Edgar Filing: KELLOGG CO

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)



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

For the quarterly period ended October 1, 2016



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

For the transition period from to

Commission file number 1-4171

KELLOGG COMPANY



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

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

Registrant’s telephone number: 269-961-2000

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

Yes x No ¨

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

Yes x No ¨

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



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

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

Yes ¨ No x

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

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KELLOGG COMPANY

INDEX



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

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Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET

(millions, except per share data)



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

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

(millions, except per share data)



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

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(millions)



	Quarter ended October 1, 2016									Year-to-date period ended October 1, 2016
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	292								$	747
Other comprehensive income (loss):
Foreign currency translation adjustments	(20		)	7			(13		)	(123		)	20			(103		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	3			(1		)	2			(57		)	23			(34		)
Reclassification to net income	—			(1		)	(1		)	8			(4		)	4
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service cost	—			—			—			(1		)	—			(1		)
Reclassification to net income:
Net experience loss	1			—			1			3			—			3
Prior service cost	1			(1		)	—			3			(1		)	2
Other comprehensive income (loss)	$	(15	)	$	4		$	(11	)	$	(167	)	$	38		$	(129	)
Comprehensive income							$	281								$	618
Comprehensive income attributable to Kellogg Company							$	281								$	618

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

Refer to Notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF EQUITY

(millions)



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

Refer to notes to Consolidated Financial Statements.

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Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

(millions)



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

Supplemental cash flow disclosures
Interest paid	$	294		$	154
Income taxes paid	$	225		$	290

Supplemental cash flow disclosures of non-cash investing activities:
Additions to properties included in accounts payable*	$	87		$	110

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

Refer to Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

for the quarter ended October 1, 2016 (unaudited)

Note 1 Accounting policies

Basis of presentation

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

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

Accounts payable

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

New accounting standards

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


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


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


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

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

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

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

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

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

Accounting standards to be adopted in future periods

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

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

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

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

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

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

Note 2 Sale of accounts receivable

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

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

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

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

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

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

Note 3 Goodwill and other intangible assets

Acquisitions

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

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

Joint Venture

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

Carrying amount of goodwill



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

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Intangible assets subject to amortization

(millions)



Gross carrying amount	U.S. Morning Foods		U.S. Snacks			U.S. Specialty		North America Other		Europe			Latin America		Asia Pacific			Consoli- dated
January 2, 2016	$	8	$	42		$	—	$	5	$	45		$	6	$	10		$	116
Currency translation adjustment	—		—			—		—		—			—		—			—
October 1, 2016	$	8	$	42		$	—	$	5	$	45		$	6	$	10		$	116

Accumulated Amortization
January 2, 2016	$	8	$	16		$	—	$	4	$	11		$	6	$	2		$	47
Amortization	—		2			—		—		2			—		1			5
October 1, 2016	$	8	$	18		$	—	$	4	$	13		$	6	$	3		$	52

Intangible assets subject to amortization, net
January 2, 2016	$	—	$	26		$	—	$	1	$	34		$	—	$	8		$	69
Currency translation adjustment	—		—			—		—		—			—		—			—
Amortization	—		(2		)	—		—		(2		)	—		(1		)	(5		)
October 1, 2016	$	—	$	24		$	—	$	1	$	32		$	—	$	7		$	64

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

Intangible assets not subject to amortization



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

Note 4 Investments in unconsolidated entities

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

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

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Note 5 Restructuring and cost reduction activities

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

Project K

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

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

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

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

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

Other Projects

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

Total Projects

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

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

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

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



	Quarter ended				Year-to-date period ended				Program costs to date
(millions)	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015		October 1, 2016
Employee related costs	$	6	$	31	$	26	$	64	$	285
Asset related costs	5		15		32		62		178
Asset impairment	—		—		16		18		121
Other costs	29		39		90		99		409
Total	$	40	$	85	$	164	$	243	$	993

	Quarter ended				Year-to-date period ended				Program costs to date
(millions)	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015		October 1, 2016
U.S. Morning Foods	$	4	$	30	$	13	$	51	$	231
U.S. Snacks	8		15		62		34		188
U.S. Specialty	1		1		4		3		15
North America Other	7		11		20		40		110
Europe	6		12		34		56		207
Latin America	2		1		6		2		22
Asia Pacific	2		2		6		10		80
Corporate	10		13		19		47		140
Total	$	40	$	85	$	164	$	243	$	993

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

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



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

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Note 6 Equity

Earnings per share

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

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



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

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



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

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

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

Comprehensive income

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

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



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

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



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

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



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

Noncontrolling interests

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

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Note 7 Debt

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



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

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

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

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

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

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

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

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

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

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Note 8 Stock compensation

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

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



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

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

Stock options

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

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



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

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



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

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



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

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

Performance shares

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

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

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



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

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

Other stock-based awards

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

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



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

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



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

Note 9 Employee benefits

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

Pension



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



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



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



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



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



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


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