Edgar Filing: KELLOGG CO

Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)



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

For the quarterly period ended September 30, 2017



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

For the transition period from to

Commission file number 1-4171

KELLOGG COMPANY



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

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

Registrant’s telephone number: 269-961-2000

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

Yes x No ¨

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

Yes x No ¨

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



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Yes ¨ No x

Common Stock outstanding as of October 28, 2017 — 345,472,588 shares

Table of Contents

KELLOGG COMPANY

INDEX



		Page
	PART I — Financial Information
	Item 1:
	Financial Statements
	Consolidated Balance Sheet — September 30, 2017 and December 31, 2016	3
	Consolidated Statement of Income — quarter and year-to-date periods ended September 30, 2017 and October 1, 2016	4
	Consolidated Statement of Comprehensive Income – quarter and year-to-date periods ended September 30, 2017 and October 1, 2016	5
	Consolidated Statement of Equity — year ended December 31, 2016 and year-to-date period ended September 30, 2017	6
	Consolidated Statement of Cash Flows — year-to-date periods ended September 30, 2017 and October 1, 2016	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	58
	Item 4:
	Controls and Procedures	58
	PART II — Other Information
	Item 1:
	Legal Proceedings	59
	Item 1A:
	Risk Factors	59
	Item 2:
	Unregistered Sales of Equity Securities and Use of Proceeds	59
	Item 6:
	Exhibits	60
	Signatures	61
	Exhibit Index	62

Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET

(millions, except per share data)



	September 30, 2017 (unaudited)			December 31, 2016 *
Current assets
Cash and cash equivalents	$	267		$	280
Accounts receivable, net	1,512			1,231
Inventories:
Raw materials and supplies	327			315
Finished goods and materials in process	868			923
Other prepaid assets	198			191
Total current assets	3,172			2,940
Property, net of accumulated depreciation of $5,636 and $5,280	3,629			3,569
Investments in unconsolidated entities	432			438
Goodwill	5,135			5,166
Other intangibles, net of accumulated amortization of $62 and $54	2,442			2,369
Other assets	831			629
Total assets	$	15,641		$	15,111
Current liabilities
Current maturities of long-term debt	$	410		$	631
Notes payable	572			438
Accounts payable	2,140			2,014
Accrued advertising and promotion	552			436
Accrued income taxes	38			47
Accrued salaries and wages	277			318
Other current liabilities	658			590
Total current liabilities	4,647			4,474
Long-term debt	7,216			6,698
Deferred income taxes	411			525
Pension liability	933			1,024
Other liabilities	491			464
Commitments and contingencies
Equity
Common stock, $.25 par value	105			105
Capital in excess of par value	851			806
Retained earnings	6,862			6,571
Treasury stock, at cost	(4,425		)	(3,997		)
Accumulated other comprehensive income (loss)	(1,466		)	(1,575		)
Total Kellogg Company equity	1,927			1,910
Noncontrolling interests	16			16
Total equity	1,943			1,926
Total liabilities and equity	$	15,641		$	15,111

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

Table of Contents

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

(millions, except per share data)



	Quarter ended						Year-to-date period ended
(Results are unaudited)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016
Net sales	$	3,273		$	3,254		$	9,714		$	9,917
Cost of goods sold	2,041			1,990			6,013			6,138
Selling, general and administrative expense	768			854			2,424			2,482
Operating profit	464			410			1,277			1,297
Interest expense	64			58			188			343
Other income (expense), net	(2		)	3			(5		)	7
Income before income taxes	398			355			1,084			961
Income taxes	104			62			248			215
Earnings (loss) from unconsolidated entities	3			(1		)	5			1
Net Income	$	297		$	292		$	841		$	747
Per share amounts:
Basic earnings	$	0.86		$	0.83		$	2.41		$	2.13
Diluted earnings	$	0.85		$	0.82		$	2.39		$	2.11
Dividends	$	0.54		$	0.52		$	1.58		$	1.52
Average shares outstanding:
Basic	345			350			348			350
Diluted	348			354			351			354
Actual shares outstanding at period end							345			351

Refer to Notes to Consolidated Financial Statements.

Table of Contents

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(millions)



	Quarter ended September 30, 2017									Year-to-date period ended September 30, 2017
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	297								$	841
Other comprehensive income (loss):
Foreign currency translation adjustments	(6		)	33			27			4			99			103
Cash flow hedges:
Reclassification to net income	3			(1		)	2			7			(2		)	5
Postretirement and postemployment benefits:
Reclassification to net income:
Net experience loss	—			—			—			1			—			1
Other comprehensive income (loss)	$	(3	)	$	32		$	29		$	12		$	97		$	109
Comprehensive income							$	326								$	950

	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

Refer to Notes to Consolidated Financial Statements.

Table of Contents

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF EQUITY

(millions)



	Common stock			Capital in excess of par value			Retained earnings			Treasury stock					Accumulated other comprehensive income (loss)			Total Kellogg Company equity			Non-controlling interests		Total equity
(unaudited)	shares	amount								shares		amount
Balance, 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							694											694			1		695
Acquisition of noncontrolling interest																		—			5		5
Dividends							(716		)									(716		)			(716		)
Other comprehensive loss															(199		)	(199		)	—		(199		)
Stock compensation				63														63					63
Stock options exercised and other				(2		)	(4		)	(7	)	372						366					366
Balance, December 31, 2016	420	$	105	$	806		$	6,571		69		$	(3,997	)	$	(1,575	)	$	1,910		$	16	$	1,926
Common stock repurchases										7		(516		)				(516		)			(516		)
Net income							841											841					841
Dividends							(550		)									(550		)			(550		)
Other comprehensive income															109			109			—		109
Stock compensation				53														53					53
Stock options exercised and other				(8		)	—			(1	)	88						80					80
Balance, September 30, 2017	420	$	105	$	851		$	6,862		75		$	(4,425	)	$	(1,466	)	$	1,927		$	16	$	1,943

Refer to notes to Consolidated Financial Statements.

Table of Contents

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

(millions)



	Year-to-date period ended
(unaudited)	September 30, 2017			October 1, 2016
Operating activities
Net income	$	841		$	747
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization	366			357
Postretirement benefit plan expense (benefit)	(191		)	(53		)
Deferred income taxes	(20		)	(26		)
Stock compensation	53			45
Other	32			(3		)
Postretirement benefit plan contributions	(33		)	(29		)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables	(223		)	(208		)
Inventories	78			25
Accounts payable	135			139
Accrued income taxes	(10		)	10
Accrued interest expense	43			53
Accrued and prepaid advertising and promotion	83			66
Accrued salaries and wages	(50		)	(45		)
All other current assets and liabilities, net	17			(57		)
Net cash provided by (used in) operating activities	1,121			1,021
Investing activities
Additions to properties	(374		)	(376		)
Acquisitions, net of cash acquired	4			(21		)
Investments in unconsolidated entities, net proceeds	14			27
Other	(7		)	(11		)
Net cash provided by (used in) investing activities	(363		)	(381		)
Financing activities
Net issuances (reductions) of notes payable	134			(749		)
Issuances of long-term debt	656			2,061
Reductions of long-term debt	(626		)	(1,230		)
Net issuances of common stock	87			356
Common stock repurchases	(516		)	(426		)
Cash dividends	(550		)	(533		)
Net cash provided by (used in) financing activities	(815		)	(521		)
Effect of exchange rate changes on cash and cash equivalents	44			(24		)
Increase (decrease) in cash and cash equivalents	(13		)	95
Cash and cash equivalents at beginning of period	280			251
Cash and cash equivalents at end of period	$	267		$	346

Supplemental cash flow disclosures
Interest paid	$	149		$	294
Income taxes paid	$	279		$	225

Supplemental cash flow disclosures of non-cash investing activities:
Additions to properties included in accounts payable	$	85		$	87

Refer to Notes to Consolidated Financial Statements.

Table of Contents

Notes to Consolidated Financial Statements

for the quarter ended September 30, 2017 (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 2016 Annual Report on Form 10-K.

The condensed balance sheet information at December 31, 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 September 30, 2017 are not necessarily indicative of the results to be expected for other interim periods or the full year.

Accounts payable

The Company has agreements with certain third parties to provide accounts payable tracking systems which facilitates participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these agreements is to capture overall supplier savings, in the form of payment terms or vendor funding, created by facilitating suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreement for those payment obligations that have been sold by suppliers. As of September 30, 2017, $798 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $582 million of those payment obligations to participating financial institutions. As of December 31, 2016, $677 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $507 million of those payment obligations to participating financial institutions.

New accounting standards

Income Taxes. In October 2016, the FASB, as part of their simplification initiative, issued an Accounting Standard Update (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 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 early adopted the ASU in the first quarter of 2017. As a result of intercompany transfers of intellectual property, the Company recorded reductions totaling $39 million to income tax expense in the year-to-date period ended September 30, 2017. Upon adoption, there was no cumulative effect adjustment to retained earnings.

Accounting standards to be adopted in future periods

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

Table of Contents

to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company is currently assessing the impact and timing of adoption of this ASU.

Improving the Presentation of net Periodic Pension Cost and net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The 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 (interim or annual) 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 retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company will adopt the ASU in the first quarter of 2018. See further discussion in Accounting policies to be adopted in future periods section of MD&A.

Simplifying the test for goodwill impairment. In January 2017, the FASB issued an ASU to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The ASU is effective for an entity's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU should be applied on a prospective basis. The Company is currently assessing the impact and timing of adoption of this 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 will adopt the new ASU in the first quarter of 2018. If the Company adopted the ASU in the first quarter of 2017, cash flow from operations would have decreased $45 million and cash flow from investing activities would have increased $45 million for the year-to-date period ended September 30, 2017.

Leases. In February 2016, the FASB issued an ASU which will require the recognition of lease assets and lease liabilities by lessees for all leases with terms greater than 12 months. The distinction between finance leases and operating leases will remain, with similar classification criteria as current GAAP to distinguish between capital and operating leases. The principal difference from current guidance is that the lease assets and lease liabilities arising from operating leases will be recognized on the Consolidated Balance Sheet. Lessor accounting remains substantially similar to current GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company will adopt the ASU in the first quarter of 2019, and is currently evaluating the impact that implementing this ASU will have on its financial statements.

Recognition and measurement of financial assets and liabilities. In January 2016, the FASB issued an ASU which which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and which updates certain presentation and disclosure requirements. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. Entities should apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company will adopt the updated standard in the first quarter of 2018. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

Table of Contents

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. Based upon the Company's preliminary assessment, the impact of adoption is not expected to be material, and is limited to timing and classification differences as well as disaggregated revenue disclosures. The Company will adopt the updated standard in the first quarter of 2018, using a modified retrospective transition method.

Note 2 Sale of accounts receivable

In 2016, the Company entered into a Receivable Sales Agreement and a separate U.S. accounts receivable securitization program (the "securitization program"), both described below, which primarily enable the Company to extend payment terms for participating customers in exchange for elimination of the discount the Company offered for early payment. The agreements are intended to directly offset the impact that extended customer payment terms would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. See further discussion in the Liquidity and capital resources section of MD&A.

In March 2016, the Company entered into a 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 $800 million (increased from $700 million as of July 1, 2017). During the year-to-date periods ended September 30, 2017 and October 1, 2016 approximately $1.7 billion and $1.0 billion, respectively, of accounts receivable have been sold via this arrangement. Accounts receivable sold of $629 million and $562 million remained outstanding under this arrangement as of September 30, 2017 and December 31, 2016, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded loss on sale of receivables was $3 million and $8 million for the quarter and year-to-date period ended September 30, 2017, respectively, and was $1 million and $3 million for the quarter and year-to-date period ended October 1, 2016, respectively. The recorded loss is included in Other income and expense.

In July 2016, the Company entered into the securitization program with a third party financial institution. Under the program, the Company receives cash consideration of up to $600 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 the Company's consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of Kellogg Funding assets prior to any assets or value in Kellogg Funding becoming available to the Company or its subsidiaries. The assets of Kellogg Funding are not available to pay creditors of the Company or its subsidiaries. This program expires in July 2018 but can be renewed with consent from the parties to the program.

Table of Contents

During the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively, approximately $2.0 billion and $341 million of accounts receivable were sold via the accounts receivable securitization program. As of September 30, 2017, approximately $480 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company received net cash proceeds of approximately $433 million and a deferred purchase price asset of approximately $47 million. As of December 31, 2016, approximately $292 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company received net cash proceeds of approximately $255 million and a deferred purchase price asset of approximately $37 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 loss on sale of receivables was $1 million and $4 million for the quarter and year-to-date periods ended September 30, 2017, respectively and was not material for the 2016 periods. The recorded loss is included in Other income and expense.

The Company has no retained interests in the receivables sold under the programs above. The Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of September 30, 2017 and December 31, 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 transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. During the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively, $145 million and $33 million of accounts receivable have been sold via these programs. Accounts receivable sold of $45 million and $124 million remained outstanding under these programs as of September 30, 2017 and December 31, 2016, respectively. 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

Parati acquisition

In December 2016, the Company acquired Ritmo Investimentos, controlling shareholder of Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading Brazilian food group for approximately BRL 1.38 billion ($381 million) or $379 million, net of cash and cash equivalents. The purchase price was subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the acquisition date compared to targeted amounts. These adjustments were finalized during the quarter ended July 1, 2017 and resulted in a purchase price reduction of BRL 14 million ($4 million). The acquisition was accounted for under the purchase price method and was financed with cash on hand and short-term borrowings.

In our Latin America reportable segment, for the quarter ended September 30, 2017 the acquisition added $48 million in net sales and $3 million of operating profit. For the year-to-date period ended September 30, 2017 the acquisition added $141 million in net sales and $15 million of operating profit.

The assets and liabilities of the Parati Group are included in the Consolidated Balance Sheet as of September 30, 2017 within the Latin America segment. The acquired assets and assumed liabilities include the following:



(millions)		December 1, 2016
Current assets		$	44
Property	72
Goodwill	165
Intangible assets	148
Current liabilities	(48			)
Non-current deferred tax liability and other	(6			)
		$	375

Table of Contents

During the year-to-date period ended September 30, 2017, the value of intangible assets subject to amortization increased $38 million and intangible assets not subject to amortization decreased $11 million with an offsetting $27 million adjustment to goodwill in conjunction with an updated allocation of the purchase price.

A portion of the acquisition price aggregating $67 million was placed in escrow in favor of the seller for general representations and warranties, as well as pending resolution of certain contingencies arising from the business prior to the acquisition. During the quarter and year-to-date periods ended September 30, 2017, the Company recognized $3 million and $7 million, respectively, for certain pre-acquisition contingencies which are considered to be probable of being incurred, which increased goodwill.

During the quarter ended April 1, 2017, the Company finalized plans to merge the acquired and pre-existing Brazilian legal entities, which resulted in tax basis of the acquired intangible assets. Accordingly, deferred tax liabilities and goodwill were both reduced by $41 million during the first quarter of 2017. In addition, deferred tax liabilities related to basis differences were reduced by $15 million with a corresponding reduction in goodwill, for the quarter ended September 30, 2017.

The amounts in the above table represent the allocation of purchase price as of September 30, 2017 and represent the finalization of the appraisals for intangible assets and the Company's evaluation of pre-acquisition contingencies. The purchase price allocation remains subject to the Company’s finalization of the merger and the resulting income tax effects, which is expected to occur in November 2017. The goodwill from this acquisition is expected to be deductible for income tax purposes.

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

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
December 31, 2016	$	131	$	3,568	$	82	$	457	$	376	$	328		$	224	$	5,166
Purchase price allocation adjustment	—		—		—		—		—		(79		)	—		(79		)
Purchase price adjustment	—		—		—		—		—		(4		)	—		(4		)
Currency translation adjustment	—		—		—		4		35		9			4		52
September 30, 2017	$	131	$	3,568	$	82	$	461	$	411	$	254		$	228	$	5,135

Table of Contents

Intangible assets subject to amortization



Gross carrying amount
(millions)	U.S. Morning Foods		U.S. Snacks			U.S. Specialty		North America Other		Europe			Latin America			Asia Pacific			Consoli- dated
December 31, 2016	$	8	$	42		$	—	$	5	$	40		$	36		$	10		$	141
Purchase price allocation adjustment	—		—			—		—		—			39			—			39
Currency translation adjustment	—		—			—		—		3			2			—			5
September 30, 2017	$	8	$	42		$	—	$	5	$	43		$	77		$	10		$	185

Accumulated Amortization
December 31, 2016	$	8	$	19		$	—	$	4	$	14		$	6		$	3		$	54
Amortization	—		2			—		—		2			3			1			8
September 30, 2017	$	8	$	21		$	—	$	4	$	16		$	9		$	4		$	62

Intangible assets subject to amortization, net
December 31, 2016	$	—	$	23		$	—	$	1	$	26		$	30		$	7		$	87
Purchase price allocation adjustment	—		—			—		—		—			39			—			39
Currency translation adjustment	—		—			—		—		3			2			—			5
Amortization	—		(2		)	—		—		(2		)	(3		)	(1		)	(8		)
September 30, 2017	$	—	$	21		$	—	$	1	$	27		$	68		$	6		$	123

For intangible assets in the preceding table, amortization was $8 million and $5 million for the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively. The currently estimated aggregate annual amortization expense for full-year 2017 is approximately $11 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
December 31, 2016	$	—	$	1,625	$	—	$	176	$	383	$	98		$	—	$	2,282
Purchase price allocation adjustment	—		—		—		—		—		(11		)	—		(11		)
Currency translation adjustment	—		—		—		—		45		3			—		48
September 30, 2017	$	—	$	1,625	$	—	$	176	$	428	$	90		$	—	$	2,319

Note 4 Investments in unconsolidated entities

In 2015, the Company acquired, for a final net purchase price of $418 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 a call 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 acquisition of the 50% interest is accounted for under the equity method of accounting. The Purchase Option, is recorded at cost and has been monitored for impairment through September 30, 2017 with no impairment being required. In July 2017, the Company received notification that the entity, through June 30, 2017, had achieved the level of earnings as defined in the agreement for the purchase option to become exercisable for a one year period. During the exercise period, the Company will validate the information provided in the notification and evaluate whether to exercise its right to acquire the 24.5% interest. While no decision to exercise the option has been made by the Company, if the option is exercised, the Company would acquire 24.5% of the affiliated food manufacturing entity for approximately $400 million.

Table of Contents

Note 5 Restructuring and cost reduction activities

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

Total Projects

During the quarter ended September 30, 2017, the Company recorded total net charges of $1 million across all restructuring and cost reduction activities. The charges were comprised of a net $9 million credit recorded in cost of goods sold (COGS) and a net $10 million expense recorded in selling, general and administrative (SG&A) expense. During the year-to-date period ended September 30, 2017, the Company recorded total charges of $239 million across all restructuring and cost reduction activities. The charges were comprised of $26 million recorded in cost of goods sold (COGS) and $213 million recorded in selling, general and administrative (SG&A) expense.

During the quarter ended October 1, 2016, the Company recorded total charges of $40 million across all restructuring and cost reduction activities. The charges consist of $12 million recorded in COGS and $28 million recorded in SG&A 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 SG&A expense.

Project K

In February 2017, the Company announced an expansion and an extension to its previously-announced global efficiency and effectiveness program (“Project K”), to reflect additional and changed initiatives. Project K is expected to continue generating a significant amount of savings that may be invested in key strategic areas of focus for the business to drive future growth or utilized to achieve our 2018 Margin Expansion target.

In addition to the original program’s focus on strengthening existing businesses in core markets, increasing growth in developing and emerging markets, and driving an increased level of value-added innovation, the extended program will also focus on implementing a more efficient go-to-market model for certain businesses and creating a more efficient organizational design in several markets. Since inception, Project K has provided significant benefits and is expected to continue to provide a number of benefits in the future, including an optimized supply chain infrastructure, the implementation of global business services, a new global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market strategies.

The Company currently anticipates that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be approximately $1.1 billion. Based on current estimates and actual charges to date, the Company expects the total project charges will consist of asset-related costs of approximately $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $500 million which will include severance, pension and other termination benefits; and other costs of approximately $600 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.

The Company currently expects that total pre-tax charges will impact reportable segments as follows: U.S. Morning Foods (approximately 16%), U.S. Snacks (approximately 35%), U.S. Specialty (approximately 1%), North America Other (approximately 13%), Europe (approximately 23%), Latin America (approximately 2%), Asia-Pacific (approximately 5%), and Corporate (approximately 5%).

During the quarter ended September 30, 2017, the Company recorded a net curtailment gain of $134 million related to certain pension and post-retirement benefit plans. The curtailment gain is primarily the result of an amendment of certain defined benefit pension plans in the U.S. and Canada for salaried employees as well as other project related initiatives. See additional discussion regarding this net curtailment gain in Note 9 Employee benefits.

Since the inception of Project K, the Company has recognized charges of $1,355 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $716 million recorded in COGS and $633 million recorded in SG&A expense.

Table of Contents

Other Projects

In 2015 the Company implemented a zero-based budgeting (ZBB) program in its North America business that has delivered 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 $1 million and $21 million during the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively. Total charges of $38 million have been recognized since the inception of the ZBB program.

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 September 30, 2017 and October 1, 2016 and program costs to date for programs currently active as of September 30, 2017.



	Quarter ended					Year-to-date period ended					Program costs to date
(millions)	September 30, 2017			October 1, 2016		September 30, 2017			October 1, 2016		September 30, 2017
Employee related costs	$	31		$	6	$	166		$	26	$	523
Pension curtailment (gain) loss, net	(134		)	—		(133		)	—		(122		)
Asset related costs	38			5		68			32		260
Asset impairment	—			—		—			16		155
Other costs	66			29		138			90		577
Total	$	1		$	40	$	239		$	164	$	1,393

	Quarter ended					Year-to-date period ended					Program costs to date
(millions)	September 30, 2017			October 1, 2016		September 30, 2017			October 1, 2016		September 30, 2017
U.S. Morning Foods	$	14		$	4	$	16		$	13	$	257
U.S. Snacks	106			8		305			62		507
U.S. Specialty	—			1		1			4		20
North America Other	4			7		13			20		141
Europe	13			6		21			34		320
Latin America	2			2		6			6		30
Asia Pacific	1			2		5			6		86
Corporate	(139		)	10		(128		)	19		32
Total	$	1		$	40	$	239		$	164	$	1,393

For the quarters ended September 30, 2017 and October 1, 2016 employee related costs consist primarily of severance and other termination related benefits, pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives, asset related costs consist primarily of accelerated depreciation and other costs consist primarily of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.

At September 30, 2017 total exit cost reserves were $194 million, related to severance payments and other costs of which a substantial portion will be paid out in 2017 and 2018. The following table provides details for exit cost reserves.



	Employee Related Costs			Pension curtailment (gain) loss, net			Asset Impairment		Asset Related Costs			Other Costs			Total
Liability as of December 31, 2016	$	102		$	—		$	—	$	—		$	29		$	131
2017 restructuring charges	166			(133		)	—		68			138			239
Cash payments	(146		)	—			—		(31		)	(98		)	(275		)
Non-cash charges and other	3			133			—		(37		)	—			99
Liability as of September 30, 2017	$	125		$	—		$	—	$	—		$	69		$	194

Table of Contents

Note 6 Equity

Earnings per share

Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table. There were 5 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended September 30, 2017. 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.

Quarters ended September 30, 2017 and October 1, 2016:



(millions, except per share data)	Net income		Average shares outstanding	Earnings per share
2017
Basic	$	297	345	$	0.86
Dilutive potential common shares			3	(0.01		)
Diluted	$	297	348	$	0.85
2016
Basic	$	292	350	$	0.83
Dilutive potential common shares			4	(0.01		)
Diluted	$	292	354	$	0.82

Year-to-date periods ended September 30, 2017 and October 1, 2016:



(millions, except per share data)	Net income		Average shares outstanding	Earnings per share
2017
Basic	$	841	348	$	2.41
Dilutive potential common shares			3	(0.02		)
Diluted	$	841	351	$	2.39
2016
Basic	$	747	350	$	2.13
Dilutive potential common shares			4	(0.02		)
Diluted	$	747	354	$	2.11

In December 2015, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock beginning in 2016 through December 2017. As of September 30, 2017, $558 million remains available under the authorization.

During the year-to-date period ended September 30, 2017, the Company repurchased approximately 7 million shares of common stock for a total of $516 million. During the year-to-date period ended October 1, 2016, the Company repurchased 6 million shares of common stock for a total of $426 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.

Table of Contents

Reclassifications out of AOCI for the quarter and year-to-date periods ended September 30, 2017 and October 1, 2016, consisted of the following:



(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended September 30, 2017			Year-to-date period ended September 30, 2017
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	—		$	(1	)	COGS
Interest rate contracts	3			8			Interest expense
	$	3		$	7		Total before tax
	(1		)	(2		)	Tax expense (benefit)
	$	2		$	5		Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	—		$	1		See Note 9 for further details
	$	—		$	1		Total before tax
	—			—			Tax expense (benefit)
	$	—		$	1		Net of tax
Total reclassifications	$	2		$	6		Net of tax




(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

Table of Contents

Accumulated other comprehensive income (loss), net of tax, as of September 30, 2017 and December 31, 2016 consisted of the following:



(millions)	September 30, 2017			December 31, 2016
Foreign currency translation adjustments	$	(1,402	)	$	(1,505	)
Cash flow hedges — unrealized net gain (loss)	(62		)	(67		)
Postretirement and postemployment benefits:
Net experience loss	(13		)	(14		)
Prior service cost	11			11
Total accumulated other comprehensive income (loss)	$	(1,466	)	$	(1,575	)

Note 7 Debt

The following table presents the components of notes payable at September 30, 2017 and December 31, 2016:



	September 30, 2017				December 31, 2016
(millions)	Principal amount		Effective interest rate (a)		Principal amount		Effective interest rate (a)
U.S. commercial paper	$	285	1.29	%	$	80	0.61	%
Europe commercial paper	201		(0.26	)%	306		(0.18	)%
Bank borrowings	86				52
Total	$	572			$	438

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

In May 2017, the Company issued €600 million (approximately $709 million USD at September 30, 2017, which reflects the discount and translation adjustments) of five-year 0.80% Euro Notes due 2022, resulting in aggregate net proceeds after debt discount of $656 million. The proceeds from these Notes were used for general corporate purposes, including, together with cash on hand and additional commercial paper borrowings, repayment of the Company's $400 million, five-year 1.75% U.S. Dollar Notes due 2017 at maturity. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision. The Notes were designated as a net investment hedge of the Company's investment in its Europe subsidiary when issued.

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

In the second quarter of 2017, the Company entered into interest rate swaps with notional amounts totaling approximately €600 million which effectively converted €600 million of its 1.25% Euro Notes due 2025 from fixed to floating rate obligations. The U.S. Dollar interest rate swaps were settled during the second quarter for an unrealized loss of $14 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 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.

The Company has entered into interest rate swaps with notional amounts totaling $2.2 billion, which effectively converts a portion of the associated U.S. Dollar Notes and Euro Notes from fixed rate to floating rate obligations. These derivative instruments are designated as fair value hedges. The effective interest rates on debt obligations

Table of Contents

resulting from the Company’s interest rate swaps as of September 30, 2017 were as follows: (a) seven-year 3.25% U.S. Dollar Notes due 2018 – 3.08%; (b) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.51%; (c) ten-year 4.00% U.S. Dollar Notes due 2020 – 3.41%; (d) ten-year 3.125% U.S. Dollar Notes due 2022 – 2.58%; (e) ten-year 2.75% U.S. Dollar Notes due 2023 – 2.72%; (f) seven-year 2.65% U.S. Dollar Notes due 2023 – 2.36%; (g) eight-year 1.00% Euro Notes due 2024 – 0.72%; (h) ten-year 1.25% Euro Notes due 2025 - 1.33% and (i) ten-year 3.25% U.S. Notes due 2026 – 3.64%.

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 2016 Annual Report on Form 10-K.

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



	Quarter ended				Year-to-date period ended
(millions)	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016
Pre-tax compensation expense	$	18	$	16	$	57	$	49
Related income tax benefit	$	7	$	6	$	21	$	18

As of September 30, 2017, total stock-based compensation cost related to non-vested awards not yet recognized was $101 million and the weighted-average period over which this amount is expected to be recognized was 2 years.

Stock options

During the year-to-date periods ended September 30, 2017 and October 1, 2016, 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 2016 Annual Report on Form 10-K.

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



Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	15		$	62
Granted	2		73
Exercised	(1	)	57
Forfeitures and expirations	(1	)	70
Outstanding, end of period	15		$	64	6.8	$	37
Exercisable, end of period	10		$	60	5.8	$	37

Table of Contents

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

The weighted-average grant date fair value of options granted was $10.14 per share and $9.44 per share for the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively. The fair value was estimated using the following assumptions:



	Weighted- average expected volatility		Weighted- average expected term (years)	Weighted- average risk-free interest rate		Dividend yield
Grants within the year-to-date period ended September 30, 2017:	18	%	6.6	2.26	%	2.80	%
Grants within the year-to-date period ended October 1, 2016:	17	%	6.9	1.60	%	2.60	%

The total intrinsic value of options exercised was $21 million and $140 million for the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively.

Performance shares

In the first quarter of 2017, 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 currency-neutral comparable operating margin 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 currency-neutral comparable operating margin expansion. Compensation cost related to currency-neutral comparable operating margin performance is revised for changes in the expected outcome. The 2017 target grant currently corresponds to approximately 186,000 shares, with a grant-date fair value of $67 per share.

Based on the market price of the Company’s common stock at September 30, 2017, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:



(millions)	September 30, 2017
2015 Award	$	20
2016 Award	$	22
2017 Award	$	23

The 2014 performance share award, payable in stock, was settled at 35% of target in February 2017 for a total dollar equivalent of $5 million.

Other stock-based awards

During the year-to-date period ended September 30, 2017, 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

Table of Contents

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 2016 Annual Report on Form 10-K.

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



Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	1,166		$	63
Granted	666		67
Vested	(76	)	57
Forfeited	(125	)	65
Non-vested, end of period	1,631		$	65

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

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 2016 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

In September 2017, the Company amended certain defined benefit pension plans in the U.S. and Canada for salaried employees. As of December 31, 2018, the amendment will freeze the compensation and service periods used to calculate pension benefits for active salaried employees who participate in the affected pension plans. Beginning January 1, 2019, impacted employees will not accrue additional benefits for future service and eligible compensation received under these plans.

Concurrently, the Company also amended its 401(k) savings plans effective January 1, 2019, to make previously ineligible salaried U.S. and Canada employees eligible for Company retirement contributions, which range from 3% to 7% of eligible compensation based on the employee’s length of employment.

Table of Contents

Pension



	Quarter ended						Year-to-date period ended
(millions)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016
Service cost	$	22		$	25		$	72		$	74
Interest cost	40			43			123			131
Expected return on plan assets	(97		)	(87		)	(277		)	(266		)
Amortization of unrecognized prior service cost	3			3			7			10
Recognized net (gain) loss	83			28			84			28
Net periodic benefit cost	51			12			9			(23		)
Curtailment (gain) loss	(134		)	—			(136		)	—
Total pension (income) expense	$	(83	)	$	12		$	(127	)	$	(23	)



As of September 30, 2017:
				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	$	14		$	(14	)	$	—	$	—
Total liability derivatives	$	(71	)	$	14		$	16	$	(41	)



(millions)	Pension		Nonpension postretirement		Total
Quarter ended:
September 30, 2017	$	2	$	3	$	5
October 1, 2016	$	3	$	3	$	6
Year-to-date period ended:
September 30, 2017	$	25	$	8	$	33
October 1, 2016	$	18	$	11	$	29
Full year:
Fiscal year 2017 (projected)	$	26	$	16	$	42
Fiscal year 2016 (actual)	$	18	$	15	$	33



(millions)
December 31, 2016	$	63
Tax positions related to current year:
Additions	4
Reductions	—
Tax positions related to prior years:
Additions	3
Reductions	(8		)
Settlements	(4		)
Lapse in statute of limitations	(2		)
September 30, 2017	$	56



As of December 31, 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	$	41		$	(24	)	$	—	$	17
Total liability derivatives	$	(83	)	$	24		$	48	$	(11	)



(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income (a)
		September 30, 2017		October 1, 2016
Interest rate contracts	Interest expense	$	4	$	6
Total		$	4	$	6


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



(millions)	Gain (loss) recognized in AOCI				Location of gain (loss) reclassified from AOCI	Gain (loss) reclassified from AOCI into income				Location of gain (loss) recognized in income (a)	Gain (loss) recognized in income (a)
	September 30, 2017		October 1, 2016			September 30, 2017		October 1, 2016			September 30, 2017		October 1, 2016
Foreign currency exchange contracts	$	—	$	1	COGS	$	—	$	4	Other income (expense), net	$	—	$	(1	)
Foreign currency exchange contracts	—		1		SGA expense	—		1		Other income (expense), net	—