Edgar Filing: KELLOGG CO

K-2015 Q2 10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)



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

For the quarterly period ended July 4, 2015



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

For the transition period from to

Commission file number 1-4171

KELLOGG COMPANY



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

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

Registrant’s telephone number: 269-961-2000

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

Yes x No ¨

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

Yes x No ¨

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



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

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

Yes ¨ No x

Common Stock outstanding as of August 1, 2015 — 353,581,043 shares

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KELLOGG COMPANY

INDEX



	Page
PART I — Financial Information
Item 1:
Financial Statements
Consolidated Balance Sheet — July 4, 2015 and January 3, 2015	3
Consolidated Statement of Income — quarter and year-to-date periods ended July 4, 2015 and June 28, 2014	4
Consolidated Statement of Comprehensive Income – quarter and year-to-date periods ended July 4, 2015 and June 28, 2014	5
Consolidated Statement of Equity — year ended January 3, 2015 and year-to-date period ended July 4, 2015	6
Consolidated Statement of Cash Flows — year-to-date periods ended July 4, 2015 and June 28, 2014	7
Notes to Consolidated Financial Statements	8
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3:
Quantitative and Qualitative Disclosures about Market Risk	50
Item 4:
Controls and Procedures	51
PART II — Other Information
Item 1A:
Risk Factors	52
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6:
Exhibits	52
Signatures	53
Exhibit Index	54

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Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET

(millions, except per share data)



	July 4, 2015 (unaudited)			January 3, 2015 *
Current assets
Cash and cash equivalents	$	294		$	443
Accounts receivable, net	1,420			1,276
Inventories:
Raw materials and supplies	318			327
Finished goods and materials in process	893			952
Deferred income taxes	161			184
Other prepaid assets	240			158
Total current assets	3,326			3,340
Property, net of accumulated depreciation of $5,585 and $5,526	3,624			3,769
Goodwill	4,978			4,971
Other intangibles, net of accumulated amortization of $43 and $43	2,266			2,295
Pension	279			250
Other assets	489			528
Total assets	$	14,962		$	15,153
Current liabilities
Current maturities of long-term debt	$	754		$	607
Notes payable	939			828
Accounts payable	1,591			1,528
Accrued advertising and promotion	470			446
Accrued income taxes	15			39
Accrued salaries and wages	245			320
Other current liabilities	505			596
Total current liabilities	4,519			4,364
Long-term debt	5,800			5,935
Deferred income taxes	747			726
Pension liability	728			777
Nonpension postretirement benefits	69			82
Other liabilities	425			418
Commitments and contingencies
Equity
Common stock, $.25 par value	105			105
Capital in excess of par value	704			678
Retained earnings	6,789			6,689
Treasury stock, at cost	(3,665		)	(3,470		)
Accumulated other comprehensive income (loss)	(1,281		)	(1,213		)
Total Kellogg Company equity	2,652			2,789
Noncontrolling interests	22			62
Total equity	2,674			2,851
Total liabilities and equity	$	14,962		$	15,153

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

(millions, except per share data)



	Quarter ended						Year-to-date period ended
(Results are unaudited)	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Net sales	$	3,498		$	3,685		$	7,054		$	7,427
Cost of goods sold	2,257			2,274			4,568			4,512
Selling, general and administrative expense	829			944			1,690			1,834
Operating profit	412			467			796			1,081
Interest expense	58			50			112			102
Other income (expense), net	(46		)	3			(72		)	13
Income before income taxes	308			420			612			992
Income taxes	85			122			161			287
Earnings (loss) from joint ventures	(1		)	(3		)	(2		)	(4		)
Net income	$	222		$	295		$	449		$	701
Net income (loss) attributable to noncontrolling interests	(1		)	—			(1		)	—
Net income attributable to Kellogg Company	$	223		$	295		$	450		$	701
Per share amounts:
Basic	$	0.63		$	0.82		$	1.27		$	1.95
Diluted	$	0.63		$	0.82		$	1.26		$	1.94
Dividends per share	$	0.49		$	0.46		$	0.98		$	0.92
Average shares outstanding:
Basic	353			359			354			360
Diluted	355			362			356			362
Actual shares outstanding at period end							353			360

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(millions)



	Quarter ended July 4, 2015									Year-to-date period ended July 4, 2015
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	222								$	449
Other comprehensive income (loss):
Foreign currency translation adjustments	9			5			14			(54		)	(16		)	(70		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	(4		)	—			(4		)	4			(1		)	3
Reclassification to net income	(3		)	—			(3		)	(7		)	—			(7		)
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service credit (cost)	1			—			1			—			—			—
Reclassification to net income:
Net experience loss	1			—			1			2			—			2
Prior service cost	2			(1		)	1			5			(2		)	3
Other comprehensive income (loss)	$	6		$	4		$	10		$	(50	)	$	(19	)	$	(69	)
Comprehensive income							$	232								$	380
Net income (loss) attributable to noncontrolling interests							(1		)							(1		)
Other comprehensive income (loss) attributable to noncontrolling interests							—									(1		)
Comprehensive income attributable to Kellogg Company							$	233								$	382

	Quarter ended June 28, 2014									Year-to-date period ended June 28, 2014
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	295								$	701
Other comprehensive income (loss):
Foreign currency translation adjustments	30			—			30			33			—			33
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	(23		)	7			(16		)	(24		)	7			(17		)
Reclassification to net income	(1		)	—			(1		)	(11		)	3			(8		)
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service credit (cost)	(9		)	3			(6		)	(9		)	3			(6		)
Reclassification to net income:
Net experience loss	1			—			1			2			—			2
Prior service cost	4			(1		)	3			6			(2		)	4
Other comprehensive income (loss)	$	2		$	9		$	11		$	(3	)	$	11		$	8
Comprehensive income							$	306								$	709

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF EQUITY

(millions)



	Common stock			Capital in excess of par value		Retained earnings			Treasury stock					Accumulated other comprehensive income (loss)			Total Kellogg Company equity			Non- controlling interests			Total equity			Total comprehensive income (loss)
(unaudited)	shares	amount							shares		amount
Balance, December 28, 2013	420	$	105	$	626	$	6,749		57		$	(2,999	)	$	(936	)	$	3,545		$	62		$	3,607
Common stock repurchases									11		(690		)				(690		)				(690		)
Net income						632											632			1			633			633
Dividends						(680		)									(680		)	(1		)	(681		)
Other comprehensive loss														(277		)	(277		)				(277		)	(277		)
Stock compensation				29													29						29
Stock options exercised and other				23		(12		)	(4	)	219						230						230
Balance, January 3, 2015	420	$	105	$	678	$	6,689		64		$	(3,470	)	$	(1,213	)	$	2,789		$	62		$	2,851		$	356
Common stock repurchases									4		(285		)				(285		)				(285		)
Acquisition of noncontrolling interest																	—			20			20
VIE deconsolidation																	—			(58		)	(58		)
Net income						450											450			(1		)	449			449
Dividends						(347		)									(347		)				(347		)
Other comprehensive loss														(68		)	(68		)	(1		)	(69		)	(69		)
Stock compensation				21													21						21
Stock options exercised and other				5		(3		)	(1	)	90						92						92
Balance, July 4, 2015	420	$	105	$	704	$	6,789		67		$	(3,665	)	$	(1,281	)	$	2,652		$	22		$	2,674		$	380

Refer to notes to Consolidating Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

(millions)



	Year-to-date period ended
(unaudited)	July 4, 2015			June 28, 2014
Operating activities
Net income	$	449		$	701
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization	269			235
Postretirement benefit plan expense (benefit)	(41		)	(45		)
Deferred income taxes	(11		)	18
Venezuela remeasurement expense	152			—
VIE deconsolidation	(49		)	—
Other	56			18
Postretirement benefit plan contributions	(17		)	(37		)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables	(207		)	(136		)
Inventories	5			(55		)
Accounts payable	114			30
Accrued income taxes	(34		)	7
Accrued interest expense	(2		)	(8		)
Accrued and prepaid advertising, promotion and trade allowances	9			(12		)
Accrued salaries and wages	(61		)	(39		)
All other current assets and liabilities	(91		)	(23		)
Net cash provided by (used in) operating activities	541			654
Investing activities
Additions to properties	(218		)	(226		)
Acquisitions, net of cash acquired	(117		)	—
Other	42			—
Net cash provided by (used in) investing activities	(293		)	(226		)
Financing activities
Net issuances (reductions) of notes payable	114			118
Issuances of long-term debt	672			952
Reductions of long-term debt	(606		)	(957		)
Net issuances of common stock	90			133
Common stock repurchases	(285		)	(329		)
Cash dividends	(347		)	(331		)
Other	5			6
Net cash provided by (used in) financing activities	(357		)	(408		)
Effect of exchange rate changes on cash and cash equivalents	(40		)	(3		)
Increase (decrease) in cash and cash equivalents	(149		)	17
Cash and cash equivalents at beginning of period	443			273
Cash and cash equivalents at end of period	$	294		$	290

Refer to Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

for the quarter ended July 4, 2015 (unaudited)

Note 1 Accounting policies

Basis of presentation

The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2014 Annual Report on Form 10-K.

The condensed balance sheet data at January 3, 2015 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended July 4, 2015 are not necessarily indicative of the results to be expected for other interim periods or the full year.

Accounts payable

Beginning in 2014, the Company has an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into this agreement is to capture overall supplier savings, in the form of payment terms or vendor funding, created by facilitating suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under this arrangement. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreement for those payment obligations that have been sold by suppliers. As of July 4, 2015, $355 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $294 million of those payment obligations to participating financial institutions. As of January 3, 2015, $236 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $184 million of those payment obligations to participating financial institutions.

Accounting standards to be adopted in future periods

In April 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. Entities should apply the new guidance on a retrospective basis. The Company is currently assessing when it will adopt the updated standard. The Company does not expect the adoption of this guidance to have a significant impact on its financial statements.

In April 2015, the FASB issued an ASU to provide a practical expedient for the measurement date of an employer’s defined benefit obligation and plan assets. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently to all plans from year to year. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. Entities should apply the new guidance on a prospective basis. The Company will early adopt the updated standard when measuring the fair value of plan assets at the end of its 2015 fiscal year. The Company does not expect the adoption of this guidance to have a significant impact on its financial statements.

In April 2015, the FASB issued an ASU to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. Entities should apply the new guidance either; 1)

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prospectively to all arrangements entered into or materially modified after the effective date or 2) retrospectively. The Company will adopt the updated standard prospectively in the first quarter of 2016. The Company does not expect the adoption of this guidance to have a significant impact on its financial statements.

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

Note 2 Goodwill and other intangible assets

Bisco Misr acquisition

In January 2015, the Company completed its acquisition of a majority interest in Bisco Misr, the number one packaged biscuits company in Egypt, for $125 million, or $117 million net of cash and cash equivalents acquired. The acquisition was accounted for under the purchase method and was financed through cash on hand. The assets and liabilities of Bisco Misr are included in the Consolidated Balance Sheet as of July 4, 2015 and the results of its operations subsequent to the acquisition date, which are immaterial, are included in the Consolidated Statement of Income within the Europe operating segment. In addition, the pro-forma effect of this acquisition, if the acquisition had been completed at the beginning of 2014, would have been immaterial.

The acquired assets and assumed liabilities include the following:



(millions)	January 18, 2015
Current assets	$	11
Property	79
Goodwill	59
Intangible assets and other	30
Current liabilities	(15		)
Other non current liabilities, primarily deferred taxes	(27		)
Non-controlling interests	(20		)
	$	117

Goodwill, which is not expected to be deductible for statutory tax purposes, is calculated as the excess of the purchase price over the fair value of the net assets recognized. The goodwill recorded primarily reflects the value of providing an established platform to leverage the Company’s existing brands in the markets served by Bisco Misr as well as any intangible assets that do not qualify for separate recognition. The above amounts represent the preliminary allocation of purchase price and are subject to revision when appraisals are finalized, which is expected to occur by the end of 2015.

Carrying amount of goodwill

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(millions)	U.S. Morning Foods		U.S. Snacks			U.S. Specialty		North America Other			Europe			Latin America			Asia Pacific			Consoli- dated
January 3, 2015*	$	131	$	3,589		$	82	$	465		$	389		$	83		$	232		$	4,971
Additions	—		—			—		—			59			—			—			59
VIE deconsolidation**	—		(21		)	—		—			—			—			—			(21		)
Currency translation adjustment	—		—			—		(5		)	(18		)	(3		)	(5		)	(31		)
July 4, 2015	$	131	$	3,568		$	82	$	460		$	430		$	80		$	227		$	4,978

* In conjunction with the establishment of the Kashi operating segment, included within the North America Other reportable segment, goodwill was reallocated on a relative fair value basis. All prior period balances were updated to conform with current presentation. See Note 12 for further discussion.

** See discussion regarding VIE deconsolidation in the Noncontrolling interest section of Note 4.

Intangible assets subject to amortization

(millions)



Gross carrying amount	U.S. Morning Foods		U.S. Snacks			U.S. Specialty		North America Other		Europe			Latin America		Asia Pacific		Consoli- dated
January 3, 2015	$	8	$	65		$	—	$	5	$	38		$	6	$	10	$	132
Additions	—		—			—		—		4			—		—		4
VIE deconsolidation**	—		(23		)	—		—		—			—		—		(23		)
Currency translation adjustment	—		—			—		—		(1		)	—		—		(1		)
July 4, 2015	$	8	$	42		$	—	$	5	$	41		$	6	$	10	$	112

Accumulated Amortization
January 3, 2015	$	8	$	16		$	—	$	4	$	7		$	6	$	2	$	43
VIE deconsolidation**	—		(4		)	—		—		—			—		—		(4		)
Amortization	—		2			—		—		2			—		—		4
July 4, 2015	$	8	$	14		$	—	$	4	$	9		$	6	$	2	$	43

Intangible assets subject to amortization, net
January 3, 2015	$	—	$	49		$	—	$	1	$	31		$	—	$	8	$	89
Additions	—		—			—		—		4			—		—		4
VIE deconsolidation**	—		(19		)	—		—		—			—		—		(19		)
Currency translation adjustment	—		—			—		—		(1		)	—		—		(1		)
Amortization	—		(2		)	—		—		(2		)	—		—		(4		)
July 4, 2015	$	—	$	28		$	—	$	1	$	32		$	—	$	8	$	69

**See discussion regarding VIE deconsolidation in the Noncontrolling interest section of Note 4.

For intangible assets in the preceding table, amortization was $4 million for the year-to-date periods ended July 4, 2015 and June 28, 2014. The currently estimated aggregate annual amortization expense for full-year 2015 is approximately $8 million.

Intangible assets not subject to amortization



(millions)	U.S. Morning Foods		U.S. Snacks		U.S. Specialty		North America Other		Europe			Latin America		Asia Pacific		Consoli- dated
January 3, 2015*	$	—	$	1,625	$	—	$	158	$	423		$	—	$	—	$	2,206
Additions	—		—		—		—		25			—		—		25
Currency translation adjustment	—		—		—		—		(34		)	—		—		(34		)
July 4, 2015	$	—	$	1,625	$	—	$	158	$	414		$	—	$	—	$	2,197

* In conjunction with the establishment of the Kashi operating segment, included within the North America Other reportable segment, certain intangible assets were reallocated. All prior period balances were updated to conform with current presentation. See Note 12 for further discussion.

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Note 3 Restructuring and cost reduction activities

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

Project K

The most recent and largest program that is currently active is Project K, a four-year efficiency and effectiveness program announced in November 2013. The program is expected to generate a significant amount of savings that may be invested in key strategic areas of focus for the business. The Company expects that this investment will drive future growth in revenues, gross margin, operating profit, and cash flow.

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

The Company currently anticipates that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.2 to $1.4 billion, with after-tax cash costs, including incremental capital investments, estimated to be $900 million to $1.1 billion. The Company currently expects the charges will consist of asset-related costs totaling $450 to $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs totaling $425 to $475 million which will include severance, pension and other termination benefits; and other costs totaling $325 to $425 million which will consist primarily of charges related to the design and implementation of global business capabilities. A significant portion of other costs are the result of the implementation of global business service centers which are intended to simplify and standardize business support processes.

The Company currently expects that total pre-tax charges will impact reportable segments as follows: U.S. Morning Foods (approximately 18%), U.S. Snacks (approximately 12%), U.S. Specialty (approximately 1%), North America Other (approximately 9%), Europe (approximately 14%), Latin America (approximately 3%), Asia-Pacific (approximately 6%), and Corporate (approximately 37%). A majority of the costs impacting Corporate relate to additional initiatives to be approved and executed in the future. When these initiatives are fully defined and approved, the Company will update its estimated costs by reportable segment as needed.

Since the inception of Project K, the Company has recognized charges of $664 million that have been attributed to the program. The charges consist of $4 million recorded as a reduction of revenue, $423 million recorded in COGS and $237 million recorded in SGA.

All Projects

During the quarter ended July 4, 2015, the Company recorded total charges of $90 million across all restructuring and cost reduction activities. The charges consist of $65 million recorded in cost of goods sold (COGS) and $25 million recorded in selling, general and administrative (SGA) expense. During the year-to-date period ended July 4, 2015, the Company recorded total charges of $158 million across all restructuring and cost reduction activities. The charges consist of $2 million recorded as a reduction of revenue, $97 million recorded in COGS and $59 million recorded in SGA expense.

During the quarter ended June 28, 2014, the Company recorded total charges of $78 million across all restructuring and cost reduction activities. The charges consist of $31 million recorded in COGS and $47 million recorded in SGA expense. During the year-to-date period ended June 28, 2014, the Company recorded total charges of $132 million across all restructuring and cost reduction activities. The charges consist of $56 million recorded in COGS and $76 million recorded in SGA expense.

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The tables below provide the details for charges across all restructuring and cost reduction activities incurred during the quarter and year-to-date periods ended July 4, 2015 and June 28, 2014 and program costs to date for programs currently active as of July 4, 2015.



	Quarter ended				Year-to-date period ended				Program costs to date
(millions)	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		July 4, 2015
Employee related costs	$	16	$	35	$	33	$	52	$	230
Asset related costs	24		7		47		10		90
Asset impairment	18		—		18		—		105
Other costs	32		36		60		70		239
Total	$	90	$	78	$	158	$	132	$	664

	Quarter ended				Year-to-date period ended				Program costs to date
(millions)	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		July 4, 2015
U.S. Morning Foods	$	13	$	15	$	21	$	26	$	181
U.S. Snacks	10		3		19		10		95
U.S. Specialty	1		—		2		1		8
North America Other	23		6		29		9		56
Europe	25		28		44		40		143
Latin America	1		1		1		5		13
Asia Pacific	3		5		8		11		69
Corporate	14		20		34		30		99
Total	$	90	$	78	$	158	$	132	$	664

For the quarter and year-to-date periods ended July 4, 2015 and June 28, 2014 employee related costs consist primarily of severance benefits, asset related costs consist primarily of accelerated depreciation, and other costs consist primarily of third-party incremental costs related to the development and implementation of global business capabilities.

At July 4, 2015 total exit cost reserves were $78 million, related to severance payments and other costs of which a substantial portion will be paid out in 2015 and 2016. The following table provides details for exit cost reserves.



	Employee Related Costs			Asset Impairment			Asset Related Costs			Other Costs			Total
Liability as of January 3, 2015	$	96		$	—		$	—		$	14		$	110
2015 restructuring charges	33			18			47			60			158
Cash payments	(62		)	—			(12		)	(63		)	(137		)
Non-cash charges and other	(2		)	(18		)	(33		)	—			(53		)
Liability as of July 4, 2015	$	65		$	—		$	2		$	11		$	78

Note 4 Equity

Earnings per share

Basic earnings per share is determined by dividing net income attributable to Kellogg Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table. There were 3 million and 2 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended July 4, 2015, respectively. There were zero and 4

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million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended June 28, 2014, respectively.

Quarters ended July 4, 2015 and June 28, 2014:



(millions, except per share data)	Net income attributable to Kellogg Company		Average shares outstanding	Earnings per share
2015
Basic	$	223	353	$	0.63
Dilutive potential common shares			2	—
Diluted	$	223	355	$	0.63
2014
Basic	$	295	359	$	0.82
Dilutive potential common shares			3	—
Diluted	$	295	362	$	0.82

Year-to-date periods ended July 4, 2015 and June 28, 2014:



(millions, except per share data)	Net income attributable to Kellogg Company		Average shares outstanding	Earnings per share
2015
Basic	$	450	354	$	1.27
Dilutive potential common shares			2	(0.01		)
Diluted	$	450	356	$	1.26
2014
Basic	$	701	360	$	1.95
Dilutive potential common shares			2	(0.01		)
Diluted	$	701	362	$	1.94

In February 2014, the Company’s board of directors approved a share repurchase program authorizing the repurchase of up to $1.5 billion of it's common stock through December 2015. This authorization supersedes the April 2013 authorization and is intended to allow the Company to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.

During the year-to-date period ended July 4, 2015, the Company repurchased approximately 4 million shares of common stock for a total of $285 million. During the year-to-date period ended June 28, 2014, the Company repurchased 6 million shares of common stock for a total of $329 million.

Comprehensive income

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

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	Quarter ended July 4, 2015									Year-to-date period ended July 4, 2015
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	222								$	449
Other comprehensive income (loss):
Foreign currency translation adjustments	9			5			14			(54		)	(16		)	(70		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	(4		)	—			(4		)	4			(1		)	3
Reclassification to net income	(3		)	—			(3		)	(7		)	—			(7		)
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service credit (cost)	1			—			1			—			—			—
Reclassification to net income:
Net experience loss	1			—			1			2			—			2
Prior service cost	2			(1		)	1			5			(2		)	3
Other comprehensive income (loss)	$	6		$	4		$	10		$	(50	)	$	(19	)	$	(69	)
Comprehensive income							$	232								$	380
Net income (loss) attributable to noncontrolling interests							(1		)							(1		)
Other comprehensive income (loss) attributable to noncontrolling interests							—									(1		)
Comprehensive income attributable to Kellogg Company							$	233								$	382

	Quarter ended June 28, 2014									Year-to-date period ended June 28, 2014
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	295								$	701
Other comprehensive income (loss):
Foreign currency translation adjustments	30			—			30			33			—			33
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	(23		)	7			(16		)	(24		)	7			(17		)
Reclassification to net income	(1		)	—			(1		)	(11		)	3			(8		)
Postretirement and postemployment benefits:
Amounts arising during the period:
Prior service credit (cost)	(9		)	3			(6		)	(9		)	3			(6		)
Reclassification to net income:
Net experience loss	1			—			1			2			—			2
Prior service cost	4			(1		)	3			6			(2		)	4
Other comprehensive income (loss)	$	2		$	9		$	11		$	(3	)	$	11		$	8
Comprehensive income							$	306								$	709

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Reclassifications out of Accumulated Other Comprehensive Income (AOCI) for the quarter and year-to-date periods ended July 4, 2015 consisted of the following:



(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended July 4, 2015			Year-to-date period ended July 4, 2015
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	(9	)	$	(16	)	COGS
Foreign currency exchange contracts	2			2			SGA
Interest rate contracts	1			1			Interest expense
Commodity contracts	3			6			COGS
	$	(3	)	$	(7	)	Total before tax
	—			—			Tax (expense) benefit
	$	(3	)	$	(7	)	Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	1		$	2		See Note 7 for further details
Prior service cost	2			5			See Note 7 for further details
	$	3		$	7		Total before tax
	(1		)	(2		)	Tax (expense) benefit
	$	2		$	5		Net of tax
Total reclassifications	$	(1	)	$	(2	)	Net of tax

Reclassifications out of AOCI for the quarter and year-to-date periods ended June 28, 2014 consisted of the following:



(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended June 28, 2014			Year-to-date period ended June 28, 2014
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	(1	)	$	(2	)	COGS
Foreign currency exchange contracts	(2		)	(3		)	SGA
Interest rate contracts	—			(9		)	Interest expense
Commodity contracts	2			3			COGS
	$	(1	)	$	(11	)	Total before tax
	—			3			Tax (expense) benefit
	$	(1	)	$	(8	)	Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	1		$	2		See Note 7 for further details
Prior service cost	4			6			See Note 7 for further details
	$	5		$	8		Total before tax
	(1		)	(2		)	Tax (expense) benefit
	$	4		$	6		Net of tax
Total reclassifications	$	3		$	(2	)	Net of tax

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Accumulated other comprehensive income (loss) as of July 4, 2015 and January 3, 2015 consisted of the following:



(millions)	July 4, 2015			January 3, 2015
Foreign currency translation adjustments	$	(1,188	)	$	(1,119	)
Cash flow hedges — unrealized net gain (loss)	(28		)	(24		)
Postretirement and postemployment benefits:
Net experience loss	(16		)	(18		)
Prior service cost	(49		)	(52		)
Total accumulated other comprehensive income (loss)	$	(1,281	)	$	(1,213	)

Noncontrolling interests

In December 2012, the Company entered into a series of agreements with a third party including a subordinated loan (VIE Loan) of $44 million which is convertible into approximately 85% of the equity of the entity (VIE). Due to this convertible subordinated loan and other agreements, the Company determined that the entity was a variable interest entity, the Company was the primary beneficiary and the Company consolidated the financial statements of the VIE in the U.S. Snacks operating segment. During the quarter ended April 4, 2015, the Company determined that the VIE Loan and other amounts receivable from the VIE may not be fully recoverable and recorded a non-cash charge of $25 million, which was recorded as other income (expense), net. During the quarter ended July 4, 2015, the 2012 Agreements were terminated and the VIE Loan, including related accrued interest and other receivables, were settled, resulting in a partial reversal of the prior quarter charge of $6 million for the current quarter. The net charge, in the year-to-date period of $19 million was recorded as Other income (expense), net. Upon termination of the 2012 Agreements, the Company is no longer considered the primary beneficiary of the VIE and accordingly, the VIE was deconsolidated as of July 4, 2015. In connection with the deconsolidation, the Company derecognized all assets and liabilities of the VIE, including an allocation of a portion of goodwill from the U.S. Snacks operating segment, resulting in a $67 million non-cash gain, which was recorded within SGA expense for the quarter ended July 4, 2015.

Note 5 Debt

The following table presents the components of notes payable at July 4, 2015 and January 3, 2015:



	July 4, 2015				January 3, 2015
(millions)	Principal amount		Effective interest rate		Principal amount		Effective interest rate
U.S. commercial paper	$	857	0.44	%	$	681	0.36	%
Europe commercial paper	28		0.05	%	96		0.09	%
Bank borrowings	54				51
Total	$	939			$	828

In May 2015, the Company repaid its $350 million 1.125% fixed rate U.S. Dollar Notes due 2015 at maturity with U.S. commercial paper.

In the second quarter of 2015, the Company entered into interest rate swaps with notional amounts totaling $958 million, which were designated as fair value hedges for (a) $500 million of its 4.15% fixed rate U.S. Dollar Notes due 2019, (b) $300 million of its 4.0% fixed rate U.S. Dollar Notes due 2020 and (c) $158 million of its 3.125% fixed rate U.S. Dollar Notes due 2022.

In February 2015, the Company repaid its $250 million floating-rate U.S. Dollar Notes due 2015 at maturity with U.S. commercial paper.

In March 2015, the Company issued €600 million (approximately $665 million USD at July 4, 2015, which reflects the discount and translation adjustments) of ten-year 1.25% Euro Notes due 2025, using the proceeds from these Notes for general corporate purposes, including the repayment of a portion of its commercial paper borrowings. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.

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The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued.

In the first quarter of 2015, the Company entered into interest rate swaps with notional amounts totaling $558 million, which were designated as fair value hedges for (a) $300 million of its 4.15% fixed rate U.S. Dollar Notes due 2019, (b) $200 million of its 4.0% fixed rate U.S. Dollar Notes due 2020 and (c) $58 million of its 3.125% fixed rate U.S. Dollar Notes due 2022.

In the first quarter of 2015, the Company terminated interest rate swaps with notional amounts totaling $1.5 billion, which were designated as fair value hedges for (a) $800 million of its 4.15% fixed rate U.S. Dollar Notes due 2019, (b) $500 million of its 4.0% fixed rate U.S. Dollar Notes due 2020 and (c) $216 million of its 3.125% fixed rate U.S. Dollar Notes due 2022 (collectively, the Notes). The interest rate swaps effectively converted the interest rate on the Notes from fixed to variable and the gain upon termination of $26 million will be amortized to interest expense over the remaining term of the Notes.

As of July 4, 2015, the Company has interest rate swaps with notional amounts totaling $2.4 billion, which effectively converts a portion of the associated U.S. Dollar Notes from fixed rate to floating rate obligations. These derivative instruments are designated as fair value hedges. The effective interest rates on debt obligations resulting from the Company’s current and previous interest rate swaps as of July 4, 2015 were as follows: (a) seven-year 4.45% U.S. Dollar Notes due 2016 – 3.58%; (b) five-year 1.875% U.S. Dollar Notes due 2016 – 1.58%; (c) five-year 1.75% U.S. Dollar Notes due 2017 – 1.36%; (d) seven-year 3.25% U.S. Dollar Notes due 2018 – 1.88%; (e) ten-year 4.15% U.S. Dollar Notes due 2019 – 2.58%; (f) ten-year 4.00% U.S. Dollar Notes due 2020 – 1.52%; (g) ten-year 3.125% U.S. Dollar Notes due 2022 – 1.44%.

Note 6 Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. During 2015, the Company changed the mix of equity compensation, awarding an increasing number of restricted stock units and fewer stock option awards. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2014 Annual Report on Form 10-K.

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



	Quarter ended				Year-to-date period ended
(millions)	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
Pre-tax compensation expense	$	13	$	14	$	25	$	28
Related income tax benefit	$	5	$	5	$	9	$	10

As of July 4, 2015, total stock-based compensation cost related to non-vested awards not yet recognized was $77 million and the weighted-average period over which this amount is expected to be recognized was 2 years.

Stock options

During the year-to-date periods ended July 4, 2015 and June 28, 2014, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 2014 Annual Report on Form 10-K.

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Year-to-date period ended July 4, 2015:



Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	21		$	56
Granted	3		64
Exercised	(2	)	53
Forfeitures and expirations	—		—
Outstanding, end of period	22		$	57	7.1	$	131
Exercisable, end of period	13		$	55	6.1	$	114

Year-to-date period ended June 28, 2014:



Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	20		$	54
Granted	6		60
Exercised	(2	)	50
Forfeitures and expirations	(1	)	57
Outstanding, end of period	23		$	55	7.5	$	209
Exercisable, end of period	11		$	52	6.0	$	145

The weighted-average fair value of options granted was $7.20 per share and $6.70 per share for the year-to-date periods ended July 4, 2015 and June 28, 2014, respectively. The fair value was estimated using the following assumptions:



	Weighted- average expected volatility		Weighted- average expected term (years)	Weighted- average risk-free interest rate		Dividend yield
Grants within the year-to-date period ended July 4, 2015:	16	%	6.9	1.98	%	3.00	%
Grants within the year-to-date period ended June 28, 2014:	15	%	7.3	2.35	%	3.00	%

The total intrinsic value of options exercised was $23 million and $33 million for the year-to-date periods ended July 4, 2015 and June 28, 2014, respectively.

Performance shares

In the first quarter of 2015, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-year cumulative operating cash flow (CCF) and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.

A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of CCF achievement. Compensation cost related to CCF performance is revised for changes in the expected outcome. The 2015 target grant currently corresponds to approximately 177,000 shares, with a grant-date fair value of $58 per share.

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Based on the market price of the Company’s common stock at July 4, 2015, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:



(millions)	July 4, 2015
2013 Award	$	24
2014 Award	$	27
2015 Award	$	22

The 2012 performance share award, payable in stock, was settled at 35% of target in February 2015 for a total dollar equivalent of $3 million.

Other stock-based awards

During the year-to-date period ended July 4, 2015, the Company granted restricted stock units and a nominal number of restricted stock awards to eligible employees as presented in the following table. Terms of these grants and the Company’s method of determining grant-date fair value were consistent with that described within the stock compensation footnote in the Company’s 2014 Annual Report on Form 10-K.

Year-to-date period ended July 4, 2015:



Employee restricted stock and restricted stock units	Shares(thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	346		$	54
Granted	563		58
Vested	(79	)	51
Forfeited	(17	)	56
Non-vested, end of period	813		$	57

Grants of restricted stock and restricted stock units for the comparable period ended June 28, 2014 were 56,000.

Note 7 Employee benefits

The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 2014 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

Pension



	Quarter ended						Year-to-date period ended
(millions)	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Service cost	$	28		$	27		$	56		$	53
Interest cost	53			56			106			113
Expected return on plan assets	(100		)	(105		)	(200		)	(209		)
Amortization of unrecognized prior service cost	3			4			6			7
Total pension (income) expense	$	(16	)	$	(18	)	$	(32	)	$	(36	)

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(millions)	Pension		Nonpension postretirement		Total
Quarter ended:
July 4, 2015	$	1	$	4	$	5
June 28, 2014	$	5	$	4	$	9
Year-to-date period ended:
July 4, 2015	$	10	$	7	$	17
June 28, 2014	$	29	$	8	$	37
Full year:
Fiscal year 2015 (projected)	$	39	$	16	$	55
Fiscal year 2014 (actual)	$	37	$	16	$	53



(millions)
January 3, 2015	$	78
Tax positions related to current year:
Additions	3
Reductions	—
Tax positions related to prior years:
Additions	2
Reductions	(8		)
Settlements	(1		)
July 4, 2015	$	74


(a)	The fair value of the related hedged portion of the Company’s long-term debt, a level 2 liability, was $2.4 billion and $2.5 billion as of July 4, 2015 and January 3, 2015, respectively.