10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2015
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 1-4171
KELLOGG COMPANY
 
State of Incorporation—Delaware
  
IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Common Stock outstanding as of October 31, 2015 — 354,397,695 shares
 

Table of Contents

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


Table of Contents

Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
 
October 3,
2015 (unaudited)
January 3,
2015 *
Current assets
 
 
Cash and cash equivalents
$
299

$
443

Accounts receivable, net
1,457

1,276

Inventories:
 
 
Raw materials and supplies
320

327

Finished goods and materials in process
890

952

Deferred income taxes
193

184

Other prepaid assets
194

158

Total current assets
3,353

3,340

Property, net of accumulated depreciation of $5,535 and $5,526
3,594

3,769

Investments in unconsolidated entities
454

1

Goodwill
4,988

4,971

Other intangibles, net of accumulated amortization of $45 and $43
2,281

2,295

Pension
283

250

Other assets
565

527

Total assets
$
15,518

$
15,153

Current liabilities
 
 
Current maturities of long-term debt
$
756

$
607

Notes payable
1,363

828

Accounts payable
1,610

1,528

Accrued advertising and promotion
500

446

Accrued income taxes
25

39

Accrued salaries and wages
292

320

Other current liabilities
526

596

Total current liabilities
5,072

4,364

Long-term debt
5,830

5,935

Deferred income taxes
765

726

Pension liability
731

777

Nonpension postretirement benefits
56

82

Other liabilities
391

418

Commitments and contingencies


Equity
 
 
Common stock, $.25 par value
105

105

Capital in excess of par value
721

678

Retained earnings
6,815

6,689

Treasury stock, at cost
(3,656
)
(3,470
)
Accumulated other comprehensive income (loss)
(1,322
)
(1,213
)
Total Kellogg Company equity
2,663

2,789

Noncontrolling interests
10

62

Total equity
2,673

2,851

Total liabilities and equity
$
15,518

$
15,153

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

3
Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
 
Quarter ended
 
Year-to-date period ended
(Results are unaudited)
October 3,
2015
September 27,
2014
 
October 3,
2015
September 27,
2014
Net sales
$
3,329

$
3,639

 
$
10,383

$
11,066

Cost of goods sold
2,096

2,347

 
6,664

6,859

Selling, general and administrative expense
899

927

 
2,589

2,761

Operating profit
334

365

 
1,130

1,446

Interest expense
56

54

 
168

156

Other income (expense), net
(6
)
1

 
(78
)
14

Income before income taxes
272

312

 
884

1,304

Income taxes
66

86

 
227

373

Earnings (loss) from unconsolidated entities
(1
)
(1
)
 
(3
)
(5
)
Net income
$
205

$
225

 
$
654

$
926

Net income (loss) attributable to noncontrolling interests
—

1

 
(1
)
1

Net income attributable to Kellogg Company
$
205

$
224

 
$
655

$
925

Per share amounts:
 
 
 
 
 
Basic
$
0.58

$
0.63

 
$
1.85

$
2.58

Diluted
$
0.58

$
0.62

 
$
1.84

$
2.56

Dividends per share
$
0.50

$
0.49

 
$
1.48

$
1.41

Average shares outstanding:
 
 
 
 
 
Basic
354

358

 
354

359

Diluted
356

360

 
356

361

Actual shares outstanding at period end




 
354

355

Refer to Notes to Consolidated Financial Statements.

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Table of Contents

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

Quarter ended
October 3, 2015

Year-to-date period ended
October 3, 2015
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount

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


$
205




$
654

Other comprehensive income (loss):







Foreign currency translation adjustments
(88
)
5

(83
)

(142
)
(11
)
(153
)
Cash flow hedges:







Unrealized gain (loss) on cash flow hedges
7

(2
)
5


11

(3
)
8

Reclassification to net income
(7
)
1

(6
)

(14
)
1

(13
)
Postretirement and postemployment benefits:







Amount arising during the period:








Prior service credit (cost)
66

(25
)
41


66

(25
)
41

Reclassification to net income:







Net experience loss
1

—

1


3

—

3

Prior service cost
2

—

2


7

(2
)
5

Other comprehensive income (loss)
$
(19
)
$
(21
)
$
(40
)

$
(69
)
$
(40
)
$
(109
)
Comprehensive income
 
 
$
165

 
 
 
$
545

Net income (loss) attributable to noncontrolling interests
 
 
—

 
 
 
(1
)
Other comprehensive income (loss) attributable to noncontrolling interests
 
 
1

 
 
 
—

Comprehensive income attributable to Kellogg Company
 
 
$
164

 
 
 
$
546















 
Quarter ended
September 27, 2014

Year-to-date period ended
September 27, 2014
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount

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


$
225




$
926

Other comprehensive income (loss):







Foreign currency translation adjustments
(87
)
(17
)
(104
)

(54
)
(17
)
(71
)
Cash flow hedges:







Unrealized gain (loss) on cash flow hedges
(2
)
4

2


(26
)
11

(15
)
Reclassification to net income
—

—

—


(11
)
3

(8
)
Postretirement and postemployment benefits:







Amount arising during the period:







Prior service credit (cost)
19

(7
)
12


10

(4
)
6

Reclassification to net income:







Net experience loss
1

—

1


3

—

3

Prior service cost
2

(1
)
1


8

(3
)
5

Other comprehensive income (loss)
$
(67
)
$
(21
)
$
(88
)

$
(70
)
$
(10
)
$
(80
)
Comprehensive income


$
137




$
846

Refer to Notes to Consolidated Financial Statements.

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Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
 
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellogg
Company
equity
Non-
controlling
interests
Total
equity
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
 
 


 
6

(381
)
 
(381
)
 
(381
)
 
Acquisition of noncontrolling interest, net
 
 
 
 
 
 
 
—

7

7

 
VIE deconsolidation








—

(58
)
(58
)


Net income
 
 
 
655

 
 
 
655

(1
)
654

654

Dividends
 
 
 
(523
)
 
 
 
(523
)
 
(523
)
 
Other comprehensive loss
 
 
 
 
 
 
(109
)
(109
)


(109
)
(109
)
Stock compensation
 
 
32

 
 
 
 
32

 
32

 
Stock options exercised and other
 
 
11

(6
)
(4
)
195

 
200



200

 
Balance, October 3, 2015
420

$
105

$
721

$
6,815

66

$
(3,656
)
$
(1,322
)
$
2,663

$
10

$
2,673

$
545

Refer to notes to Consolidating Financial Statements.

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Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
 
 
Year-to-date period ended
(unaudited)
October 3,
2015
September 27,
2014
Operating activities
 
 
Net income
$
654

$
926

Adjustments to reconcile net income to operating cash flows:
 
 
Depreciation and amortization
387

375

Postretirement benefit plan expense (benefit)
(68
)
(73
)
Deferred income taxes
(61
)
2

Venezuela remeasurement expense
165

—

VIE deconsolidation
(49
)
—

Other
67

—

Postretirement benefit plan contributions
(21
)
(44
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
Trade receivables
(214
)
(122
)
Inventories
1

40

Accounts payable
135

34

Accrued income taxes
11

19

Accrued interest expense
15

48

Accrued and prepaid advertising, promotion and trade allowances
49

10

Accrued salaries and wages
(14
)
(33
)
All other current assets and liabilities
(115
)
(5
)
Net cash provided by (used in) operating activities
942

1,177

Investing activities
 
 
Additions to properties
(362
)
(355
)
Acquisitions, net of cash acquired
(161
)
—

Investments in unconsolidated entities
(456
)
(6
)
Other
43

13

Net cash provided by (used in) investing activities
(936
)
(348
)
Financing activities
 
 
Net issuances (reductions) of notes payable
533

339

Issuances of long-term debt
672

952

Reductions of long-term debt
(604
)
(959
)
Net issuances of common stock
196

164

Common stock repurchases
(381
)
(690
)
Cash dividends
(523
)
(506
)
Other
(3
)
12

Net cash provided by (used in) financing activities
(110
)
(688
)
Effect of exchange rate changes on cash and cash equivalents
(40
)
12

Increase (decrease) in cash and cash equivalents
(144
)
153

Cash and cash equivalents at beginning of period
443

273

Cash and cash equivalents at end of period
$
299

$
426

Refer to Notes to Consolidated Financial Statements.

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Table of Contents

Notes to Consolidated Financial Statements
for the quarter ended October 3, 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 October 3, 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 October 3, 2015, $396 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $312 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 September 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to simplify the accounting for measurement-period adjustments for items in a business combination. The ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Entities should apply the new guidance prospectively to adjustments to provisional amounts that occur after the effective date of the ASU with earlier application permitted for financial statements that have not been issued. The Company will adopt the updated standard 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 April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. 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

8
Table of Contents

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) 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 October 3, 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.

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Table of Contents

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.

During the quarter ended October 3, 2015, the Company acquired additional ownership in Bisco Misr through payment of $13 million to non-controlling interests, which is reported as financing activity on the consolidated statement of cash flows. As of October 3, 2015, the Company owns greater than 95% of Bisco Misr outstanding shares.
Mass Foods Acquisition
In September 2015, the Company completed the acquisition of Mass Foods, Egypt’s leading cereal company, for $46 million, or $44 million net of cash and cash equivalents acquired. The acquisition was accounted for under the purchase method and financed through cash on hand. The assets and liabilities of Mass Foods are included in the Consolidated Balance Sheet as of October 3, 2015 within the European reportable segment. 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 liabilities assumed include the following: Current assets - $10 million, Property, intangible assets and goodwill - $46 million , Current and non-current liabilities - $12 million. 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 Mass Foods as well as any intangibles 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 no later than the third quarter of 2016.
Carrying amount of goodwill
(millions)
U.S.
Morning
Foods
U.S.
Snacks
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
January 3, 2015*
$
131

$
3,589

$
82

$
465

$
389

$
83

$
232

$
4,971

Additions
—

—

—

—

85

—

—

85

VIE deconsolidation**
—

(21
)
—

—

—

—

—

(21
)
Currency translation adjustment
—

—

—

(7
)
(25
)
(6
)
(9
)
(47
)
October 3, 2015
$
131

$
3,568

$
82

$
458

$
449

$
77

$
223

$
4,988

* 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 13 for further discussion.
** See discussion regarding VIE deconsolidation in the Noncontrolling interest section of Note 5.

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Table of Contents

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
—

—

—

—

6

—

—

6

VIE deconsolidation**
—

(23
)
—

—

—

—

—

(23
)
Currency translation adjustment
—

—

—

—

(1
)
—

—

(1
)
October 3, 2015
$
8

$
42

$
—

$
5

$
43

$
6

$
10

$
114

 
 
 
 
 
 
 
 
 
Accumulated Amortization
 
 
 
 
 
 
 
 
January 3, 2015
$
8

$
16

$
—

$
4

$
7

$
6

$
2

$
43

VIE deconsolidation**
—

(4
)
—

—

—

—

—

(4
)
Amortization
—

3

—

—

3

—

—

6

October 3, 2015
$
8

$
15

$
—

$
4

$
10

$
6

$
2

$
45

 
 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
 
 
 
 
 
 
January 3, 2015
$
—

$
49

$
—

$
1

$
31

$
—

$
8

$
89

Additions
—

—

—

—

6

—

—

6

VIE deconsolidation**
—

(19
)
—

—

—

—

—

(19
)
Currency translation adjustment
—

—

—

—

(1
)
—

—

(1
)
Amortization
—

(3
)
—

—

(3
)
—

—

(6
)
October 3, 2015
$
—

$
27

$
—

$
1

$
33

$
—

$
8

$
69

**See discussion regarding VIE deconsolidation in the Noncontrolling interest section of Note 5.
For intangible assets in the preceding table, amortization was $6 million for the year-to-date periods ended October 3, 2015 and September 27, 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
—

—

—

—

36

—

—

36

Currency translation adjustment
—

—

—

—

(30
)
—

—

(30
)
October 3, 2015
$
—

$
1,625

$
—

$
158

$
429

$
—

$
—

$
2,212

* 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 13 for further discussion.


11
Table of Contents

Note 3 Investments in unconsolidated entities
In September 2015, the Company acquired, for $445 million, a 50% interest in Multipro Singapore Pte. Ltd. (Multipro), a leading distributor of a variety of food products in Nigeria and Ghana and also obtained an option to acquire 24.5% of an affiliated food manufacturing entity under common ownership based on a fixed multiple of future earnings as defined in the agreement (Purchase Option). The amount paid is subject to purchase price adjustments, including the finalization of Multipro’s 2015 earnings as defined in the agreement. The acquisition of the 50% interest is accounted for under the equity method of accounting and was financed with cash on hand and commercial paper borrowings. The Purchase Option becomes exercisable upon the earlier of the entity achieving a minimum level of earnings as defined in the agreement, in which case the Company has a one year exercise period, or 2020.
Summarized financial information for the balance sheet of Multi-Pro (on a 100% basis) is as follows: Current assets - $35 million, Non-current assets - $35 million, Current liabilities - $43 million and Non-current liabilities - $23 million.
The difference between the amount paid for Multipro and the underlying equity in net assets is primarily attributable to intangible assets, a portion of which will be amortized in future periods, and goodwill.
The Company also has other investments in unconsolidated entities aggregating $9 million as of October 3, 2015.
Note 4 Restructuring and cost reduction activities
The Company views its continued spending on restructuring and cost reduction activities as part of its ongoing operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.
Project K
Project K, a four-year efficiency and effectiveness program, was announced in November 2013, and is expected to 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 $749 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $480 million recorded in COGS and $263 million recorded in SGA.

12
Table of Contents

During the quarter ended October 3, 2015, the Company recorded total charges of $85 million across all restructuring and cost reduction activities. The charges consist of $2 million recorded as a reduction of revenue, $57 million recorded in cost of goods sold (COGS) and $26 million recorded in selling, general and administrative (SGA) expense. During the year-to-date period ended October 3, 2015, the Company recorded total charges of $243 million across all restructuring and cost reduction activities. The charges consist of $4 million recorded as a reduction of revenue, $154 million recorded in COGS and $85 million recorded in SGA expense.
During the quarter ended September 27, 2014, the Company recorded total charges of $92 million across all restructuring and cost reduction activities. The charges consist of $64 million recorded in COGS and $28 million recorded in SGA expense. During the year-to-date period ended September 27, 2014, the Company recorded total charges of $224 million across all restructuring and cost reduction activities. The charges consist of $120 million recorded in COGS and $104 million recorded in SGA expense.
The tables below provide the details for charges across all restructuring and cost reduction activities incurred during the quarter and year-to-date periods ended October 3, 2015 and September 27, 2014 and program costs to date for programs currently active as of October 3, 2015.
 
Quarter ended
 
Year-to-date period ended
 
Program costs to date
(millions)
October 3, 2015
September 27, 2014
 
October 3, 2015
September 27, 2014
 
October 3, 2015
Employee related costs
$
31

$
22

 
$
64

$
74

 
$
261

Asset related costs
15

6

 
62

16

 
105

Asset impairment
—

21

 
18

21

 
105

Other costs
39

43

 
99

113

 
278

Total
$
85

$
92

 
$
243

$
224

 
$
749

 
 
 
 
 
 
 
 
 
Quarter ended
 
Year-to-date period ended
 
Program costs to date
(millions)
October 3, 2015
September 27, 2014
 
October 3, 2015
September 27, 2014
 
October 3, 2015
U.S. Morning Foods
$
30

$
15

 
$
51

$
41

 
$
211

U.S. Snacks
15

32

 
34

42

 
110

U.S. Specialty
1

1

 
3

2

 
9

North America Other
11

2

 
40

11

 
67

Europe
12

23

 
56

63

 
155

Latin America
1

1

 
2

6

 
14

Asia Pacific
2

11

 
10

22

 
71

Corporate
13

7

 
47

37

 
112

Total
$
85

$
92

 
$
243

$
224

 
$
749

For the quarter and year-to-date periods ended October 3, 2015 and September 27, 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.

13
Table of Contents

At October 3, 2015 total exit cost reserves were $73 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
64

18

62

99

243

Cash payments
(96
)
—

(21
)
(102
)
(219
)
Non-cash charges and other
(2
)
(18
)
(41
)
—

(61
)
Liability as of October 3, 2015
$
62

$
—

$
—

$
11

$
73

Note 5 Equity
Earnings per share
Basic earnings per share is determined by dividing net income attributable to Kellogg Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table. There were 3 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended October 3, 2015, respectively. There were zero and 5 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended September 27, 2014, respectively.

Quarters ended October 3, 2015 and September 27, 2014:

(millions, except per share data)
Net income
attributable to
Kellogg Company
Average
shares
outstanding
Earnings
per share
2015
 
 
 
Basic
$
205

354

$
0.58

Dilutive potential common shares
 
2

—

Diluted
$
205

356

$
0.58

2014
 
 
 
Basic
$
224

358

$
0.63

Dilutive potential common shares
 
2

(0.01
)
Diluted
$
224

360

$
0.62



14
Table of Contents

Year-to-date periods ended October 3, 2015 and September 27, 2014:
(millions, except per share data)
Net income
attributable to
Kellogg Company
Average
shares
outstanding
Earnings
per share
2015
 
 
 
Basic
$
655

354

$
1.85

Dilutive potential common shares
 
2

(0.01
)
Diluted
$
655

356

$
1.84

2014
 
 
 
Basic
$
925

359

$
2.58

Dilutive potential common shares
 
2

(0.02
)
Diluted
$
925

361

$
2.56

 
 
 
 
In February 2014, the Company’s board of directors approved a share repurchase program authorizing the repurchase of up to $1.5 billion of its 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 October 3, 2015, the Company repurchased approximately 6 million shares of common stock for a total of $381 million. During the year-to-date period ended September 27, 2014, the Company repurchased 11 million shares of common stock for a total of $690 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. During the quarter ended October 3, 2015, the Company amended a U.S. postretirement health plan as well as a U.S. pension plan. As a result of the U.S. postretirement health plan amendment, a prior service credit was recognized in other comprehensive income with an offsetting reduction in the accumulated postretirement benefit obligation. The U.S. pension plan amendment increased the Company's pension benefit obligation with an offsetting increase in prior service costs in other comprehensive. See Note 8 for further details.

15
Table of Contents

 

Quarter ended
October 3, 2015

Year-to-date period ended
October 3, 2015
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount

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


$
205




$
654

Other comprehensive income (loss):







Foreign currency translation adjustments
(88
)
5

(83
)

(142
)
(11
)
(153
)
Cash flow hedges:







Unrealized gain (loss) on cash flow hedges
7

(2
)
5


11

(3
)
8

Reclassification to net income
(7
)
1

(6
)

(14
)
1

(13
)
Postretirement and postemployment benefits:







Amount arising during the period:








Prior service credit (cost)
66

(25
)
41


66

(25
)
41

Reclassification to net income:







Net experience loss
1

—

1


3

—

3

Prior service cost
2

—

2


7

(2
)
5

Other comprehensive income (loss)
$
(19
)
$
(21
)
$
(40
)

$
(69
)
$
(40
)
$
(109
)
Comprehensive income
 
 
$
165

 
 
 
$
545

Net income (loss) attributable to noncontrolling interests
 
 
—

 
 
 
(1
)
Other comprehensive income (loss) attributable to noncontrolling interests
 
 
1

 
 
 
—

Comprehensive income attributable to Kellogg Company
 
 
$
164

 
 
 
$
546















 
Quarter ended
September 27, 2014

Year-to-date period ended
September 27, 2014
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount

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


$
225




$
926

Other comprehensive income (loss):







Foreign currency translation adjustments
(87
)
(17
)
(104
)

(54
)
(17
)
(71
)
Cash flow hedges:







Unrealized gain (loss) on cash flow hedges
(2
)
4

2


(26
)
11

(15
)
Reclassification to net income
—

—

—


(11
)
3

(8
)
Postretirement and postemployment benefits:







Amounts arising during the period:







Prior service credit (cost)
19

(7
)
12


10

(4
)
6

Reclassification to net income:







Net experience loss
1

—

1


3

—

3

Prior service cost
2

(1
)
1


8

(3
)
5

Other comprehensive income (loss)
$
(67
)
$
(21
)
$
(88
)

$
(70
)
$
(10
)
$
(80
)
Comprehensive income


$
137




$
846





16
Table of Contents

Reclassifications out of Accumulated Other Comprehensive Income (AOCI) for the quarter and year-to-date periods ended October 3, 2015 consisted of the following:
 
(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
October 3, 2015
Year-to-date period ended
October 3, 2015
  
(Gains) losses on cash flow hedges:
 
 
 
Foreign currency exchange contracts
$
(11
)
$
(27
)
COGS
Foreign currency exchange contracts
—

2

SGA
Interest rate contracts
1

2

Interest expense
Commodity contracts
3

9

COGS
 
$
(7
)
$
(14
)
Total before tax
 
1

1

Tax (expense) benefit
 
$
(6
)
$
(13
)
Net of tax
Amortization of postretirement and postemployment benefits:
 
 
 
Net experience loss
$
1

$
3

See Note 8 for further details
Prior service cost
2

7

See Note 8 for further details
 
$
3

$
10

Total before tax
 
—

(2
)
Tax (expense) benefit
 
$
3

$
8

Net of tax
Total reclassifications
$
(3
)
$
(5
)
Net of tax

Reclassifications out of AOCI for the quarter and year-to-date periods ended September 27, 2014 consisted of the following:
(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
September 27, 2014
Year-to-date period ended
September 27, 2014
  
(Gains) losses on cash flow hedges:
 
 
 
Foreign currency exchange contracts
$
—

$
(2
)
COGS
Foreign currency exchange contracts
(2
)
(5
)
SGA
Interest rate contracts
—

(9
)
Interest expense
Commodity contracts
2

5

COGS
 
$
—

$
(11
)
Total before tax
 
—

3

Tax (expense) benefit
 
$
—

$
(8
)
Net of tax
Amortization of postretirement and postemployment benefits:
 
 
 
Net experience loss
$
1

$
3

See Note 8 for further details
Prior service cost
2

8

See Note 8 for further details
 
$
3

$
11

Total before tax
 
(1
)
(3
)
Tax (expense) benefit
 
$
2

$
8

Net of tax
Total reclassifications
$
2

$
—

Net of tax


17
Table of Contents

Accumulated other comprehensive income (loss) as of October 3, 2015 and January 3, 2015 consisted of the following:
(millions)
October 3,
2015
January 3,
2015
Foreign currency translation adjustments
$
(1,272
)
$
(1,119
)
Cash flow hedges — unrealized net gain (loss)
(29
)
(24
)
Postretirement and postemployment benefits:
 
 
Net experience loss
(15
)
(18
)
Prior service cost
(6
)
(52
)
Total accumulated other comprehensive income (loss)
$
(1,322
)
$
(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 was convertible into approximately 85% of the equity of the entity (VIE). Due to this convertible subordinated loan and other agreements, the Company determined that the entity was a variable interest entity, the Company was the primary beneficiary and the Company consolidated the financial statements of the VIE in the U.S. Snacks operating segment. During 2015, the 2012 Agreements were terminated and the VIE Loan, including related accrued interest and other receivables, were settled, resulting in charge of $19 million which was recorded as Other income (expense) in the year-to-date period ended October 3, 2015.  Upon termination of the 2012 Agreements, the Company was no longer considered the primary beneficiary of the VIE, the VIE was deconsolidated, and the Company derecognized all assets and liabilities of the VIE, including an allocation of a portion of goodwill from the U.S. Snacks operating segment, resulting in a $67 million non-cash gain, which was recorded within SGA expense for the year-to-date period ended October 3, 2015.

Note 6 Debt
The following table presents the components of notes payable at October 3, 2015 and January 3, 2015:
 
 
October 3, 2015
 
January 3, 2015
(millions)
Principal
amount
Effective
interest rate
 
Principal
amount
Effective
interest rate
U.S. commercial paper
$
1,213

0.41
%
 
$
681

0.36
%
Europe commercial paper
78

0.02
%
 
96

0.09
%
Bank borrowings
72

 
 
51

 
Total
$
1,363

 
 
$
828

 
In the third quarter of 2015, the Company entered into interest rate swaps with notional amounts totaling $458 million , which were designated as fair value hedges for (a) $300 million of its 4.15% U.S. Dollar Notes due 2019 and (b) $158 million of its 3.125% U.S. Dollar Notes due 2022.
In the third quarter of 2015, the Company terminated all of its interest rate swaps with notional amounts totaling $2.8 billion which were designated as fair value hedges for (a) $400 million of its 1.75% fixed rate U.S. Dollar Notes due 2017, (b) $400 million of it 3.25% U.S. Dollar Notes due 2018, (c) $800 million of its 4.15% U.S. Dollar Notes due 2019, (d) $700 million of its 4.00% U.S. Dollar Notes due 2020 and (e) $516 million of its 3.125% U.S. Dollar Notes due 2022 (collectively, the Notes). While the interest rate swaps were in place, they effectively converted the interest rate on the Notes from fixed to variable. The gain upon termination of $25 million will be amortized to interest expense over the remaining term of the Notes.
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.

18
Table of Contents

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 $673 million USD at October 3, 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. 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). While the interest rate swaps were in place they 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.
The effective interest rates on debt obligations resulting from the Company’s previous interest rate swaps as of October 3, 2015 were as follows: (a) seven-year 4.45% U.S. Dollar Notes due 2016 – 3.84%; (b) five-year 1.875% U.S. Dollar Notes due 2016 – 1.58%; (c) five-year 1.75% U.S. Dollar Notes due 2017 –  1.71%; (d) seven-year 3.25% U.S. Dollar Notes due 2018 – 2.52%; (e) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.52%; (f) ten-year 4.00% U.S. Dollar Notes due 2020 – 2.98%; (g) ten-year 3.125% U.S. Dollar Notes due 2022 – 2.69%.
Note 7 Stock compensation
The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. 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)
October 3, 2015
September 27, 2014
 
October 3, 2015
September 27, 2014
Pre-tax compensation expense
$
12

$
3

 
$
37

$
31

Related income tax benefit
$
4

$
1

 
$
13

$
11

As of October 3, 2015, total stock-based compensation cost related to non-vested awards not yet recognized was $72 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Stock options
During the year-to-date periods ended October 3, 2015 and September 27, 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.

19
Table of Contents

Year-to-date period ended October 3, 2015:
 
Employee and director stock options
Shares (millions)
Weighted-
average
exercise price
Weighted-
average
remaining
contractual term (yrs.)
Aggregate
intrinsic
value (millions)
 
 
Outstanding, beginning of period
21

$
56

 
 
 
Granted
3

64

 
 
 
Exercised
(4
)
53

 
 
 
Forfeitures and expirations
—

—

 
 
 
Outstanding, end of period
20

$
58

7.1
$
192

 
Exercisable, end of period
12

$
55

6.0
$
145

Year-to-date period ended September 27, 2014:
 
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
(3
)
50

 
 
 
Forfeitures and expirations
(1
)
58

 
 
 
Outstanding, end of period
22

$
56

7.3
$
132

 
Exercisable, end of period
11

$
52

5.8
$
102


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 October 3, 2015 and September 27, 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 October 3, 2015:
16
%
6.9
1.98
%
3.00
%
Grants within the year-to-date period ended September 27, 2014:
15
%
7.3
2.35
%
3.00
%
The total intrinsic value of options exercised was $50 million and $44 million for the year-to-date periods ended October 3, 2015 and September 27, 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 175,000 shares, with a grant-date fair value of $58 per share.

20
Table of Contents

Based on the market price of the Company’s common stock at October 3, 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)
October 3, 2015
2013 Award
$
25

2014 Award
$
29

2015 Award
$
24

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 October 3, 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 October 3, 2015:
Employee restricted stock and restricted stock units
Shares(thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
346

$
54

Granted
587

59

Vested
(90
)
50

Forfeited
(28
)
57

Non-vested, end of period
815

$
57

Grants of restricted stock and restricted stock units for the comparable period ended September 27, 2014 were 71,000.
Note 8 Employee benefits
The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 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)
October 3, 2015
September 27, 2014
 
October 3, 2015
September 27, 2014
Service cost
$
28

$
27

 
$
84

$
80

Interest cost
50

56

 
156

169

Expected return on plan assets
(100
)
(104
)
 
(300
)
(313
)
Amortization of unrecognized prior service cost
4

3

 
10

10

Total pension (income) expense
$
(18
)
$
(18
)
 
$
(50
)
$
(54
)

21
Table of Contents

Other nonpension postretirement
 
Quarter ended
 
Year-to-date period ended
(millions)
October 3, 2015
September 27, 2014
 
October 3, 2015
September 27, 2014
Service cost
$
7

$
7

 
$
24

$
21

Interest cost
11

13

 
36

40

Expected return on plan assets
(25
)
(24
)
 
(75
)
(73
)
Amortization of unrecognized prior service cost (credit)
(2
)
(1
)
 
(3
)
(2
)
Recognized net loss
—

7

 
—

7

Curtailment gain
—

(12
)
 
—

(12
)
Total postretirement benefit (income) expense
$
(9
)
$
(10
)
 
$
(18
)
$
(19
)
Postemployment
 
Quarter ended
 
Year-to-date period ended
(millions)
October 3, 2015
September 27, 2014
 
October 3, 2015
September 27, 2014
Service cost
$
2

$
2

 
$
5

$
6

Interest cost
1

1

 
3

3

Recognized net loss
1

1

 
3

3

Total postemployment benefit expense
$
4

$
4

 
$
11

$
12

Company contributions to employee benefit plans are summarized as follows:
(millions)
Pension
Nonpension postretirement
Total
Quarter ended:
 
 
 
October 3, 2015
$
1

$
3

$
4

September 27, 2014
$
5

$
2

$
7

Year-to-date period ended:
 
 
 
October 3, 2015
$
11

$
10

$
21

September 27, 2014
$
34

$
10

$
44

Full year:
 
 
 
Fiscal year 2015 (projected)
$
39

$
16

$
55

Fiscal year 2014 (actual)
$
37

$
16

$
53

During the quarter ended October 3, 2015, the Company amended a U.S. postretirement health plan as well as a U.S. pension plan. As a result of the U.S. postretirement health plan amendment, a prior service credit of $84 million ($53 million, net of tax) was recognized in other comprehensive income with an offsetting reduction in the accumulated postretirement benefit obligation. The U.S. pension plan amendment increased the Company's pension benefit obligation with an offsetting increase in prior service costs in other comprehensive income of $17 million ($11 million, net of tax).
Plan funding strategies may be modified in response to management’s evaluation of tax deductibility, market conditions, and competing investment alternatives.
Note 9 Income taxes
The consolidated effective tax rate for the quarter ended October 3, 2015 was 24% as compared to the prior year’s rate of 28%. The consolidated effective tax rates for the year-to-date periods ended October 3, 2015 and September 27, 2014 were 26% and 29%, respectively. The effective tax rate for 2015 benefited from a reduction in tax related to current year remitted and unremitted earnings and the completion of certain tax examinations.

22
Table of Contents

As of October 3, 2015, the Company classified $17 million of unrecognized tax benefits as a net current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance expected to be settled within one year, offset by approximately $7 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year-to-date period ended October 3, 2015; $51 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
 
(millions)
January 3, 2015
$
78

Tax positions related to current year:
 
Additions
5

Reductions
—

Tax positions related to prior years:
 
Additions
3

Reductions
(10
)
Settlements
(2
)
October 3, 2015
$
74

For the quarter ended October 3, 2015, the Company recognized a decrease of $1 million for tax-related interest and penalties. For the year-to-date period ended October 3, 2015, the Company recognized a $1 million reduction in tax-related interest and penalties. The Company recognized no cash settlements during the current quarter or year-to-date periods. The accrual balance was $19 million at October 3, 2015.
Note 10 Derivative instruments and fair value measurements
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
Total notional amounts of the Company’s derivative instruments as of October 3, 2015 and January 3, 2015 were as follows:
(millions)
October 3,
2015
January 3,
2015
Foreign currency exchange contracts
$
1,086

$
764

Interest rate contracts
—

2,958

Commodity contracts
571

492

Total
$
1,657

$
4,214

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at October 3, 2015 and January 3, 2015, measured on a recurring basis.
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

23
Table of Contents

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of October 3, 2015 or January 3, 2015.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of October 3, 2015 and January 3, 2015:
Derivatives designated as hedging instruments
 
October 3, 2015
 
January 3, 2015
(millions)
Level 1
Level 2
Total
 
Level 1
Level 2
Total
Assets:
 
 
 
 
 
 
 
Foreign currency exchange contracts:
 
 
 
 
 
 
 
Other prepaid assets
$
—

$
33

$
33

 
$
—

$
29

$
29

Interest rate contracts:
 
 

 
 
 

Other assets (a)
—

—

—

 
—

7

7

Total assets
$
—

$
33

$
33


$
—

$
36

$
36

Liabilities:
 
 

 
 
 

Foreign currency exchange contracts:
 
 

 
 
 

Other current liabilities
$
—

$
(18
)
$
(18
)
 
$
—

$
(6
)
$
(6
)
Interest rate contracts:
 
 

 
 
 

Other current liabilities
—

—

—

 
—

(3
)
(3