the pendency of the divestiture and following its completion, which could harm our business. Even if the proposed divestiture is completed, we may not realize some or all of the anticipated benefits from the divestiture and the divestiture may in fact adversely affect our business.
We may not realize the benefits that we expect from our global efficiency and effectiveness program (Project K).
In November 2013, the Company announced a global efficiency and effectiveness program (Project K). While we are in the final year of Project K and many of the initiatives under the program have been successfully implemented or are nearing completion, we may not be able to conclude Project K as planned. Events and circumstances, such as financial or strategic difficulties, delays and unexpected costs may occur that could result in our not realizing the remaining anticipated benefits or our not realizing the anticipated benefits on our expected timetable. Any failure to conclude Project K in accordance with our expectations could adversely affect our financial condition, results of operations and cash flows.
We may not realize the benefits we expect from revenue growth management.
We are utilizing formal revenue growth management practices to help us realize price in a more effective way. This approach addresses price strategy, price-pack architecture, promotion strategy, mix management, and trade strategies. Revenue growth management involves changes to the way we do business and may not always be accepted by our customers, consumers or third party providers causing us not to realize the anticipated benefits. In addition, the complexity of the execution requires a substantial amount of management and operational resources. These and related demands on our resources may divert the organization's attention from other business issues and have adverse effects on existing business relationships with suppliers and customers. Any failure to execute revenue growth management in accordance with our plans could adversely affect our business or financial condition.
Our results may be materially and adversely impacted as a result of increases in the price of raw materials, including agricultural commodities, fuel and labor.
Agricultural commodities, including corn, wheat, potato flakes, vegetable oils, sugar and cocoa, are the principal raw materials used in our products. Cartonboard, corrugated, and plastic are the principal packaging materials used by us. The cost of such commodities may fluctuate widely due to government policy, regulation, and/or shutdown, drought and other weather conditions (including the potential effects of climate change) or other unforeseen circumstances. To the extent that any of the foregoing factors affect the prices of such commodities and we are unable to increase our prices or adequately hedge against such changes in prices in a manner that offsets such changes, the results of our operations could be materially and adversely affected. In addition, we use derivatives to hedge price risk associated with forecasted purchases of raw materials. Our hedged price could exceed the spot price on the date of purchase, resulting in an unfavorable impact on both gross margin and net earnings.
Cereal processing ovens at major domestic and international facilities are regularly fueled by electricity, natural gas or propane, which are obtained from local utilities or other local suppliers. Short-term stand-by propane storage exists at several plants for use in case of interruption in natural gas supplies. Oil may also be used to fuel certain operations at various plants. In addition, considerable amounts of diesel fuel are used in connection with the

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distribution of our products. The cost of fuel may fluctuate widely due to economic and political conditions, government policy, regulation and/or shutdown, war, or other unforeseen circumstances which could have a material adverse effect on our consolidated operating results or financial condition.

Our results may be adversely affected by increases in transportation costs and reduced availability of or increases in the price of oil or other fuels.

We rely on trucking and railroad operators to deliver incoming ingredients to our manufacturing locations and to deliver finished products to our customers. Shortages of truck drivers and railroad workers have contributed to increased freight costs, which has had a material and adverse effect on our business, financial condition and results of operations. Transportation costs are further increasing as a result of high levels of long-haul driver turnover and increased railroad traffic and service issues. Additionally, energy and fuel costs can fluctuate dramatically and, at times, have resulted in significant cost increases, particularly for the price of oil and gasoline. An increase in the price of oil increases our transportation costs for distribution and costs to purchase our products from suppliers. Increases in transportation and energy and fuel costs has, and may continue to affect our profitability and may increase the cost of our products, which may reduce consumer demand.
A shortage in the labor pool, failure to successfully negotiate collectively bargained agreements, or other general inflationary pressures or changes in applicable laws and regulations could increase labor cost, which could have a material adverse effect on our consolidated operating results or financial condition.
Our labor costs include the cost of providing benefits for employees. We sponsor a number of benefit plans for employees in the United States and various foreign locations, including pension, retiree health and welfare, active health care, severance and other postemployment benefits. We also participate in a number of multiemployer pension plans for certain of our manufacturing locations. Our major pension plans and U.S. collectively bargained retiree health and welfare plans are funded with trust assets invested in a globally diversified portfolio of equity securities with smaller holdings of bonds, real estate and other investments. The annual cost of benefits can vary significantly from year to year and is materially affected by such factors as changes in the assumed or actual rate of return on major plan assets, a change in the weighted-average discount rate used to measure obligations, the rate or trend of health care cost inflation, and the outcome of collectively-bargained wage and benefit agreements. Many of our employees are covered by collectively-bargained agreements and other employees may seek to be covered by collectively-bargained agreements. Strikes or work stoppages and interruptions could occur if we are unable to renew these agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could adversely impact our operating results. The terms and conditions of existing, renegotiated or new agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency.
Multiemployer pension plans could adversely affect our business.
We participate in various “multiemployer” pension plans administered by labor unions representing some of our employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. Our required contributions to these funds could increase because of a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these funds, inability or failure of withdrawing companies to pay their withdrawal liability, lower than expected returns on pension fund assets or other funding deficiencies. In the event that we withdraw from participation in one of these plans,
then applicable law could require us to make an additional lump-sum contribution to the plan, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our consolidated balance sheet. There is the potential that the sale of our cookies, fruit snacks, pie crust and ice cream cone businesses may result in withdrawal liability under certain multiemployer pension plans and any such withdrawal could have a material adverse effect on our consolidated operating results or financial condition.  Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s funding of vested benefits. In the ordinary course of our renegotiation of collective bargaining agreements with labor unions that maintain these plans, we may decide to discontinue participation in a plan, and in that event, we could face a withdrawal liability. Some multiemployer plans in which we participate are reported to have significant underfunded liabilities. Such underfunding could increase the size of our potential withdrawal liability.

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We operate in the highly competitive food industry.
We face competition across our product lines, including snacks, ready-to-eat cereals and other convenience foods, from other companies which have varying abilities to withstand changes in market conditions. The principal aspects of our business where we face competition include brand recognition, taste, nutritional value, price, promotion, innovation, shelf space, navigating the growing e-commerce marketplace, convenient ordering and delivery to the consumer and customer service. Most of our competitors have substantial financial, marketing and other resources, and some of our competitors may spend more aggressively on advertising and promotional activities than we do. Our competition with other companies in our various markets and product lines could cause us to reduce prices, increase capital, marketing or other expenditures, or lose category share, any of which could have a material adverse effect on our business and financial results. In some cases, our competitors may be able to respond to changing business and economic conditions more quickly than us. Category share and growth could also be adversely impacted if we are not successful in introducing new products, anticipating changes in consumer preferences with respect to dietary trends or purchasing behaviors or in effectively assessing, changing and setting proper pricing.
The changing retail environment and the growing presence of alternative retail channels, could negatively impact our sales and profits.
Our businesses are largely concentrated in the traditional retail grocery trade. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19% of consolidated net sales during 2018, comprised principally of sales within the United States. No other customer accounted for greater than 10% of net sales in 2018. During 2018, our top five customers, collectively, including Wal-Mart, accounted for approximately 33% of our consolidated net sales and approximately 49% of U.S. net sales. There can be no assurances that our largest customers will continue to purchase our products in the same mix or quantities or on the same terms as in the past. As the retail grocery trade continues to consolidate and retailers become larger, our large retail customers have sought, and may continue to seek in the future, to use their position to improve their profitability through improved efficiency, lower pricing, increased promotional programs funded by their suppliers and more favorable terms. If we are unable to use our scale, marketing expertise, product innovation and category leadership positions to respond, our profitability or volume growth could be negatively affected. The loss of any large customer or severe adverse impact on the business operations of any large customer for an extended length of time could negatively impact our sales and profits.
Additionally, alternative retail channels, such as internet-based retailers, mobile applications, subscription services, discount and dollar stores, drug stores and club stores, have become more prevalent. This trend away from traditional retail grocery, and towards such channels, is expected to continue in the future. If we are not successful in expanding sales in alternative retail channels, our business or financial results may be negatively impacted. In addition, these alternative retail channels may create consumer price deflation, affecting our retail customer relationships and presenting additional challenges to increasing prices in response to commodity or other cost increases. Also, if these alternative retail channels, such as internet-based retailers were to take significant share away from traditional retailers that could have a flow over effect on our business and our financial results could be negatively impacted.

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Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands.
We have a number of iconic brands with significant value. Maintaining and continually enhancing the value of these brands is critical to the success of our business. Brand value is based in large part on consumer perceptions. Success in promoting and enhancing brand value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly due to a number of factors, including consumer perception that we, or any of our employees, have acted in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, the products becoming unavailable to consumers, or the failure to meet the nutrition expectations of our products or particular ingredients in our products (whether or not valid), including whether certain of our products are perceived to contribute to obesity. In addition, we might fail to anticipate consumer preferences with respect to dietary trends or purchasing behaviors, invest sufficiently in maintaining, extending and expanding our brand image or achieve the desired efforts of our marketing efforts. The growing use of social and digital media by consumers, Kellogg and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Kellogg, our brands, our products or any of our employees on social or digital media could seriously damage our brands, reputation and brand loyalty, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction. Brand recognition and loyalty can also be impacted by the effectiveness of our advertising campaigns, marketing programs and sponsorships, as well as our use of social media. If we do not maintain the favorable perception of our brands, our results could be negatively impacted.
Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions where the Company’s subsidiaries are organized. Due to economic and political conditions (including shifts in the geopolitical landscape), tax rates in the U.S. and various foreign jurisdictions have been and may be subject to significant change. The future effective tax rate could be effected by changes in mix of earnings in countries with differing statutory tax rates, changes in valuation of deferred tax asset and liabilities, or changes in tax laws or their interpretation which includes recently enacted U.S. tax reform and contemplated changes in other countries of long-standing tax principles if finalized and adopted could have a material impact on our income tax expense and deferred tax balances.
We are also subject to regular reviews, examinations and audits by the Internal Revenue Service and other taxing authorities with respect to taxes inside and outside of the U.S. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.
We also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, including value added tax, or other changes in the application of existing taxes, in markets in which we are currently active, or may be active in the future, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
If our food products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience product liability if consumers are injured as a result.
Selling food products involves a number of legal and other risks, including product contamination, food borne illnesses, spoilage, product tampering, allergens, or other adulteration. We may need to recall some of our products if they become adulterated or misbranded. We may also be liable if the consumption of any of our products causes injury, illness or death. A widespread product recall or market withdrawal could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of our brands. Moreover, even if a product liability or consumer fraud claim is meritless, does not prevail or is not pursued, the negative publicity surrounding assertions against our company and our products or processes could adversely affect our reputation or brands.
We could also be adversely affected if consumers lose confidence in the safety and quality of certain food products or ingredients, or the food safety system generally. If another company recalls or experiences negative publicity related to a product in a category in which we compete, consumers might reduce their overall consumption of

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products in this category. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.
Unanticipated business disruptions could have an adverse effect on our business, financial condition and results of operations.
We manufacture and source products and materials on a global scale. We have a complex network of suppliers, owned manufacturing locations, contract manufacturer locations, warehousing and distribution networks and information systems that support our ability to provide our products to our customers consistently. Our ability to make, move and sell products globally is critical to our success. Factors that are hard to predict or beyond our control, such as product or raw material scarcity, weather (including any potential effects of climate change), natural disasters, fires or explosions, terrorism, political unrest, unrest or government shutdowns, cybersecurity breaches, health pandemics, disruptions in logistics, loss or impairment of key manufacturing sites, supplier capacity constraints, or strikes, could damage or disrupt our operations or our suppliers' or contract manufacturers' operations. If we do not effectively respond to disruptions in our operations, for example, by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or cannot quickly repair damage to our information, technology, production or supply systems, we may be late in delivering or unable to deliver products to our customers. If that occurs, we may lose our customers' confidence, and long-term consumer demand for our products could decline. These events could adversely affect our business, financial condition and results of operations.
Evolving tax, environmental, food quality and safety or other regulations or failure to comply with existing licensing, labeling, trade, food quality and safety and other regulations and laws could have a material adverse effect on our consolidated financial condition.
Our activities or products, both in and outside of the United States, are subject to regulation by various federal, state, provincial and local laws, regulations and government agencies, including the U.S. Food and Drug Administration, U.S. Federal Trade Commission, the U.S. Departments of Agriculture, Commerce and Labor, as well as similar and other authorities outside of the United States, International Accords and Treaties and others, including voluntary regulation by other bodies. Legal and regulatory systems can change quickly, as demonstrated by the events of the Brexit vote. In addition, legal and regulatory systems in emerging and developing markets may be less developed, and less certain. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic, regulatory or social events. In addition, the enforcement of remedies in certain foreign jurisdictions may be less certain, resulting in varying abilities to enforce intellectual property and contractual rights.
The manufacturing, marketing and distribution of food products are subject to governmental regulation that impose additional regulatory requirements. Those regulations control such matters as food quality and safety, ingredients, advertising, product or production requirements, labeling, import or export of our products or ingredients, relations with distributors and retailers, health and safety, the environment, and restrictions on the use of government programs, such as Supplemental Nutritional Assistance Program, to purchase certain of our products.
The marketing of food products has come under increased regulatory scrutiny in recent years, and the food industry has been subject to an increasing number of proceedings and claims relating to alleged false or deceptive marketing under federal, state and foreign laws or regulations. We are also regulated with respect to matters such as licensing requirements, trade and pricing practices, tax, anticorruption standards, advertising and claims, and environmental matters. The need to comply with new, evolving or revised tax, environmental, food quality and safety, labeling or other laws or regulations, or new, evolving or changed interpretations or enforcement of existing laws or regulations, may have a material adverse effect on our business and results of operations. Governmental and administrative bodies within the U.S. are considering a variety of trade and other regulatory reforms. Changes in legal or regulatory requirements (such as new food safety requirements and revised nutrition facts labeling and serving size regulations), or evolving interpretations of existing legal or regulatory requirements, may result in increased compliance costs, capital expenditures and other financial obligations that could adversely affect our business or financial results. If we are found to be out of compliance with applicable laws and regulations in these areas, we could be subject to civil remedies, including fines, injunctions, termination of necessary licenses or permits, or recalls, as well as potential criminal sanctions, any of which could have a material adverse effect on our business. Even if regulatory review does not result in these types of determinations, it could potentially create negative publicity or perceptions which could harm our business or reputation. Further, modifications to international trade policy, including changes to or repeal of the North American Free Trade Agreement, changes in the European Union (such as Brexit) or the imposition of increased or new tariffs, quotas or trade barriers on key commodities,

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could have a negative impact on us or the industries we serve, including as a result of related uncertainty, and could materially and adversely impact our business, financial condition, results of operations and cash flows.
Our operations face significant foreign currency exchange rate exposure and currency restrictions which could negatively impact our operating results.
We hold assets and incur liabilities, earn revenue and pay expenses in a variety of currencies other than the U.S. dollar, including the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian Real, Nigerian Naira, and Russian ruble. Because our consolidated financial statements are presented in U.S. dollars, we must translate our assets, liabilities, revenue and expenses into U.S. dollars at then-applicable exchange rates and face exposure to adverse movements in foreign currency exchange rates. For example, the announcement and implementation of Brexit has caused, and may continue to cause, significant volatility in currency exchange rate fluctuations. Consequently, changes in the value of the U.S. dollar may unpredictably and negatively affect the value of these items in our consolidated financial statements, even if their value has not changed in their original currency.
Potential liabilities and costs from litigation could adversely affect our business.
There is no guarantee that we will be successful in defending our self in civil, criminal or regulatory actions, including under general, commercial, employment, environmental, data privacy or security, intellectual property, food quality and safety, anti-trust and trade, advertising and claims, and environmental laws and regulations, or in asserting our rights under various laws. For example, our marketing or claims could face allegations of false or deceptive advertising or other criticisms which could end up in litigation and result in potential liabilities or costs. In addition, we could incur substantial costs and fees in defending our self or in asserting our rights in these actions or meeting new legal requirements. The costs and other effects of potential and pending litigation and administrative actions against us, and new legal requirements, cannot be determined with certainty and may differ from expectations.
Our consolidated financial results and demand for our products are dependent on the successful development of new products and processes.
There are a number of trends in consumer preferences which may impact us and the industry as a whole. These include changing consumer dietary trends and the availability of substitute products.
Our success is dependent on anticipating changes in consumer preferences and on successful new product and process development and product relaunches in response to such changes. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced loyalty demand and price reductions for our brands and products. We aim to introduce products or new or improved production processes on a timely basis in order to counteract obsolescence and decreases in sales of existing products. While we devote significant focus to the development of new products and to the research, development and technology process functions of our business, we may not be successful in developing new products or our new products may not be commercially successful. In addition, if sales generated by new products cause a decline in sales of the Company's existing products, the Company's financial condition and results of operations could be materially adversely affected. Our future results and our ability to maintain or improve our competitive position will depend on our capacity to gauge the direction of our key markets and upon our ability to successfully identify, develop, manufacture, market and sell new or improved products in these changing markets.
Our postretirement benefit-related costs and funding requirements could increase as a result of volatility in the financial markets, changes in interest rates and actuarial assumptions.
Increases in the costs of postretirement medical and pension benefits may continue and negatively affect
our business as a result of increased usage of medical benefits by retired employees and medical cost inflation, an increase in participants enrolled, the effect of potential declines in the stock and bond markets on the performance of our pension and post-retirement plan assets, potential reductions in the discount rate used to determine the present value of our benefit obligations, and changes to our investment strategy that may impact our expected return on pension and post-retirement plan assets assumptions. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. The Company’s accounting policy for defined benefit plans may subject earnings to volatility due to the recognition of actuarial gains and losses, particularly those due to the change in the fair value of pension and post-retirement plan assets and interest rates. In addition, funding requirements for our plans may become more significant. However,

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the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns, and the impact of legislative or regulatory changes related to pension and post-retirement funding obligations.
We use available borrowings under the credit facilities and other available debt financing for cash to operate our business, which subjects us to market and counter-party risk, some of which is beyond our control.
In addition to cash we generate from our business, our principal existing sources of cash are borrowings available under our credit facilities and other available debt financing. If our access to such financing was unavailable or reduced, or if such financing were to become significantly more expensive for any reason, we may not be able to fund daily operations, which would cause material harm to our business or could affect our ability to operate our business as a going concern. In addition, if certain of our lenders experience difficulties that render them unable to fund future draws on the facilities, we may not be able to access all or a portion of these funds, which could have similar adverse consequences.

We utilize extended payment terms for customers and suppliers supplemented with third party financing programs to assist in effectively managing our core working capital. If the extension of payment terms are reversed or financial institutions terminate their participation, our ability to maintain current levels of core working capital could be adversely impacted.

Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. We utilize third-party financing programs to offset the negative impact of offering extended customer payment terms. In addition, in combination with extending supplier payment terms, structured payables programs are available to our suppliers which enable suppliers, at their sole discretion, to enter bilateral agreements to sell Company payment obligations to designated third-party financial institutions.

Changes in financial markets or interest rates could make these third party financing programs less attractive to the financial institutions purchasing trade accounts receivables and Company payment obligations thereunder and these financial institutions may seek to terminate their participation. In the event of such termination or if our extended payment terms are reversed, our ability to effectively manage core working capital could be adversely impacted.
We have a substantial amount of indebtedness.
We have indebtedness that is substantial in relation to our shareholders’ equity, and we may incur additional indebtedness in the future, or enter into off-balance sheet financing, which would increase our leverage risks. As of December 29, 2018, we had total debt of approximately $9.4 billion and total Kellogg Company equity of $2.6 billion.
Our substantial indebtedness could have important consequences, including:
impairing the ability to access global capital markets to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward or if a rating organization announces that our ratings are under review for a potential downgrade;
a downgrade in our credit ratings, particularly our short-term credit rating, would likely reduce the amount of commercial paper we could issue, increase our commercial paper borrowing costs, or both;
restricting our flexibility in responding to changing market conditions or making us more vulnerable in the event of a general downturn in economic conditions or our business;
requiring a substantial portion of the cash flow from operations to be dedicated to the payment of principal and interest on our debt, reducing the funds available to us for other purposes such as expansion through acquisitions, paying dividends, repurchasing shares, marketing and other spending and expansion of our product offerings; and
causing us to be more leveraged than some of our competitors, which may place us at a competitive disadvantage.
Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness or incur new indebtedness will depend on our financial and operating performance, which in turn, is subject to prevailing economic conditions, the availability of, and interest rates on, short-term financing, and financial, business and other factors beyond our control.

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Our performance is affected by general economic, political and social conditions and taxation policies.
Customer and consumer demand for our products may be impacted by recession, financial and credit market disruptions, or other economic downturns in the United States or other nations. Our results in the past have been, and in the future may continue to be, materially affected by changes in general economic, political and social conditions in the United States and other countries, including the interest rate environment in which we conduct business, the financial markets through which we access capital and currency, political and social unrest and terrorist acts in the United States or other countries in which we carry on business. The economic, political and social conditions resulting from Brexit, among other events, may adversely impact our overall performance.
Current economic conditions globally may delay or reduce purchases by our customers and consumers. This could result in reductions in sales of our products, reduced acceptance of innovations, and increased price competition. Deterioration in economic conditions in any of the countries in which we do business could also cause slower collections on accounts receivable which may adversely impact our liquidity and financial condition. Financial institutions may be negatively impacted by economic conditions and may consolidate or cease to do business which could result in a tightening in the credit markets, a low level of liquidity in many financial markets, and increased volatility in fixed income, credit, currency and equity markets. There could be a number of effects from a financial institution credit crisis on our business, which could include impaired credit availability and financial stability of our customers, including our suppliers, co-manufacturers and distributors. A disruption in financial markets may also have an effect on our derivative counterparties and could also impair our banking partners on which we rely for operating cash management. Any of these events would likely harm our business, results of operations and financial condition.
We may not be able to attract, develop and retain the highly skilled people we need to support our business.
We depend on the skills and continued service of key personnel, including our experienced management team. In addition, our ability to achieve our strategic and operating goals depends on our ability to identify, recruit, hire, train and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, recruit, train, develop and retain other talented personnel. Any such loss, failure or negative perception with respect to these individuals may adversely affect our business or financial results. In addition, activities related to identifying, recruiting, hiring and integrating qualified individuals may require significant time and expense. We may not be able to locate suitable replacements for any key employees who leave, or offer employment to potential replacements on reasonable terms, each of which may adversely affect our business and financial results. Additionally, changes in immigration laws and policies could also make it more difficult for us to recruit or relocate skilled employees.
An impairment of the carrying value of goodwill or other acquired intangibles could negatively affect our consolidated operating results and net worth.
The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of trademarks, trade names, and other acquired intangibles as of the acquisition date. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by management at least annually for impairment. If carrying value exceeds current fair value, the intangible is considered impaired and is reduced to fair value via a charge to earnings. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; and (iv) significant disruptions to our operations as a result of both internal and external events. Should the value of one or more of the acquired intangibles become impaired, our consolidated earnings and net worth may be materially adversely affected.
As of December 29, 2018, the carrying value of intangible assets totaled approximately $9.4 billion, of which $6.1 billion was goodwill and $3.3 billion represented trademarks, tradenames, and other acquired intangibles compared to total assets of $17.8 billion and total Kellogg Company equity of $2.6 billion.
Competition against retailer brands could negatively impact our business.
In nearly all of our product categories, we face branded and price-based competition. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and retailer brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer retailer brands, then we could lose category share or sales volumes or shift our product mix to lower margin

16



offerings, which could have a material effect on our business and consolidated financial position and on the consolidated results of our operations and profitability.
We may not achieve our targeted cost savings and efficiencies from cost reduction initiatives.
Our success depends in part on our ability to be an efficient producer in a highly competitive industry. We have invested a significant amount in capital expenditures to improve our operational facilities. Ongoing operational issues are likely to occur when carrying out major production, procurement, or logistical changes and these, as well as any failure by us to achieve our planned cost savings and efficiencies, could have a material adverse effect on our business and consolidated financial position and on the consolidated results of our operations and profitability.
Technology failures, cyber attacks, privacy breaches or data breaches could disrupt our operations, reputation and negatively impact our business.
We increasingly rely on information technology systems and third party service providers, including through the internet, to process, transmit, and store electronic information. For example, our production and distribution facilities and inventory management utilize information technology to increase efficiencies and limit costs. Information technology systems are also integral to the reporting of our results of operations. Furthermore, a significant portion of the communications between, and storage of personal data of, our personnel, customers, consumers and suppliers depends on information technology. Our information technology systems, and the systems of the parties we communicate and collaborate with, may be vulnerable to a variety of interruptions, as a result of updating our enterprise platform or due to events beyond our or their control, including, but not limited to, network or hardware failures, malicious or disruptive software, unintentional or malicious actions of employees or contractors, cyberattacks by common hackers, criminal groups or nation-state organizations or social-activist (hacktivist) organizations, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events.
Moreover, our computer systems have been, and will likely continue to be subjected to computer viruses, malware, ransomware or other malicious codes, social engineering attacks, unauthorized access attempts, password theft, physical breaches, employee or inside error, malfeasance and cyber- or phishing-attacks. Cyber threats are constantly evolving, are becoming more sophisticated and are being made by groups and individuals with a wide range of expertise and motives, and this increases the difficulty of detecting and successfully defending against them. These events could compromise our confidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and/or business harm. To date, we have not experienced a material breach of cyber security. While we have implemented administrative and technical controls and taken other preventive actions, such as the maintenance of an information security program that includes updating our technology and security policies, cyber insurance, employee training, and monitoring and routinely testing our information technology systems to reduce the risk of cyber incidents and protect our information technology, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.
The Company offers promotions, rebates, customer loyalty and other programs through which it may receive personal information, and it or its vendors could experience cyber-attacks, privacy breaches, data breaches or other incidents that result in unauthorized disclosure of consumer, customer, employee or Company information. In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the United States and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. There is significant uncertainty with respect to compliance with such privacy and data protection laws and regulations, including with respect to the European Union General Data Protection Regulation (GDPR) (which imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored), because they are continuously evolving and developing and may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. Additionally, our efforts to comply with privacy and data protection laws, including the GDPR, may impose significant costs and challenges that are likely to increase over time.
If the Company suffers a loss as a result of a breach or other breakdown in its technology, including such cyber-attack, privacy breaches, data breaches, issues with or errors in system maintenance or security, migration of applications to the cloud, power outages, hardware or software failures, denial of service, telecommunication or

17



other incident involving one of the Company's vendors, that result in unauthorized disclosure or significant unavailability of business, financial, personal or stakeholder information, the Company may suffer reputational, competitive and/or business harm and may be exposed to legal liability and government investigations, which may adversely affect the Company's results of operations and/or financial condition. The misuse, leakage or falsification of information could result in violations of data privacy laws, the Company may become subject to legal action and increased regulatory oversight. The Company could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. In addition, if the Company's suppliers or customers experience such a breach or unauthorized disclosure or system failure, their businesses could be disrupted or otherwise negatively affected, which may result in a disruption in the Company's supply chain or reduced customer orders, which would adversely affect the Company's business operations.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, particularly and most notably our trademarks, but also including patents, trade secrets, copyrights and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements, third party nondisclosure and assignment agreements and policing of third party misuses of our intellectual property. Our failure to obtain or adequately protect our trademarks, products, new features of our products, our technology, or any other form of intellectual property, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business.

We may be unaware of intellectual property rights of others that may cover some of our technology, brands or products or operations. In addition, if, in the course of developing new products or improving the quality of existing products, we are found to have infringed the intellectual property rights of others, directly or indirectly, such finding could have an adverse impact on our business, financial condition or results of operations and may limit our ability to introduce new products or improve the quality of existing products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.
We are subject to risks generally associated with companies that operate globally.
We are a global company and generated 40%, 37%, and 35% of our net sales for 2018, 2017 and 2016, respectively outside the United States. We manufacture our products in 21 countries and have operations in more than 180 countries, so we are subject to risks inherent in multinational operations. Those risks include:
compliance with U.S. laws affecting operations outside of the United States, such as OFAC trade sanction regulations and Anti-Boycott regulations,
compliance with anti-corruption laws, including U.S. Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act (UKBA),
compliance with antitrust and competition laws, data privacy laws, and a variety of other local, national and multi-national regulations and laws in multiple regimes,
changes in tax laws, interpretation of tax laws and tax audit outcomes,
fluctuations or devaluations in currency values, especially in emerging markets,
changes in capital controls, including currency exchange controls, government currency policies or other limits on our ability to import raw materials or finished product or repatriate cash from outside the United States,
changes in local regulations and laws, the uncertainty of enforcement of remedies in foreign jurisdictions, and foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources,
Laws relating to information security, privacy (including the GDPR), cashless payments, and consumer protection,
uncertainty relating to Brexit and its impact on the local and international markets, the flow of goods and materials across borders, and political environments,
discriminatory or conflicting fiscal policies,
challenges associated with cross-border product distribution,

18



increased sovereign risk, such as default by or deterioration in the economies and credit worthiness of local governments,
varying abilities to enforce intellectual property and contractual rights,
greater risk of uncollectible accounts and longer collection cycles,
loss of ability to manage our operations in certain markets which could result in the deconsolidation of such businesses,
design and implementation of effective control environment processes across our diverse operations and employee base,
imposition of more or new tariffs, quotas, trade barriers, and similar restrictions on our sales or regulations, taxes or policies that might negatively affect our sales, and
changes in trade policies and trade relations.
Please refer to Note 16 for more information regarding our operations in Venezuela, including the impact on our operations from currency restrictions and our decision to deconsolidate our Venezuelan operations effective December 31, 2016.
In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest and government shutdowns, civil strife, acts of war, public corruption, expropriation and other economic or political or social uncertainties could interrupt and negatively affect our business operations or customer demand. The slowdown in economic growth or high unemployment in some emerging markets could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. Continued instability in the banking and governmental sectors of certain countries in the European Union or the dynamics associated with the federal and state debt and budget challenges in the United States could adversely affect us. All of these factors could result in increased costs or decreased revenues, and could materially and adversely affect our product sales, financial condition and results of operations.
There may be uncertainty as a result of key global events during 2018. For example, the continuing uncertainty arising from the Brexit referendum in the United Kingdom as well as ongoing terrorist activity, may adversely impact global stock markets (including The New York Stock Exchange on which our common shares are traded) and general global economic conditions. All of these factors are outside of our control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.

The results of the United Kingdom's referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. In February 2017, the British Parliament voted in favor of allowing the British government to begin negotiating the terms of the United Kingdom’s withdrawal from the European Union, and, in March 2017, the British government invoked Article 50 of the Treaty on European Union, which, per the terms of the treaty, formally triggered a two-year negotiation process and puts the United Kingdom on a course to withdraw from the European Union by the end of March 2019. In January 2019, the draft of the withdrawal agreement that was previously published in November 2018 was rejected by UK parliament. If no agreement is concluded by March 29, 2019 the United Kingdom will leave the European Union at such time. Accordingly, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal.

The economic conditions and outlook in the United Kingdom, the European Union and elsewhere could be further adversely affected by (i) the uncertainty concerning the timing and terms of the exit, (ii) new or modified trading arrangements between the United Kingdom and other countries. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, compliance risks, interest rates, financial institutions, and political, financial and monetary systems. Any of these developments, or the perception that any of them could occur, could depress economic activity and restrict our access to capital, which could materially and adversely affect our product sales, financial condition and results of operations.


19



Potential impacts to our business include: (i) reduced efficiency in processing of product shipments between the United Kingdom and other countries that could impact our ability to have sufficient products in the appropriate market for sale to customers, (ii) requirement to increase inventory levels maintained in both the United Kingdom and other countries to ensure adequate supply of product to support both base and promotional activities normally executed with our customers, (iii) increased costs related to incremental warehousing and logistics services required to adequately service our customers, (iv) significant financial impact resulting from tariffs that are implemented between the United Kingdom and other countries as the location of our European production facilities and the markets we sell in regularly require significant import and export shipments involving the United Kingdom, (v) our ability to realize future benefit from other assets on our balance sheet, such as deferred tax assets, may be impacted which could result in additional valuation allowances or reserves being established.
Our operations in certain emerging markets expose us to political, economic and regulatory risks.
Our growth strategy depends in part on our ability to expand our operations in emerging markets. However, some emerging markets have greater political, economic and currency volatility and greater vulnerability to infrastructure and labor disruptions than more established markets. In many countries outside of the United States, particularly those with emerging economies, it may be common for others to engage in business practices prohibited by laws and regulations with extraterritorial reach, such as the FCPA and the UKBA, or local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials, including in connection with obtaining permits or engaging in other actions necessary to do business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our reputation, financial condition and results of operations.
In addition, competition in emerging markets is increasing as our competitors grow their global operations and low cost local manufacturers expand and improve their production capacities. Our success in emerging markets is critical to our growth strategy. If we cannot successfully increase our business in emerging markets and manage associated political, economic and regulatory risks, our product sales, financial condition and results of operations could be materially and adversely affected.

Adverse changes in the global climate or extreme weather conditions could adversely affect our business or operations.

Climate change is a core business issue for Kellogg to ensure the long-term health and viability of the ingredients we use in our products. As set forth in the Intergovernmental Panel on Climate Change Fifth Assessment Report, there is continuing scientific evidence, as well as concern from members of the general public, that emissions of greenhouse gases and contributing human activities have caused and will continue to cause significant changes in global temperatures and weather patterns and increase the frequency or severity of weather events, wildfires and flooding. As the pressures from climate change and global population growth lead to increased demand, the food system and global supply chain is becoming increasingly vulnerable to acute shocks, leading to increased prices and volatility, especially in the energy and commodity markets. Adverse changes such as these could:

unfavorably impact the cost or availability of raw or packaging materials, especially if such events have a negative impact on agricultural productivity or on the supply of water;
disrupt our ability, or the ability of our suppliers or contract manufacturers, to manufacture or distribute our products;
disrupt the retail operations of our customers; or
unfavorably impact the demand for, or the consumer's ability to purchase, our products.

Foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating greenhouse gas emissions and energy policies. In the event that such regulation is enacted, we may experience significant increases in our costs of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. Lastly, consumers and customers may put an increased priority on purchasing products that are sustainably grown and made, requiring us to incur increased costs for additional transparency, due diligence and reporting. As a result, climate change could negatively affect our business and operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

20



ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development facilities are located in Battle Creek, Michigan.
We operated, as of February 25, 2019, offices, manufacturing plants and distribution and warehousing facilities totaling more than 41 million square feet of building area in the United States and other countries. Our plants have been designed and constructed to meet our specific production requirements, and we periodically invest money for capital and technological improvements. At the time of its selection, each location was considered to be favorable, based on the location of markets, sources of raw materials, availability of suitable labor, transportation facilities, location of our other plants producing similar products, and other factors. Our manufacturing facilities in the United States include four cereal plants and warehouses located in Battle Creek, Michigan; Lancaster, Pennsylvania; Memphis, Tennessee; and Omaha, Nebraska and other plants or facilities in San Jose, California; Atlanta, Augusta, and Rome, Georgia; Chicago, Illinois; Kansas City, Kansas; Florence, Louisville and Pikeville, Kentucky; Grand Rapids and Wyoming, Michigan; Blue Anchor, New Jersey; Cary, North Carolina; Cincinnati and Zanesville, Ohio; Muncy, Pennsylvania; Jackson and Rossville, Tennessee; and Allyn, Washington.
Outside the United States, we had, as of February 25, 2019, additional manufacturing locations, some with warehousing facilities, in Australia, Austria, Belgium, Brazil, Canada, Colombia, Ecuador, Egypt, Great Britain, India, Japan, Malaysia, Mexico, Poland, Russia, South Africa, South Korea, Spain, Thailand, and Turkey. We also have joint ventures in China, Nigeria, and Ghana which own or operate manufacturing or warehouse facilities.
We generally own our principal properties, including our major office facilities, although some manufacturing facilities are leased, and no owned property is subject to any major lien or other encumbrance. Distribution facilities (including related warehousing facilities) and offices of non-plant locations typically are leased. In general, we consider our facilities, taken as a whole, to be suitable, adequate, and of sufficient capacity for our current operations.

ITEM 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings, claims, and governmental inspections, audits or investigations arising out of our business which cover matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, employment and other actions. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.


PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Information on the market for our common stock, number of shareowners and dividends is located in Note 17 within Notes to Consolidated Financial Statements.
In December 2017, the board of directors approved an authorization to repurchase up to $1.5 billion of our common stock beginning in January 2018 through December 2019. This authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. During the fourth quarter 2018, the Company repurchased 3.2 million shares for a total of $200 million.
The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended December 29, 2018.
 

21



(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 #1:
9/30/18-10/27/18
 

 

 

 
$
1,380

Month #2:
10/28/18-11/24/18
 
2.4

 
$
62.16

 
2.4

 
$
1,230

Month #3:
11/25/18-12/29/18
 
0.8

 
$
59.42

 
0.8

 
$
1,180



22



ITEM 6. SELECTED FINANCIAL DATA
Kellogg Company and Subsidiaries
Selected Financial Data
 
(millions, except per share data and number of employees)
 
2018
 
2017
 
2016
 
2015
 
2014
Operating trends
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
13,547

 
$
12,854

 
$
12,965

 
$
13,525

 
$
14,580

Gross profit as a % of net sales
 
34.9
%
 
36.6
%
 
37.3
%
 
35.4
%
 
37.5
%
Depreciation
 
493

 
469

 
510

 
526

 
494

Amortization
 
23

 
12

 
7

 
8

 
9

Advertising expense (a)
 
752

 
732

 
736

 
898

 
1,094

Research and development expense (a)
 
154

 
148

 
182

 
193

 
199

Operating profit
 
1,706

 
1,387

 
1,483

 
1,268

 
1,693

Operating profit as a % of net sales
 
12.6
%
 
10.8
%
 
11.4
%
 
9.4
%
 
11.6
%
Interest expense
 
287

 
256

 
406

 
227

 
209

Net income attributable to Kellogg Company
 
1,336

 
1,254

 
699

 
614

 
632

Average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
347

 
348

 
350

 
354

 
358

Diluted
 
348

 
350

 
354

 
356

 
360

Per share amounts:
 
 
 
 
 
 
 
 
 
 
Basic
 
3.85

 
3.61

 
1.99

 
1.74

 
1.76

Diluted
 
3.83

 
3.58

 
1.97

 
1.72

 
1.75

Cash flow trends
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
1,536

 
$
403

 
$
1,271

 
$
1,691

 
$
1,793

Capital expenditures
 
578

 
501

 
507

 
553

 
582

Net cash provided by (used in) operating activities reduced by capital expenditures (b)
 
958

 
(98
)
 
764

 
1,138

 
1,211

Net cash provided by (used in) investing activities
 
(948
)
 
149

 
(392
)
 
(1,127
)
 
(573
)
Net cash provided by (used in) used in financing activities
 
(566
)
 
(604
)
 
(786
)
 
(706
)
 
(1,063
)
Interest coverage ratio (c)
 
8.1

 
9.4

 
4.6

 
6.8

 
7.3

Capital structure trends
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
17,780

 
$
16,351

 
$
15,111

 
$
15,251

 
$
15,139

Property, net
 
3,731

 
3,716

 
3,569

 
3,621

 
3,769

Short-term debt and current maturities of long-term debt
 
686

 
779

 
1,069

 
2,470

 
1,435

Long-term debt
 
8,207

 
7,836

 
6,698

 
5,275

 
5,921

Total Kellogg Company equity
 
2,601

 
2,178

 
1,891

 
2,128

 
2,789

Share price trends
 
 
 
 
 
 
 
 
 
 
Stock price range
 
$56-75

 
$59-76

 
$70-87

 
$61-74

 
$57-69

Cash dividends per common share
 
2.20

 
2.12

 
2.04

 
1.98

 
1.90

Number of employees
 
34,000

 
33,000

 
37,000

 
34,000

 
30,000


The above amounts have been restated to include the impact of Accounting Standard Updates adopted in Q1 2018 with the exception of 2015 and 2014, which were not restated for the Revenue Recognition ASU. See additional discussion in Footnote 1.

(a)
Recent declines in advertising were the result of foreign currency translation, implementation of efficiency and effectiveness programs including zero-based budgeting, the change in media landscape migrating investment to digital, and shifting investment to food innovation and renovation. 
(b)
We use this non-GAAP financial measure, which is reconciled above, to focus management and investors on the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, and share repurchase.
(c)
Interest coverage ratio is calculated based on net income attributable to Kellogg Company before interest expense, income taxes, depreciation and amortization, divided by interest expense.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kellogg Company and Subsidiaries
 
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 8 of this report.

For more than 100 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. These foods include snacks, such as cookies, crackers, savory snacks, toaster pastries, cereal bars and bites, fruit-flavored snacks; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles.
Kellogg products are manufactured and marketed globally. Consumption and share data noted within based on Nielsen x-AOC or other comparable source, for the applicable period.

Segments
As of December 29, 2018, we manage our operations through ten operating segments that are based on product category or geographic location. These operating segments have been 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. For the periods presented we have the following reportable segments: U.S. Snacks; U.S. Morning Foods; U.S. Specialty Channels; North America Other; Europe; Latin America; and Asia Pacific. The operating segments will change beginning in 2019.

On November 12, 2018, we announced that we would be exploring the sale of our cookies business (including the Keebler, Famous Amos, Mother's and Murray brands), fruit snacks business (including the Stretch Island brand) pie crust and ice cream cone businesses to enable us to bring a sharper focus to our core businesses. This exploration was driven by our need to make strategic choices about our business and the brands within our portfolio. Nevertheless, we believe these iconic and beloved brands can thrive in the portfolio of another organization that can focus on driving growth in these particular categories. The financial impact of the potential sale of businesses will be addressed upon the announcement of any transaction.

Restatement of financial statements
Financial statements for 2017 and 2016 were restated to reflect changes in accounting standards that were adopted on a retrospective basis, as well as product transfer between reportable segments.

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.


24



Non-GAAP Financial Measures
Non-GAAP financial measures used for evaluation of performance include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted earnings per share (EPS), and cash flow. We determine currency-neutral 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.

Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral sales. In addition, we exclude the impact of acquisitions, dispositions, related integration costs, shipping day differences, and foreign currency, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, 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 these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.

Adjusted: operating profit, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, and other costs impacting comparability resulting in adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. 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, Zero Based Budgeting (ZBB), and Revenue Growth Management, to assess performance of newly acquired businesses, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.

Currency-neutral adjusted: gross profit, gross margin, operating profit, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. 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, Zero Based Budgeting (ZBB), and Revenue Growth Management, to assess performance of newly acquired businesses, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.

Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts. In addition, we have excluded an adjustment for the transitional estimates related to the adoption of U.S. Tax Reform. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective income 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, excluding the pre-tax income and tax effect of the items noted above, 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

25



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
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. We recorded a total pre-tax mark-to-market charge of $343 million for 2018, a total pre-tax mark-to-market benefit of $45 million in 2017 and a total pre-tax mark-to-market charge of $261 million in 2016. Within these totals, the pre-tax mark-to-market charge for pension plans was $335 million for 2018, a pre-tax mark-to-market benefit for pension plans was $86 million for 2017 and a pre-tax mark-to-market charge for pension plans was $314 million for 2016.

Project K and cost reduction activities
Project K continued generating savings used to invest in key strategic areas of focus for the business. We recorded pre-tax charges related to this program of $143 million in 2018, $263 million in 2017, and $325 million in 2016.

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

Brexit impacts
With the uncertainty of the United Kingdom (U.K.) exiting the European Union (EU), commonly referred to as Brexit, we have begun preparations to proactively prepare for the potential adverse impacts of Brexit, such as delays at ports of entry and departure. As a result, we incurred pre-tax charges of $3 million for the year ended December 29, 2018.

Business and portfolio realignment
Up front and/or one-time costs related to: pending and prospective divestitures and acquisitions, including our previously announced proposed divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses. As a result, we incurred pre-tax charges of $5 million for the year ended December 29, 2018.

Debt redemption
During the quarter ended April 2, 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031. 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.

Venezuela
As of December 31, 2016, we deconsolidated and changed to the cost method of accounting for our Venezuelan subsidiary. We recorded a $72 million pre-tax charge in Other income (expense), net as we fully impaired the value of our cost method investment in Venezuela. The deconsolidation charge included the historical cumulative translation losses of approximately $63 million related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity. Additionally, the deconsolidation reduced net sales by $31 million for the year ended December 31, 2016 which impacted the comparability of 2017 to 2016 reported results.

In 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. Following the change to the DICOM (formerly SIMADI) rate in 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 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 $11 million in 2016 related to the utilization of these remaining non-monetary assets, primarily impacting COGS.


26



Acquisitions
In December 2016, the Company acquired Ritmo Investimentos, controlling shareholder of Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading Brazilian food group. In our Latin America reportable segment for the year ended December 30, 2017, the acquisition added $203 million in net sales that impacted the comparability to 2016 reported results.

In October of 2017, the Company acquired Chicago Bar Company LLC manufacturer of RXBAR, a high protein snack bar made of simple ingredients. In our North America Other reportable segment for the year ended December 29, 2018, the acquisition added $186 million in net sales that impacted the comparability of 2017 reported results. Additionally, for the year ended December 30, 2017, the acquisition added $27 million in net sales that impacted the comparability of 2016 reported results.

In May of 2018, the Company acquired an incremental 1% ownership interest in Multipro, which along with concurrent changes to the shareholders' agreement, resulted in the Company now having a 51% controlling interest in and began consolidating Multipro, a leading distributor of a variety of food products in Nigeria and Ghana. In our Asia Pacific reportable segment, for the year ended December 30, 2018, the acquisition added $536 million in net sales that impacted the comparability of 2017 reported results.

Shipping day differences
In December 2017, we eliminated a one-month timing difference in reporting of financial results for the Parati Group. This update resulted in an additional month of financial results being reported in the year ended December 30, 2017, which included $14 million of net sales that impacted the comparability of 2018 versus 2017 and 2017 versus 2016 reported results.

Adoption of U.S. Tax Reform
In conjunction with the adoption of U.S. Tax Reform, we finalized our provisional estimates resulting in a net $11 million reduction of income tax expense for the year ended December 29, 2018, primarily related to the transition tax and assertion on foreign earnings. Additionally, for the year ended December 30, 2017, we recorded net tax expense totaling $8 million related primarily to the remeasurement of deferred tax assets and liabilities, as well as the transition tax on foreign earnings.

Gain on unconsolidated entities, net
In connection with the Multipro 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. Additionally, the Company exercised its call option to acquire a 50% interest in Tolaram Africa Foods, PTE LTD, 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. In conjunction with the exercise, the Company recognized a one-time, non-cash loss of $45 million, which represents an other than temporary excess of cost over fair value of the investment. These amounts were recorded within Earnings (loss) from unconsolidated entities during the second quarter of 2018.

Foreign currency translation
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. Organic net sales exclude the impact of acquisitions, including the foreign currency impact calculated by applying the prior year foreign currency rates to current period results.

Financial results
For the full year 2018, our reported net sales increased by 5.4% due primarily to acquisition of RX (October 2017) and the consolidation of Multipro (May 2018) partially offset by unfavorable foreign currency as the U.S. Dollar strengthened against key currencies. Organic net sales were flat compared to the prior year as underlying growth was offset by the negative impact of list-price adjustments and rationalization of stock-keeping units related to the mid-2017 transition from Direct-Store Delivery (DSD) in U.S. Snacks.

Reported operating profit increased by 23% due to lower restructuring charges, the consolidation of Multipro results, and favorable year-over-year mark-to-market impacts. Currency-neutral adjusted operating profit was up slightly compared to the prior year due to cost savings that funded and offset a substantial planned increase in advertising and promotion investment as well as higher freight costs, and adverse mix and incremental costs, much of which

27



was related to growth in new pack formats. Currency-neutral adjusted operating profit excludes the impact of restructuring, mark-to-market, foreign currency and other expenses related to the proposed divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses, as well as preparing for potential Brexit.

Reported diluted EPS of $3.83 was up 7% compared to the prior year of $3.58 due primarily to a one-time non-cash gain related to our transaction in West Africa, a lower effective tax rate as a result of U.S. Tax Reform as well as benefits from discrete tax items, and lower restructuring charges partially offset by unfavorable mark-to-market impacts. Currency-neutral adjusted diluted EPS of $4.32 was up 8% compared to prior year of $4.00, after excluding the impact of mark-to-market, restructuring, the adoption of U.S. Tax Reform, gain from unconsolidated entities, costs related to proposed divestitures and Brexit.

Reconciliation of certain non-GAAP Financial Measures
Consolidated results (dollars in millions, except per share data)
 
2018
 
2017
Reported net income attributable to Kellogg Company
 
$
1,336

 
$
1,254

Mark-to-market (pre-tax)
 
(343
)
 
45

Project K and cost reduction activities (pre-tax)
 
(143
)
 
(263
)
Brexit impacts (pre-tax)
 
(3
)
 

Business and portfolio realignment (pre-tax)
 
(5
)
 

Income tax impact applicable to adjustments, net*
 
109

 
80

Adoption of U.S. Tax Reform
 
11

 
(8
)
Gain from unconsolidated entities, net
 
200

 

Adjusted net income attributable to Kellogg Company
 
$
1,510

 
$
1,400

Foreign currency impact
 
4

 
 
Currency-neutral adjusted net income attributable to Kellogg Company
 
$
1,506

 
$
1,400

Reported diluted EPS
 
$
3.83

 
$
3.58

Mark-to-market (pre-tax)
 
(0.98
)
 
0.13

Project K and cost reduction activities (pre-tax)
 
(0.41
)
 
(0.75
)
Brexit impacts (pre-tax)
 
(0.01
)
 

Business and portfolio realignment (pre-tax)
 
(0.01
)
 

Income tax impact applicable to adjustments, net*
 
0.30

 
0.22

Adoption of U.S. Tax Reform
 
0.04

 
(0.02
)
Gain from unconsolidated entities, net
 
0.57

 

Adjusted diluted EPS
 
$
4.33

 
$
4.00

Foreign currency impact
 
0.01

 
 
Currency-neutral adjusted diluted EPS
 
$
4.32

 
$
4.00

Currency-neutral adjusted diluted EPS growth
 
8.0
%
 
 
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.

28



Consolidated results (dollars in millions, except per share data)
 
2017
 
2016
Reported net income attributable to Kellogg Company
 
$
1,254

 
$
699

Mark-to-market (pre-tax)
 
45

 
(261
)
Project K and cost reduction activities (pre-tax)
 
(263
)
 
(325
)
Debt redemption (pre-tax)
 

 
(153
)
Venezuela deconsolidation (pre-tax)
 

 
(72
)
Venezuela remeasurement (pre-tax)
 

 
(11
)
Income tax impact applicable to adjustments, net*
 
80

 
198

Adoption of U.S. Tax Reform
 
(8
)
 

Adjusted net income attributable to Kellogg Company
 
$
1,400

 
$
1,323

Foreign currency impact
 
(6
)
 
 
Currency-neutral adjusted net income attributable to Kellogg Company
 
$
1,406

 
$
1,323

Reported diluted EPS
 
$
3.58

 
$
1.97

Mark-to-market (pre-tax)
 
0.13

 
(0.74
)
Project K and cost reduction activities (pre-tax)
 
(0.75
)
 
(0.92
)
Debt redemption (pre-tax)
 

 
(0.43
)
Venezuela deconsolidation (pre-tax)
 

 
(0.20
)
Venezuela remeasurement (pre-tax)
 

 
(0.03
)
Income tax impact applicable to adjustments, net*
 
0.22

 
0.55

Adoption of U.S. Tax Reform
 
(0.02
)
 

Adjusted diluted EPS
 
$
4.00

 
$
3.74

Foreign currency impact
 
(0.02
)
 
 
Currency-neutral adjusted diluted EPS
 
$
4.02

 
$
3.74

Currency-neutral adjusted diluted EPS growth
 
7.5
%
 
 
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.


29



Net sales and operating profit
2018 compared to 2017
The following tables provide an analysis of net sales and operating profit performance for 2018 versus 2017:
Year ended December 29, 2018
 
 
 
 
 
 
 
 
 
 
 
 
(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported net sales
 
$
2,957

 
$
2,643

 
$
1,235

 
$
1,853

 
$
2,395

 
$
947

 
$
1,517

 
$

 
$
13,547

Foreign currency impact on total business (inc)/dec
 

 

 

 
(3
)
 
46

 
(47
)
 
(102
)
 

 
(106
)
Currency-neutral net sales
 
$
2,957

 
$
2,643

 
$
1,235

 
$
1,856

 
$
2,349

 
$
994

 
$
1,619

 
$

 
$
13,653

Acquisitions
 

 

 

 
186

 

 

 
536

 

 
722

Foreign currency impact on acquisitions (inc)/dec
 

 

 

 

 

 

 
89

 

 
89

Organic net sales
 
$
2,957

 
$
2,643

 
$
1,235

 
$
1,670

 
$
2,349

 
$
994

 
$
994

 
$

 
$
12,842

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported net sales
 
$
3,110

 
$
2,709

 
$
1,242

 
$
1,612

 
$
2,291

 
$
944

 
$
946

 
$

 
$
12,854

Shipping day differences
 

 

 

 

 

 
14

 

 

 
14

Organic net sales
 
$
3,110

 
$
2,709

 
$
1,242

 
$
1,612

 
$
2,291

 
$
930

 
$
946

 
$

 
$
12,840

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% change - 2018 vs. 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported growth
 
(4.9
)%
 
(2.4
)%
 
(0.6
)%
 
15.0
 %
 
4.5
%
 
0.3
 %
 
60.4
 %
 
%
 
5.4
 %
Foreign currency impact
 
 %
 
 %
 
 %
 
(0.2
)%
 
1.9
%
 
(5.0
)%
 
(10.7
)%
 
%
 
(0.8
)%
Currency-neutral growth
 
(4.9
)%
 
(2.4
)%
 
(0.6
)%
 
15.2
 %
 
2.6
%
 
5.3
 %
 
71.1
 %
 
%
 
6.2
 %
Acquisitions
 
 %
 
 %
 
 %
 
11.5
 %
 
%
 
 %
 
56.6
 %
 
%
 
5.6
 %
Shipping day differences
 
 %
 
 %
 
 %
 
 %
 
%
 
(1.6
)%
 
 %
 
%
 
(0.1
)%
Foreign currency impact on acquisitions (inc)/dec
 
 %
 
 %
 
 %
 
 %
 
%
 
 %
 
9.5
 %
 
%
 
0.7
 %
Organic growth
 
(4.9
)%
 
(2.4
)%
 
(0.6
)%
 
3.7
 %
 
2.6
%
 
6.9
 %
 
5.0
 %
 
%
 
 %
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.






30



Year ended December 29, 2018
 
 
 
 
 
 
 
 
 
 
 
 
(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported operating profit
 
$
446

 
$
478

 
$
251

 
$
222

 
$
297

 
$
102

 
$
128

 
$
(218
)
 
$
1,706

Mark-to-market
 

 

 

 

 

 

 

 
7

 
7

Project K and cost reduction activities
 
(28
)
 
(50
)
 
(4
)
 
(25
)
 
(33
)
 
(15
)
 
(11
)
 
(7
)
 
(173
)
Brexit impacts
 

 

 

 

 
(3
)
 

 

 

 
(3
)
Business and portfolio realignment
 
(3
)
 

 

 

 

 

 

 
(2
)
 
(5
)
Adjusted operating profit
 
$
477

 
$
528

 
$
255

 
$
247

 
$
333

 
$
117

 
$
139

 
$
(216
)
 
$
1,880

Foreign currency impact
 

 

 

 
(2
)
 
6

 
(3
)
 
(7
)
 
3

 
(3
)
Currency-neutral adjusted operating profit
 
$
477

 
$
528

 
$
255

 
$
249

 
$
327

 
$
120

 
$
146

 
$
(219
)
 
$
1,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Year ended December 30, 2017
 
 
 
 
 
 
 
 
 
 
 

(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported operating profit
 
$
138

 
$
567

 
$
312

 
$
229

 
$
276

 
$
108

 
$
84

 
$
(327
)
 
$
1,387

Mark-to-market
 

 

 

 

 

 

 

 
(81
)
 
(81
)
Project K and cost reduction activities
 
(309
)
 
(18
)
 
(2
)
 
(16
)
 
(40
)
 
(8
)
 
(11
)
 
(7
)
 
(411
)
Adjusted operating profit
 
$
447

 
$
585

 
$
314

 
$
245

 
$
316

 
$
116

 
$
95

 
$
(239
)
 
$
1,879

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% change - 2018 vs. 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported growth
 
224.4
 %
 
(15.7
)%
 
(19.8
)%
 
(3.0
)%
 
7.8
 %
 
(5.2
)%
 
50.7
 %
 
33.1
 %
 
22.9
 %
Mark-to-market
 
 %
 
 %
 
 %
 
 %
 
 %
 
 %
 
 %
 
25.2
 %
 
7.3
 %
Project K and cost reduction activities
 
218.3
 %
 
(6.0
)%
 
(0.7
)%
 
(3.9
)%
 
3.1
 %
 
(5.6
)%
 
6.1
 %
 
(0.5
)%
 
16.1
 %
Brexit impacts
 
 %
 
 %
 
 %
 
 %
 
(0.9
)%
 
 %
 
 %
 
 %
 
(0.2
)%
Business and portfolio realignment
 
(0.8
)%
 
 %
 
 %
 
 %
 
 %
 
 %
 
 %
 
(0.8
)%
 
(0.3
)%
Adjusted growth
 
6.9
 %
 
(9.7
)%
 
(19.1
)%
 
0.9
 %
 
5.6
 %
 
0.4
 %
 
44.6
 %
 
9.2
 %
 
 %
Foreign currency impact
 
 %
 
 %
 
 %
 
(0.4
)%
 
1.9
 %
 
(2.8
)%
 
(7.2
)%
 
0.6
 %
 
(0.1
)%
Currency-neutral adjusted growth
 
6.9
 %
 
(9.7
)%
 
(19.1
)%
 
1.3
 %
 
3.7
 %
 
3.2
 %
 
51.8
 %
 
8.6
 %
 
0.1
 %
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.

U.S. Snacks
This segment consists primarily of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks.

Reported net sales declined 4.9% primarily due to unfavorable price/mix as a result of the year-on-year impact of list-price adjustments and rationalization of stock-keeping units related to the DSD exit in the back half of 2017 and a slight decrease in volume. These impacts were partially offset by improved performance of key brands like Cheez-it, Pringles, and Rice Krispies Treats, all of which grew consumption and share during the year.

All of our ex-DSD categories experienced year-over-year gains in velocity, as we now have a stronger set of SKUs on the shelf which are being supported with brand building.

Overall, the cookie category was flat compared to the prior year. We lost both consumption and share on lower volume. However, Keebler Fudge Shoppe, Keebler Grahams, Mother's and Famous Amos grew both consumption and share during the year behind resumed investment support.


31



Reported operating profit increased significantly from the prior year due primarily to lower restructuring charges as the prior year included costs associated with our DSD transition. Currency-neutral adjusted operating profit increased 6.9% after excluding the impact of restructuring charges due to lower overhead expense as a result of our transition out of DSD in mid-2017.

U.S. Morning Foods
This segment consists primarily of cereal and toaster pastries. Reported net sales declined 2.4% as a result of decreased volume and unfavorable pricing/mix.

Cereal net sales were down on lower volume and unfavorable pricing/mix as consumption and share were impacted by category-wide softness and the mid-year supply chain disruption for Honey Smacks, which returned to shelves in the fourth quarter, but offset improving performance elsewhere in the portfolio. Cereal share excluding Honey Smacks was roughly flat compared to the prior year as we continued to make progress toward stabilizing key health and wellness brands by emphasizing their wellness attributes and our Core 6 cereal brands collectively grew share during 2018.

Additionally, Pop-Tarts posted a slight increase in net sales on higher volume while returning to consumption growth in the second half of the year.

Reported operating profit decreased 16% due to higher restructuring charges, lower net sales and adverse mix and costs related to launching new pack formats. Currency-neutral adjusted operating profit decreased 9.7% after eliminating the impact of restructuring charges.

U.S. Specialty Channels
This segment sells the full line of Kellogg products to channels such as food service, convenience stores, vending and others.

Reported net sales declined 0.6% as a result of lower volume and unfavorable pricing/mix as it lapped hurricane-related shipments in the back-half of 2017. The hurricane impact was mainly in the food service channel, offsetting growth in the segment's other major channels.

Reported operating profit decreased 20% due to revised allocation of costs between U.S. operating segments. Currency-neutral adjusted operating profit decreased 19% after excluding the impact of restructuring charges.

North America Other
This segment is composed of our U.S. Frozen Foods, Kashi Company, Canada, and RX businesses.

Reported net sales increased 15% due primarily to the RXBAR acquisition and growth in U.S. Frozen and Canada. Organic net sales increased 3.7% on higher volume and favorable pricing/mix after excluding the impact of the RX acquisition and foreign currency.

U.S. Frozen net sales for the year grew on higher volume and favorable price/mix. Eggo® grew share and consumption during the year, benefiting from renovated food and packaging, including the relaunch of our premium Thick N' Fluffy line as well as continued success with Disney-shaped waffles. Morningstar Farms' consumption accelerated in 2018, as we refocused on our core offerings, renovating our food for cleaner labeling and honing our message around plant-based protein.

In Canada we posted sales growth on favorable pricing/mix offset by slightly lower volume as we gained share in most of our categories.

Kashi Company reported slightly lower net sales on lower volume partially offset by favorable pricing/mix. Kashi cereals increased both consumption and share during 2018 as a result of strong innovation and effective messaging. Innovations like Kashi by kids and new offerings under the GoLean line are gaining traction, and the business benefited from the continued success of our Bear Naked brand which grew consumption during the year. The improvements in cereal were offset by lower consumption and share in wholesome snacks during 2018.

Reported operating profit decreased 3.0% due to higher restructuring charges and a double-digit increase in brand building. These impacts were partially offset by higher net sales and Project K savings. Currency-neutral adjusted operating profit increased 1.3% after excluding the impact of restructuring and foreign currency.

32




Europe
Reported net sales increased 4.5% due primarily to higher volume and favorable foreign currency partially offset by unfavorable pricing/mix. Organic net sales increased 2.6% after excluding the impact of foreign currency.

The return to organic net sales growth in 2018 was led by broad-based growth in Pringles, and by expansion in emerging markets like Russia and the Middle East.

In Pringles, we ran a successful campaign during the World Cup in the summer and sustained the brand with new pack formats and effective media. The brand grew share in seven of our eight major markets.

Cereal net sales declines moderated during 2018 due to improving share performance in markets across the region. Most notably, we grew share in both the U.K. and France, continuing its improving trend with growth in several brands.

Emerging markets were a driver of Europe's growth in both cereal and snacks, led by Northern Africa, Russia, and the Middle East.

Reported operating profit increased 7.8% due to higher net sales, lower restructuring charges, and favorable foreign currency. Currency-neutral adjusted operating profit increased 3.7% after excluding the impact of restructuring charges and foreign currency.

Latin America
Reported net sales increased 0.3% due to higher volume partially offset by shipping day differences, unfavorable pricing/mix and unfavorable foreign currency. Organic net sales increased 6.9%, led by Mexico and Mercosur markets, after excluding the impact of foreign currency and shipping days.

Mexico posted net sales growth during the year on higher volume and favorable pricing/mix, growing consumption and share in cereal. Across the region, our cereal sales grew at a mid-single digit rate in 2018.

Our snacks business posted growth, lead by Pringles in Mexico and Caribbean/Central America.

Parati net sales grew on higher volume and favorable pricing/mix, and continued to grow consumption and share in Brazil, despite the trucker strike and volatile political environment.

Reported operating profit decreased 5.2%, primarily due to higher restructuring charges and unfavorable foreign currency.  Currency-neutral adjusted operating profit increased 3.2% after excluding the impact of restructuring and foreign currency.
 
Asia Pacific
Reported net sales increased 60% due primarily to the consolidation of the Multipro business partially offset by unfavorable foreign currency. Organic net sales increased 5.0% on higher volume and slightly favorable pricing/mix after excluding Multipro results and the impact of foreign currency.

Organic growth was led by cereal, whose broad-based growth accelerated in 2018. Our cereal business held share in the stabilized Australia market, gained share in markets like Japan and Korea, and continued to generate double-digit growth in emerging markets like India and Southeast Asia.

Our Pringles business posted high single-digit growth for the year as we continue to expand product offerings in certain markets while launching new pack-formats in others, extending the brand's distribution reach.

Reported operating profit increased 51% due primarily to the consolidation of the Multipro business beginning in May of 2018, as well as productivity and brand building efficiencies as a result of Project K, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit improved 52% after excluding the impact of restructuring and foreign currency.



33



Corporate
Reported operating expense improved 33% due primarily to favorable year-over-year mark-to-market impacts. Currency-neutral adjusted operating profit improved 8.6% due primarily to lower pension costs, after excluding the impact of mark-to-market, restructuring, foreign currency and business and portfolio realignment activities.

34



2017 compared to 2016
The following tables provide an analysis of net sales and operating profit performance for 2017 versus 2016:
Year ended December 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported net sales
 
$
3,110

 
$
2,709

 
$
1,242

 
$
1,612

 
$
2,291

 
$
944

 
$
946

 
$

 
$
12,854

Foreign currency impact on total business (inc)/dec
 

 

 

 
12

 
(18
)
 
17

 
25

 

 
36

Currency-neutral net sales
 
$
3,110

 
$
2,709

 
$
1,242

 
$
1,600

 
$
2,309

 
$
927

 
$
921

 
$

 
$
12,818

Acquisitions
 

 

 

 
28

 
11

 
203

 

 

 
242

Shipping day differences
 

 

 

 

 

 
14

 

 

 
14

Foreign currency impact on acquisitions (inc)/dec
 

 

 

 

 

 
(13
)
 

 

 
(13
)
Organic net sales
 
$
3,110

 
$
2,709

 
$
1,242

 
$
1,572

 
$
2,298

 
$
723

 
$
921

 
$

 
$
12,575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 

(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported net sales
 
$
3,197

 
$
2,917

 
$
1,207

 
$
1,593

 
$
2,383

 
$
772

 
$
896

 
$

 
$
12,965

Venezuela operations impact
 

 

 

 

 

 
31

 

 

 
31

Organic net sales
 
$
3,197

 
$
2,917

 
$
1,207

 
$
1,593

 
$
2,383

 
$
741

 
$
896

 
$

 
$
12,934

 
 

 

 


 


 


 


 


 


 


% change - 2017 vs. 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported growth
 
(2.8
)%
 
(7.1
)%
 
2.9
%
 
1.2
 %
 
(3.9
)%
 
22.2
 %
 
5.6
%
 
%
 
(0.9
)%
Foreign currency impact on total business (inc)/dec
 
 %
 
 %
 
%
 
0.8
 %
 
(0.8
)%
 
2.1
 %
 
2.8
%
 
%
 
0.2
 %
Currency-neutral growth
 
(2.8
)%
 
(7.1
)%
 
2.9
%
 
0.4
 %
 
(3.1
)%
 
20.1
 %
 
2.8
%
 
%
 
(1.1
)%
Acquisitions
 
 %
 
 %
 
%
 
1.8
 %
 
0.5
 %
 
26.2
 %
 
%
 
%
 
1.9
 %
Venezuela operations impact
 
 %
 
 %
 
%
 
 %
 
 %
 
(3.9
)%
 
%
 
%
 
(0.2
)%
Shipping day differences
 
 %
 
 %
 
%
 
 %
 
 %
 
1.9
 %
 
%
 
%
 
0.1
 %
Foreign currency impact on acquisitions (inc)/dec
 
 %
 
 %
 
%
 
 %
 
 %
 
(1.8
)%
 
%
 
%
 
(0.1
)%
Organic growth
 
(2.8
)%
 
(7.1
)%
 
2.9
%
 
(1.4
)%
 
(3.6
)%
 
(2.3
)%
 
2.8
%
 
%
 
(2.8
)%
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.












35



Year ended December 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
(millions)
 
U.S.
Snacks
 
U.S.
Morning
Foods
 
U.S.
Specialty Channels
 
North
America
Other
 
Europe
 
Latin
America
 
Asia
Pacific
 
Corporate
 
Kellogg
Consolidated
Reported operating profit
 
$
138

 
$
567

 
$
312

 
$
229

 
$
276

 
$
108

 
$
84

 
$
(327
)
 
$
1,387

Mark-to-market
 

 

 

 

 

 

 

 
(81
)
 
(81
)
Project K and cost reduction activities
 
(309
)
 
(18
)
 
(2
)
 
(16
)
 
(40
)
 
(8
)
 
(11
)
 
(7
)
 
(411
)
Adjusted operating profit
 
$
447

 
$
585

 
$
314

 
$
245

 
$
316

 
$
116

 
$
95

 
$
(239
)
 
$
1,879

Foreign currency impact
 

 

 

 
1

 
(6