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~~July 1, ~~2016~~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, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” ~~and~~, “smaller reporting ~~company”~~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~~July 29, ~~2016~~2017 — ~~350,905,165~~345,134,700 shares

KELLOGG COMPANY

INDEX



	Page
PART I — Financial Information
Item 1:
Financial Statements
Consolidated Balance Sheet — ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016	3
Consolidated Statement of Income — quarter and year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016	4
Consolidated Statement of Comprehensive Income – quarter and year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016	5
Consolidated Statement of Equity — year ended ~~January 2,~~December 31, 2016 and year-to-date period ended ~~October~~July 1, ~~2016~~2017	6
Consolidated Statement of Cash Flows — year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016	7
Notes to Consolidated Financial Statements	8
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations	3332
Item 3:
Quantitative and Qualitative Disclosures about Market Risk	6057
Item 4:
Controls and Procedures	6157
PART II — Other Information
Item 1:
Legal Proceedings	58
Item 1A:
Risk Factors	6358
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds	6358
Item 6:
Exhibits	6359
Signatures	6460
Exhibit Index	6561

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 *			July 1, 2017 (unaudited)			December 31, 2016 *
Current assets
Cash and cash equivalents	$	346		$	251		$	334		$	280
Accounts receivable, net	1,523			1,344			1,427			1,231
Inventories:
Raw materials and supplies	321			315			324			315
Finished goods and materials in process	899			935			877			923
Deferred income taxes	—			227
Other prepaid assets	207			164			205			191
Total current assets	3,296			3,236			3,167			2,940
Property, net of accumulated depreciation of $5,356 and $5,236	3,558			3,621
Property, net of accumulated depreciation of $5,530 and $5,280							3,613			3,569
Investments in unconsolidated entities	438			456			435			438
Goodwill	4,971			4,968			5,127			5,166
Other intangibles, net of accumulated amortization of $52 and $47	2,287			2,268
Pension	256			231
Other intangibles, net of accumulated amortization of $58 and $54							2,423			2,369
Other assets	513			471			770			629
Total assets	$	15,319		$	15,251		$	15,535		$	15,111
Current liabilities
Current maturities of long-term debt	$	1,138		$	1,266		$	411		$	631
Notes payable	454			1,204			724			438
Accounts payable	1,986			1,907			2,057			2,014
Accrued advertising and promotion	517			447			512			436
Accrued income taxes	35			42			48			47
Accrued salaries and wages	280			325			269			318
Other current liabilities	591			548			667			590
Total current liabilities	5,001			5,739			4,688			4,474
Long-term debt	6,296			5,275			7,123			6,698
Deferred income taxes	459			685			401			525
Pension liability	928			946			997			1,024
Nonpension postretirement benefits	50			77
Other liabilities	385			391			476			464
Commitments and contingencies
Equity
Common stock, $.25 par value	105			105			105			105
Capital in excess of par value	786			745			836			806
Retained earnings	6,807			6,597			6,752			6,571
Treasury stock, at cost	(4,008		)	(3,943		)	(4,364		)	(3,997		)
Accumulated other comprehensive income (loss)	(1,505		)	(1,376		)	(1,495		)	(1,575		)
Total Kellogg Company equity	2,185			2,128			1,834			1,910
Noncontrolling interests	15			10			16			16
Total equity	2,200			2,138			1,850			1,926
Total liabilities and equity	$	15,319		$	15,251		$	15,535		$	15,111

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

(millions, except per share data)


	Quarter ended						Year-to-date period ended					Quarter ended					Year-to-date period ended
(Results are unaudited)	October 1, 2016			October 3, 2015			October 1, 2016		October 3, 2015			July 1, 2017			July 2, 2016		July 1, 2017			July 2, 2016
Net sales	$	3,254		$	3,329		$	9,917	$	10,383		$	3,187		$	3,268	$	6,441		$	6,663
Cost of goods sold	1,990			2,096			6,138		6,664			1,922			1,998		3,972			4,148
Selling, general and administrative expense	854			899			2,482		2,589			812			821		1,656			1,628
Operating profit	410			334			1,297		1,130			453			449		813			887
Interest expense	58			56			343		168			63			68		124			285
Other income (expense), net	3			(6		)	7		(78		)	(6		)	4		(3		)	4
Income before income taxes	355			272			961		884			384			385		686			606
Income taxes	62			66			215		227			102			106		144			153
Earnings (loss) from unconsolidated entities	(1		)	(1		)	1		(3		)	—			1		2			2
Net income	$	292		$	205		$	747	$	654
Net income (loss) attributable to noncontrolling interests	—			—			—		(1		)
Net income attributable to Kellogg Company	$	292		$	205		$	747	$	655
Net Income												$	282		$	280	$	544		$	455
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
Basic earnings												$	0.81		$	0.80	$	1.56		$	1.30
Diluted earnings												$	0.80		$	0.79	$	1.54		$	1.29
Dividends												$	0.52		$	0.50	$	1.04		$	1.00
Average shares outstanding:
Basic	350			354			350		354			349			350		350			350
Diluted	354			356			354		356			352			354		353			354
Actual shares outstanding at period end							351		354								346			349

Refer to Notes to Consolidated Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(millions)


																			Quarter ended July 1, 2017									Year-to-date period ended July 1, 2017
(Results are unaudited)																			Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income																									$	282								$	544
Other comprehensive income (loss):
Foreign currency translation adjustments																			(66		)	57			(9		)	10			66			76
Cash flow hedges:
Reclassification to net income																			2			—			2			4			(1		)	3
Postretirement and postemployment benefits:
Reclassification to net income:
Net experience loss																			—			—			—			1			—			1
Other comprehensive income (loss)																			$	(64	)	$	57		$	(7	)	$	15		$	65		$	80
Comprehensive income																									$	275								$	624

	Quarter ended October 1, 2016									Year-to-date period ended October 1, 2016									Quarter ended July 2, 2016									Year-to-date period ended July 2, 2016
(Results are unaudited)	Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	292								$	747								$	280								$	455
Other comprehensive income (loss):
Foreign currency translation adjustments	(20		)	7			(13		)	(123		)	20			(103		)	(48		)	(16		)	(64		)	(103		)	13			(90		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges	3			(1		)	2			(57		)	23			(34		)	(3		)	1			(2		)	(60		)	24			(36		)
Reclassification to net income	—			(1		)	(1		)	8			(4		)	4			6			(2		)	4			8			(3		)	5
Postretirement and postemployment benefits:
Amount arising during the period:
Prior service cost	—			—			—			(1		)	—			(1		)	(1		)	—			(1		)	(1		)	—			(1		)
Reclassification to net income:
Net experience loss	1			—			1			3			—			3			1			—			1			2			—			2
Prior service cost	1			(1		)	—			3			(1		)	2			2			—			2			2			—			2
Other comprehensive income (loss)	$	(15	)	$	4		$	(11	)	$	(167	)	$	38		$	(129	)	$	(43	)	$	(17	)	$	(60	)	$	(152	)	$	34		$	(118	)
Comprehensive income							$	281								$	618								$	220								$	337
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.

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			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															shares	amount								shares		amount
Balance, January 3, 2015	420	$	105	$	678		$	6,689		64		$	(3,470	)	$	(1,213	)	$	2,789		$	62		$	2,851
Balance, January 2, 2016																											420	$	105	$	745		$	6,597		70		$	(3,943	)	$	(1,376	)	$	2,128		$	10	$	2,138
Common stock repurchases										11		(731		)				(731		)				(731		)										6		(426		)				(426		)			(426		)
Net income							614											614						614									694											694			1		695
Acquisition of noncontrolling interest, net																					7			7
VIE deconsolidation																					(58		)	(58		)
Acquisition of noncontrolling interest																																												—			5		5
Dividends							(700		)									(700		)				(700		)							(716		)									(716		)			(716		)
Other comprehensive loss															(163		)	(163		)	(1		)	(164		)															(199		)	(199		)	—		(199		)
Stock compensation				51														51						51						63														63					63
Stock options exercised and other				16			(6		)	(5	)	258						268						268						(2		)	(4		)	(7	)	372						366					366
Balance, January 2, 2016	420	$	105	$	745		$	6,597		70		$	(3,943	)	$	(1,376	)	$	2,128		$	10		$	2,138
Balance, December 31, 2016																											420	$	105	$	806		$	6,571		69		$	(3,997	)	$	(1,575	)	$	1,910		$	16	$	1,926
Common stock repurchases										6		(426		)				(426		)				(426		)										6		(435		)				(435		)			(435		)
Net income							747											747						747									544											544					544
Acquisition of noncontrolling interest, net																					5			5
Dividends							(533		)									(533		)				(533		)							(363		)									(363		)			(363		)
Other comprehensive loss															(129		)	(129		)				(129		)
Other comprehensive income																																									80			80			—		80
Stock compensation				45														45						45						36														36					36
Stock options exercised and other				(4		)	(4		)	(6	)	361						353						353						(6		)	—			(1	)	68						62					62
Balance, October 1, 2016	420	$	105	$	786		$	6,807		70		$	(4,008	)	$	(1,505	)	$	2,185		$	15		$	2,200
Balance, July 1, 2017																											420	$	105	$	836		$	6,752		74		$	(4,364	)	$	(1,495	)	$	1,834		$	16	$	1,850

Refer to notes to Consolidated Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

(millions)


	Year-to-date period ended						Year-to-date period ended
(unaudited)	October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016
Operating activities
Net income	$	747		$	654		$	544		$	455
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization	357			387			240			251
Postretirement benefit plan expense (benefit)	(53		)	(68		)	(96		)	(56		)
Deferred income taxes	(26		)	(61		)	(67		)	7
Stock compensation	45			32			36			30
Venezuela remeasurement	11			165
Variable-interest entity impairment	—			(49		)
Other	(14		)	35			30			11
Postretirement benefit plan contributions	(29		)	(21		)	(28		)	(23		)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables	(208		)	(214		)	(148		)	(159		)
Inventories	25			1			63			17
Accounts payable	139			162			70			157
Accrued income taxes	10			11			—			54
Accrued interest expense	53			15			(13		)	(2		)
Accrued and prepaid advertising and promotion	66			49			56			10
Accrued salaries and wages	(45		)	(14		)	(56		)	(87		)
All other current assets and liabilities	(57		)	(115		)
All other current assets and liabilities, net							23			(17		)
Net cash provided by (used in) operating activities	1,021			969			654			648
Investing activities
Additions to properties	(376		)	(389		)	(268		)	(249		)
Acquisitions, net of cash acquired	(21		)	(161		)	4			(15		)
Investments in unconsolidated entities, net proceeds	27			(456		)	6			29
Other	(11		)	43			(4		)	(15		)
Net cash provided by (used in) investing activities	(381		)	(963		)	(262		)	(250		)
Financing activities
Net issuances (reductions) of notes payable	(749		)	533			287			(424		)
Issuances of long-term debt	2,061			672			655			2,061
Reductions of long-term debt	(1,230		)	(604		)	(626		)	(1,227		)
Net issuances of common stock	356			196			65			233
Common stock repurchases	(426		)	(381		)	(390		)	(386		)
Cash dividends	(533		)	(523		)	(363		)	(351		)
Other	—			(3		)	—			—
Net cash provided by (used in) financing activities	(521		)	(110		)	(372		)	(94		)
Effect of exchange rate changes on cash and cash equivalents	(24		)	(40		)	34			(24		)
Increase (decrease) in cash and cash equivalents	95			(144		)	54			280
Cash and cash equivalents at beginning of period	251			443			280			251
Cash and cash equivalents at end of period	$	346		$	299		$	334		$	531

Supplemental cash flow disclosures
Interest paid	$	294		$	154		$	138		$	284
Income taxes paid	$	225		$	290		$	205		$	85

Supplemental cash flow disclosures of non-cash investing activities:
Additions to properties included in accounts payable*	$	87		$	110
Additions to properties included in accounts payable							$	82		$	89

*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.

Notes to Consolidated Financial Statements

for the quarter ended ~~October~~July 1, ~~2016~~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 ~~2015~~2016 Annual Report on Form 10-K.

The condensed balance sheet information at ~~January 2,~~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 ~~October~~July 1, ~~2016~~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 ~~October~~July 1, ~~2016, $692~~2017, $769 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold ~~$513~~$556 million of those payment obligations to participating financial institutions. As of ~~January 2,~~December 31, 2016, ~~$524~~$677 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold ~~$425~~$507 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

~~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 early adopted the ASU in the first quarter of 2017. As a result of an intercompany transfer of intellectual property, the Company recorded a $38 million reduction in income tax expense in the quarter ended April 1, 2017. Upon adoption, there was no cumulative effect adjustment to retained earnings.

Accounting standards to be adopted in future periods

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 ~~the~~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 ~~is currently assessing~~will adopt the ~~impact~~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 $24 million and ~~timing of adoption of~~cash flow from investing activities would have increased $24 million for the ~~ASU.~~year-to-date period ended July 1, 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 and disclosures, as well as timing of implementation.~~statements.

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

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~~ASU 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. Based upon the Company's preliminary assessment, there will be some limited timing and classification differences upon adoption. The Company will adopt the updated standard in the first quarter of ~~2018. The Company~~2018, using a modified retrospective transition method, and the adoption is ~~currently evaluating the~~not expected to have a significant 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.~~statements.

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 customers payment terms 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 ~~an agreement (the “Receivable~~a Receivable Sales ~~Agreement”),~~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).~~$700 million. During the year-to-date ~~period~~periods ended ~~October~~July 1, 2017 and July 2, 2016 approximately ~~$1.0~~$1.1 billion and $529 million, respectively, of accounts receivable have been sold via this arrangement. Accounts receivable sold of ~~$546~~$655 million and $562 million remained outstanding under this arrangement as of ~~October~~July 1, ~~2016.~~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 ~~net~~ loss on sale of receivables ~~is approximately~~was $3 million and $5 million for the quarter and year-to-date period ended ~~October~~July 1, 2017, respectively, and was immaterial for the 2016 ~~and~~periods. The recorded loss is included in Other income and expense.

In July 2016, the Company entered into ~~a $200 million U.S. accounts receivable~~the 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~~the Company receives cash consideration of up to ~~$400~~$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 ~~our~~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 ~~2017.~~2018 but can be renewed with consent from the parties to the program.

During the year-to-date period ended ~~October~~July 1, ~~2016, $341 million~~2017, $1.3 billion of accounts receivable ~~have been~~were sold via the accounts receivable securitization program. As of ~~October~~July 1, ~~2016,~~2017, approximately ~~$260~~$443 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company

received net cash proceeds of approximately ~~$222~~$404 million and a deferred purchase price asset of approximately ~~$38~~$39 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 ~~net~~ loss on sale of receivables was $2 million and $3 million for the quarter and year-to-date periods ended July 1, 2017, respectively. The recorded loss is included in Other income and ~~expense and is not material.~~expense.

The Company has no retained interests in the receivables sold under the programs ~~above, however the~~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 ~~October~~July 1, 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 ~~factor,~~transfer, without recourse, accounts receivable balances of certain ~~customers.~~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. ~~No sold receivable balances under these programs were outstanding as of October 1, 2016.~~ During the year-to-date period ended ~~October~~July 1, ~~2016, $33~~2017, $94 million of accounts receivable have been sold via these programs. Accounts receivable sold of $35 million and $124 million remained outstanding under these programs as of July 1, 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

~~Acquisitions~~Parati acquisition

In ~~March~~December 2016, the Company ~~completed~~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 ~~an organic and natural snack company for $18~~BRL 14 million ~~which~~($4 million). The acquisition was accounted for under the purchase price method and was financed with cash on ~~hand.~~ hand and short-term borrowings.

In our Latin America reportable segment, for the quarter ended July 1, 2017 the acquisition added $46 million in net sales and $4 million of operating profit. For the year-to-date period ended July 1, 2017 the acquisition added $93 million in net sales and $12 million of operating profit.

The assets ~~which primarily consist~~and liabilities of ~~indefinite lived brands, and liabilities~~the Parati Group are included in the Consolidated Balance Sheet as of ~~October~~July 1, ~~2016~~2017 within the ~~North~~Latin America ~~Other~~ segment. The acquired assets and assumed liabilities include the following:



(millions)		December 1, 2016
Current assets		$	46
Property	72
Goodwill	177
Intangible assets	147
Current liabilities	(48			)
Non-current deferred tax liability and other	(19			)
		$	375

~~In September 2016,~~During the ~~Company acquired a majority ownership interest in a natural, bio-organic certified breakfast company for €5 million, which was accounted for under~~year-to-date period ended July 1, 2017, the ~~purchase method and financed with cash on hand. The assets, which primarily consist~~value 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~~subject to ~~develop snacks~~amortization increased $38 million 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 decreased $11 million with aan 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 ended July 1, 2017, the Company recognized $4 million for certain pre-acquisition contingencies which are considered to be probable of being incurred, which increased goodwill. The Company is still evaluating other potential contingencies, which could result in the recognition of certain contingent liabilities along with corresponding ~~increase~~receivables from the escrow account.

During the quarter ended April 1, 2017, the Company finalized plans to merge the acquired and pre-existing Brazilian legal entities, which resulted in ~~Investments in unconsolidated entities~~tax basis of the acquired intangible assets. Accordingly, deferred tax liabilities and goodwill were both reduced by $41 million during the first quarter of ~~2016,~~2017.

The amounts in the above table represent the allocation of purchase price as of July 1, 2017 and are subject to revision when appraisals are finalized for intangible assets and the evaluation of pre-acquisition contingencies are completed, which ~~represents~~will be finalized during 2017.

Changes in the ~~value attributed~~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 ~~Pringles brand for this market.~~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
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



(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	—		—		—		—		—		(64		)	—		(64		)
Purchase price adjustment	—		—		—		—		—		(4		)	—		(4		)
Currency translation adjustment	—		—		—		1		24		—			4		29
July 1, 2017	$	131	$	3,568	$	82	$	458	$	400	$	260		$	228	$	5,127

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
(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																					—		—			—		—		—			38			—		38
Currency translation adjustment	—		—			—		—		—			—		—			—			—		—			—		—		1			—			—		1
October 1, 2016	$	8	$	42		$	—	$	5	$	45		$	6	$	10		$	116
July 1, 2017																					$	8	$	42		$	—	$	5	$	41		$	74		$	10	$	180

Accumulated Amortization
January 2, 2016	$	8	$	16		$	—	$	4	$	11		$	6	$	2		$	47
December 31, 2016																					$	8	$	19		$	—	$	4	$	14		$	6		$	3	$	54
Amortization	—		2			—		—		2			—		1			5			—		2			—		—		1			1			—		4
October 1, 2016	$	8	$	18		$	—	$	4	$	13		$	6	$	3		$	52
July 1, 2017																					$	8	$	21		$	—	$	4	$	15		$	7		$	3	$	58

Intangible assets subject to amortization, net	Intangible assets subject to amortization, net																				Intangible assets subject to amortization, net
January 2, 2016	$	—	$	26		$	—	$	1	$	34		$	—	$	8		$	69
December 31, 2016																					$	—	$	23		$	—	$	1	$	26		$	30		$	7	$	87
Purchase price allocation adjustment																					—		—			—		—		—			38			—		38
Currency translation adjustment	—		—			—		—		—			—		—			—			—		—			—		—		1			—			—		1
Amortization	—		(2		)	—		—		(2		)	—		(1		)	(5		)	—		(2		)	—		—		(1		)	(1		)	—		(4		)
October 1, 2016	$	—	$	24		$	—	$	1	$	32		$	—	$	7		$	64
July 1, 2017																					$	—	$	21		$	—	$	1	$	26		$	67		$	7	$	122

For intangible assets in the preceding table, amortization was ~~$5 million and $6~~$4 million for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015, respectively.~~July 2, 2016. The currently estimated aggregate annual amortization expense for full-year ~~2016~~2017 is approximately $7$8 million.

Intangible assets not subject to amortization

(millions)
U.S.
Morning
Foods
U.S.
Snacks
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
January 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



(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	—		—		—		—		31		(1		)	—		30
July 1, 2017	$	—	$	1,625	$	—	$	176	$	414	$	86		$	—	$	2,301

Note 4 Investments in unconsolidated entities

In ~~September~~ 2015, the Company acquired, for ~~$445~~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 ana 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 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~~is recorded at cost and ~~will be~~has been monitored for impairment through July 1, 2017 with no impairment being required. In July 2017, the ~~exercise period, which is upon the earlier of~~Company received notification that the entity, ~~achieving a minimum~~through June 30, 2017, had achieved the level of earnings as defined in the agreement ~~in which case~~for the ~~Company has~~purchase option to become exercisable for a one year period. During the exercise period, ~~or 2020.~~

~~The difference between~~ the ~~amount paid~~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 ~~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.~~approximately $400 million.

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.

Total Projects

During the quarter ended July 1, 2017, the Company recorded total charges of $96 million across all restructuring and cost reduction activities. The charges were comprised of $20 million recorded in cost of goods sold (COGS) and $76 million recorded in selling, general and administrative (SG&A) expense. During the year-to-date period ended July 1, 2017, the Company recorded total charges of $238 million across all restructuring and cost reduction activities. The charges were comprised of $35 million recorded in cost of goods sold (COGS) and $203 million recorded in selling, general and administrative (SG&A) expense.

During the quarter ended July 2, 2016, the Company recorded total charges of $72 million across all restructuring and cost reduction activities. The charges consist of $36 million recorded in COGS and $36 million recorded in SG&A expense. During the year-to-date period ended July 2, 2016, the Company recorded total charges of $124 million across all restructuring and cost reduction activities. The charges consist of $54 million recorded in COGS and $70 million recorded in SG&A expense.

Project K

~~Project K, a four-year~~In February 2017, the Company announced an expansion and an extension to its previously-announced global efficiency and effectiveness program ~~was announced in November 2013,~~(“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. Additionally, the Company expects that these savings may be used~~business to drive future growth inor utilized to achieve our 2018 Margin Expansion target.

In addition to the ~~business.~~

~~The~~original program’s focus ~~of the program is to strengthen~~on strengthening existing businesses in core markets, ~~increase~~increasing growth in developing and emerging markets, and ~~drive~~driving an increased level of value-added ~~innovation. The~~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, ~~and~~ a new global focus on ~~categories.~~

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 ~~$1.2~~$1.5 to ~~$1.4~~$1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be ~~$900 million to~~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 ~~totaling $400 to $450~~of approximately $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs ~~totaling $400 to $450~~of approximately $500 million which will include severance, pension and other termination benefits; and other costs ~~totaling $400 to $500~~of approximately $600 million which ~~will consist~~consists 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~~capabilities and ~~standardize business support processes.~~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 ~~18%~~13%), U.S. Snacks (approximately ~~17%~~35%), U.S. Specialty (approximately 1%), North America Other (approximately ~~10%~~11%), Europe (approximately ~~17%~~21%), Latin America (approximately 2%1%), Asia-Pacific (approximately 6%), and Corporate (approximately ~~29%~~12%). 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~~$1,354 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, ~~$583~~$725 million recorded in COGS and ~~$371~~$623 million recorded in ~~SGA.~~SG&A expense.

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~~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 $4$1 million and ~~$21~~$17 million during the ~~quarter~~year-to-date periods ended July 1, 2017 and ~~year-to-date period ended October 1,~~July 2, 2016, respectively. Total charges of ~~$33~~$38 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

~~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~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016 and program costs to date for programs currently active as of ~~October~~July 1, ~~2016.~~2017.


	Quarter ended				Year-to-date period ended				Program costs to date		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		July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016		July 1, 2017
Employee related costs	$	6	$	31	$	26	$	64	$	285	$	25	$	6	$	136	$	20	$	504
Asset related costs	5		15		32		62		178		20		17		30		27		222
Asset impairment	—		—		16		18		121		—		16		—		16		155
Other costs	29		39		90		99		409		51		33		72		61		511
Total	$	40	$	85	$	164	$	243	$	993	$	96	$	72	$	238	$	124	$	1,392

	Quarter ended				Year-to-date period ended				Program costs to date		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		July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016		July 1, 2017
U.S. Morning Foods	$	4	$	30	$	13	$	51	$	231	$	1	$	4	$	2	$	9	$	243
U.S. Snacks	8		15		62		34		188		79		34		199		54		401
U.S. Specialty	1		1		4		3		15		1		1		1		3		20
North America Other	7		11		20		40		110		2		4		9		13		137
Europe	6		12		34		56		207		2		14		8		28		307
Latin America	2		1		6		2		22		3		4		4		4		28
Asia Pacific	2		2		6		10		80		3		4		4		4		85
Corporate	10		13		19		47		140		5		7		11		9		171
Total	$	40	$	85	$	164	$	243	$	993	$	96	$	72	$	238	$	124	$	1,392

For the quarters ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016 employee related costs consist primarily of severance and other termination related benefits, 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.~~capabilities and a more efficient go-to-market model.

At ~~October~~July 1, ~~2016~~2017 total exit cost reserves were ~~$67~~$221 million, related to severance payments and other costs of which a substantial portion will be paid out in ~~2016~~2017 and ~~2017.~~2018. 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



	Employee Related Costs			Asset Impairment		Asset Related Costs			Other Costs			Total
Liability as of December 31, 2016	$	102		$	—	$	—		$	29		$	131
2017 restructuring charges	136			—		30			72			238
Cash payments	(52		)	—		(8		)	(67		)	(127		)
Non-cash charges and other	1			—		(22		)	—			(21		)
Liability as of July 1, 2017	$	187		$	—	$	—		$	34		$	221

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 35 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended ~~October~~July 1, ~~2016, respectively.~~2017. There were 3 million and 2 million anti dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended ~~October 3, 2015,~~July 2, 2016, respectively.

Quarters ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015:~~July 2, 2016:


(millions, except per share data)	Net income attributable to Kellogg Company		Average shares outstanding	Earnings per share			Net income		Average shares outstanding	Earnings per share
2017
Basic							$	282	349	$	0.81
Dilutive potential common shares									3	(0.01		)
Diluted							$	282	352	$	0.80
2016
Basic	$	292	350	$	0.83		$	280	350	$	0.80
Dilutive potential common shares			4	(0.01		)			4	(0.01		)
Diluted	$	292	354	$	0.82		$	280	354	$	0.79
2015
Basic	$	205	354	$	0.58
Dilutive potential common shares			2	—
Diluted	$	205	356	$	0.58

Year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015:~~July 2, 2016:


(millions, except per share data)	Net income attributable to Kellogg Company		Average shares outstanding	Earnings per share			Net income		Average shares outstanding	Earnings per share
2017
Basic							$	544	350	$	1.56
Dilutive potential common shares									3	(0.02		)
Diluted							$	544	353	$	1.54
2016
Basic	$	747	350	$	2.13		$	455	350	$	1.30
Dilutive potential common shares			4	(0.02		)			4	(0.01		)
Diluted	$	747	354	$	2.11		$	455	354	$	1.29
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. As of July 1, 2017, $639 million remains available under the authorization.

During the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, the Company repurchased approximately 6 million shares of common stock for a total of ~~$426 million.~~$435 million, of which $390 million was paid and $45 million was payable at July 1, 2017. During the year-to-date period ended ~~October 3, 2015,~~July 2, 2016, the Company repurchased 65 million shares of common stock for a total of ~~$381~~$386 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.

Reclassifications out of AOCI for the quarter and year-to-date periods ended ~~October~~July 1, 2017 and July 2, 2016, consisted of the following:



(millions)
Details about AOCI components	Amount reclassified from AOCI					Line item impacted within Income Statement
	Quarter ended July 1, 2017		Year-to-date period ended July 1, 2017
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	—	$	(1	)	COGS
Foreign currency exchange contracts	—		—			SG&A
Interest rate contracts	2		5			Interest expense
Commodity contracts	—		—			COGS
	$	2	$	4		Total before tax
	—		(1		)	Tax expense (benefit)
	$	2	$	3		Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	—	$	1		See Note 9 for further details
Prior service cost	—		—			See Note 9 for further details
	$	—	$	1		Total before tax
	—		—			Tax expense (benefit)
	$	—	$	1		Net of tax
Total reclassifications	$	2	$	4		Net of tax




(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended July 2, 2016			Year-to-date period ended July 2, 2016
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	—		$	(7	)	COGS
Foreign currency exchange contracts	—			—			SGA
Interest rate contracts	2			8			Interest expense
Commodity contracts	4			7			COGS
	$	6		$	8		Total before tax
	(2		)	(3		)	Tax expense (benefit)
	$	4		$	5		Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	1		$	2		See Note 9 for further details
Prior service cost	2			2			See Note 9 for further details
	$	3		$	4		Total before tax
	—			—			Tax expense (benefit)
	$	3		$	4		Net of tax
Total reclassifications	$	7		$	9		Net of tax

Accumulated other comprehensive income (loss) as of July 1, 2017 and December 31, 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



(millions)	July 1, 2017			December 31, 2016
Foreign currency translation adjustments	$	(1,429	)	$	(1,505	)
Cash flow hedges — unrealized net gain (loss)	(64		)	(67		)
Postretirement and postemployment benefits:
Net experience loss	(13		)	(14		)
Prior service cost	11			11
Total accumulated other comprehensive income (loss)	$	(1,495	)	$	(1,575	)

~~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.

Note 7 Debt

The following table presents the components of notes payable at ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016:


	October 1, 2016				January 2, 2016				July 1, 2017				December 31, 2016
(millions)	Principal amount		Effective interest rate (a)		Principal amount		Effective interest rate		Principal amount		Effective interest rate (a)		Principal amount		Effective interest rate (a)
U.S. commercial paper	$	100	0.48	%	$	899	0.45	%	$	229	1.15	%	$	80	0.61	%
Europe commercial paper	320		(0.15	)%	261		0.01	%	423		(0.23	)%	306		(0.18	)%
Bank borrowings	34				44				72				52
Total	$	454			$	1,204			$	724			$	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 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,~~2017, the Company issued €600 million (approximately ~~$671~~$685 million USD at ~~October~~July 1, ~~2016,~~2017, which reflects the discount and translation adjustments) of ~~eight-year 1.00%~~five-year 0.80% Euro Notes due ~~2024,~~2022, resulting in aggregate net proceeds after debt discount of ~~$679~~$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 ~~$750~~$400 million, five-year ~~4.45%~~1.75% U.S. Dollar Notes due ~~2016~~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 ~~2016~~2017, 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%~~1.25% Euro Notes due ~~2024~~2025 from fixed to floating rate obligations. The U.S. Dollar interest rate swaps were settled during the quarter for an unrealized ~~gain~~loss of ~~$12~~$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 March 2016,~~The Company has entered into interest rate swaps with notional amounts totaling $2.2 billion, which effectively converts a portion of the ~~Company issued $750 million of ten-year 3.25%~~associated U.S. Dollar Notes and ~~$650 million of thirty-year 4.5% U.S. Dollar~~Euro 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)fixed rate to ~~incur certain liens or enter into certain sale and lease-back transactions,~~floating rate obligations. These derivative instruments are designated as ~~well as a change of control provision.~~

fair value hedges. The effective interest rates on debt obligations resulting from the Company’s interest rate swaps as of ~~October~~July 1, ~~2016~~2017 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%~~2.75%; ~~(d)~~(b) ten-year 4.15% U.S. Dollar Notes due 2019 – ~~3.54%~~3.52%; ~~(e)~~(c) ten-year 4.00% U.S. Dollar Notes due 2020 – ~~2.04%~~3.41%; ~~(f)~~(d) ten-year 3.125% U.S. Dollar Notes due 2022 – ~~1.30%~~2.46%; ~~(g)~~(e) ten-year ~~3.125%~~2.75% U.S. Dollar Notes due 2023 – ~~1.43%~~2.61%; ~~(h)~~(f) seven-year 2.65% U.S. Dollar Notes due 2023 – 2.30%; (g) eight-year 1.00% Euro Notes due 2024 – ~~1.08%~~0.75%; (h) ten-year 1.25% Euro Notes due 2025 - 1.27% and (i) ten-year 3.25% U.S. Notes due 2026 – ~~3.12%~~3.58%.

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~~2016 Annual Report on Form 10-K.

The Company classifies pre-tax stock compensation expense in COGS and ~~SGA~~SG&A expense principally within its ~~corporate operations.~~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				Quarter ended				Year-to-date period ended
(millions)	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015		July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Pre-tax compensation expense	$	16	$	12	$	49	$	37	$	21	$	17	$	39	$	33
Related income tax benefit	$	6	$	4	$	18	$	13	$	8	$	6	$	14	$	12

As of ~~October~~July 1, ~~2016,~~2017, total stock-based compensation cost related to non-vested awards not yet recognized was ~~$99~~$125 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~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 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 ~~2015~~2016 Annual Report on Form 10-K.

Year-to-date period ended ~~October~~July 1, 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	—		—
Outstanding, end of period	16		$	64	7.0	$	109
Exercisable, end of period	11		$	60	6.1	$	104

Year-to-date period ended July 2, 2016:

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)

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



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	(4	)	56			��
Forfeitures and expirations	—		—
Outstanding, end of period	18		$	61	7.2	$	335
Exercisable, end of period	10		$	57	6.2	$	247

The weighted-average grant date fair value of options granted was ~~$9.44~~$10.14 per share and ~~$7.20~~$9.44 per share for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 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 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 %



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

The total intrinsic value of options exercised was ~~$140~~$17 million and ~~$50~~$79 million for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 2016, respectively.

Performance shares

In the first quarter of ~~2016,~~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 ~~three-year~~ currency-neutral comparable operating ~~profit growth~~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 ~~profit growth achievement.~~margin expansion. Compensation cost related to currency-neutral comparable operating ~~profit growth~~margin performance is revised for changes in the expected outcome. The ~~2016~~2017 target grant currently corresponds to approximately ~~176,000~~186,000 shares, with a grant-date fair value of ~~$80~~$67 per share.

Based on the market price of the Company’s common stock at ~~October~~July 1, ~~2016,~~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)	October 1, 2016		July 1, 2017
2014 Award	$	30
2015 Award	$	24	$	22
2016 Award	$	27	$	24
2017 Award			$	26

The ~~2013~~2014 performance share award, payable in stock, was settled at 35% of target in February ~~2016~~2017 for a total dollar equivalent of $3$5 million.

Other stock-based awards

During the year-to-date period ended ~~October~~July 1, ~~2016,~~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 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~~2016 Annual Report on Form 10-K.

Year-to-date period ended ~~October~~July 1, ~~2016:~~2017:


Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value		Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	806		$	58	1,166		$	63
Granted	589		70		654		67
Vested	(68	)	56		(35	)	57
Forfeited	(85	)	62		(72	)	65
Non-vested, end of period	1,242		$	63	1,713		$	65

Year-to-date period ended ~~October 3, 2015:~~July 2, 2016:


Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value		Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	346		$	54	806		$	58
Granted	587		59		574		70
Vested	(90	)	50		(51	)	55
Forfeited	(28	)	57		(55	)	62
Non-vested, end of period	815		$	57	1,274		$	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 ~~2015~~2016 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						Quarter ended						Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Service cost	$	25		$	28		$	74		$	84		$	25		$	25		$	50		$	49
Interest cost	43			50			131			156			42			44			83			88
Expected return on plan assets	(87		)	(100		)	(266		)	(300		)	(90		)	(90		)	(180		)	(179		)
Amortization of unrecognized prior service cost	3			4			10			10			2			4			4			7
Recognized net loss	28			—			28			—
Recognized net (gain) loss													(2		)	—			1			—
Curtailment (gain) loss													(3		)	—			(2		)	—
Total pension (income) expense	$	12		$	(18	)	$	(23	)	$	(50	)	$	(26	)	$	(17	)	$	(44	)	$	(35	)

Other nonpension postretirement


	Quarter ended						Year-to-date period ended						Quarter ended						Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Service cost	$	5		$	7		$	15		$	24		$	4		$	5		$	9		$	10
Interest cost	10			11			29			36			9			9			18			19
Expected return on plan assets	(22		)	(25		)	(67		)	(75		)	(25		)	(23		)	(49		)	(45		)
Amortization of unrecognized prior service cost (credit)	(2		)	(2		)	(7		)	(3		)
Amortization of unrecognized prior service (gain)													(2		)	(2		)	(4		)	(5		)
Recognized net (gain) loss													—			—			(29		)	—
Curtailment loss													—			—			3			—
Total postretirement benefit (income) expense	$	(9	)	$	(9	)	$	(30	)	$	(18	)	$	(14	)	$	(11	)	$	(52	)	$	(21	)

Postemployment


	Quarter ended				Year-to-date period ended				Quarter ended				Year-to-date period ended
(millions)	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015		July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Service cost	$	1	$	2	$	5	$	5	$	2	$	2	$	3	$	4
Interest cost	1		1		3		3		1		1		2		2
Recognized net loss	1		1		3		3		—		1		1		2
Total postemployment benefit expense	$	3	$	4	$	11	$	11	$	3	$	4	$	6	$	8

During the second quarter ~~ended October 1, 2016,~~of 2017, the Company recognized ~~expense~~a curtailment gain of ~~$28~~$3 million ~~related~~within a pension plan in conjunction with Project K restructuring activity. The Company remeasured the benefit obligation for the impacted pension plan resulting in a mark-to-market gain of $2 million. The gain was due primarily to plan asset returns in excess of the expected rate of return.

During the first quarter of 2017, the Company recognized curtailment losses of $1 million and $3 million within pension and nonpension postretirement plans, respectively, in conjunction with Project K restructuring activity. In addition, the Company remeasured the benefit obligation for impacted pension and nonpension postretirement plans. The remeasurement resulted in a mark-to-market loss of $3 million on a pension plan due primarily to a lower discount rate and a $29 million gain on a nonpension postretirement plan primarily due to plan asset investment returns slightly mitigated by the impact of a U.S. pension plan as current year distributions exceeded service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurement loss recognized during the quarter was due to an unfavorable change in thelower discount ~~rate relative to prior year.~~rate.

Company contributions to employee benefit plans are summarized as follows:

(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)	Pension		Nonpension postretirement		Total
Quarter ended:
July 1, 2017	$	2	$	2	$	4
July 2, 2016	$	2	$	4	$	6
Year-to-date period ended:
July 1, 2017	$	23	$	5	$	28
July 2, 2016	$	15	$	8	$	23
Full year:
Fiscal year 2017 (projected)	$	26	$	16	$	42
Fiscal year 2016 (actual)	$	18	$	15	$	33

Plan funding strategies may be modified in response to management’s evaluation of tax deductibility, market conditions, and competing investment alternatives.

Additionally, during the first quarter of 2017, the Company recognized expense totaling $26 million related to the exit of several multi-employer plans associated with Project K restructuring activity. This amount represents management's best estimate, actual results could differ. The cash obligation is payable over a maximum 20-year period; management has not determined the actual period over which the payments will be made.

Note 10 Income taxes

The consolidated effective tax rate for the quarter ended ~~October~~July 1, ~~2016~~2017 was ~~18%~~26% as compared to the prior year’s rate of ~~24%~~27%. For the quarter ended October 1, 2016, the effective tax rate benefited from excess tax benefits from share-based compensation totaling $16 million. See Note 1 for further discussion regarding the ASU adoption. Additionally, the effective tax rate for the quarter benefited from the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.

The consolidated effective tax rates for the year-to-date periods ended ~~October~~July 1, 2017 and July 2, 2016 were 21% and ~~October 3, 2015 were 22% and 26%~~25%, respectively. ~~The current~~For the year-to-date period ended July 1, 2017, the effective tax rate benefited from a deferred tax benefit of $38 million resulting from an intercompany transfer of intellectual property under the application of the newly adopted standard. See discussion regarding the adoption of ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, in Note 1.

The effective tax rate for the first half of 2016 benefited from excess tax benefits from share-based compensation ~~totaling $34 million as well as the completion of certain tax examinations.~~

~~The effective tax rate for 2015 benefited from a reduction in tax related to current year remitted and unremitted earnings~~ and the completion of certain tax examinations.

As of ~~October~~July 1, ~~2016,~~2017, the Company classified ~~$16~~$8 million of unrecognized tax benefits as a net current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance expected to be settled within one year, offset by approximately $8$5 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the ~~year-to-date period~~quarter ended ~~October~~July 1, ~~2016; $49~~2017; $38 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

							(millions)
January 2, 2016	$	73
December 31, 2016				$	63
Tax positions related to current year:
Additions	6			2
Reductions	—			—
Tax positions related to prior years:
Additions	1			2
Reductions	(4		)	(6		)
Settlements	1			(4		)
Lapse in statute of limitations	(2		)	—
October 1, 2016	$	75
July 1, 2017				$	57

The accrual balance for tax-related interest was ~~$19~~$20 million at ~~October~~July 1, ~~2016.~~2017.

Note 11 Derivative instruments and fair value measurements

The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.

The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Total notional amounts of the Company’s derivative instruments as of ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016 were as follows:


(millions)	October 1, 2016		January 2, 2016		July 1, 2017		December 31, 2016
Foreign currency exchange contracts	$	1,276	$	1,210	$	2,253	$	1,396
Interest rate contracts	1,769		—		2,197		2,185
Commodity contracts	453		470		423		437
Total	$	3,498	$	1,680	$	4,873	$	4,018

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016, measured on a recurring basis.

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract

rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of ~~October~~July 1, ~~2016~~2017 or ~~January 2,~~December 31, 2016.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016:

Derivatives designated as hedging instruments


	October 1, 2016								January 2, 2016								July 1, 2017								December 31, 2016
(millions)	Level 1		Level 2			Total			Level 1		Level 2			Total			Level 1		Level 2			Total			Level 1		Level 2			Total
Assets:
Foreign currency exchange contracts:
Other prepaid assets	$	—	$	12		$	12		$	—	$	11		$	11		$	—	$	—		$	—		$	—	$	2		$	2
Interest rate contracts:
Other assets (a)	—		5			5			—		—			—			—		—			—			—		1			1
Total assets	$	—	$	17		$	17		$	—	$	11		$	11		$	—	$	—		$	—		$	—	$	3		$	3
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—	$	(7	)	$	(7	)	$	—	$	(10	)	$	(10	)
Interest rate contracts:
Other liabilities (a)	—		(2		)	(2		)	—		—			—			—		(46		)	(46		)	—		(65		)	(65		)
Commodity contracts:
Other current liabilities	—		(3		)	(3		)	—		(14		)	(14		)
Total liabilities	$	—	$	(12	)	$	(12	)	$	—	$	(24	)	$	(24	)	$	—	$	(46	)	$	(46	)	$	—	$	(65	)	$	(65	)

(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was ~~$1.7~~$2.2 billion and $2.2 billion as of ~~October~~July 1, ~~2016.~~2017 and December 31, 2016, respectively.

Derivatives not designated as hedging instruments


	October 1, 2016									January 2, 2016									July 1, 2017									December 31, 2016
(millions)	Level 1			Level 2			Total			Level 1			Level 2			Total			Level 1			Level 2			Total			Level 1			Level 2			Total
Assets:
Foreign currency exchange contracts:
Other prepaid assets	$	—		$	15		$	15		$	—		$	18		$	18		$	—		$	16		$	16		$	—		$	25		$	25
Commodity contracts:
Other prepaid assets	6			—			6			4			—			4			13			—			13			13			—			13
Total assets	$	6		$	15		$	21		$	4		$	18		$	22		$	13		$	16		$	29		$	13		$	25		$	38
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—		$	(9	)	$	(9	)	$	—		$	(6	)	$	(6	)	$	—		$	(21	)	$	(21	)	$	—		$	(11	)	$	(11	)
Commodity contracts:
Other current liabilities	(23		)	—			(23		)	$	(33	)	$	—		$	(33	)	(5		)	—			(5		)	$	(7	)	$	—		$	(7	)
Total liabilities	$	(23	)	$	(9	)	$	(32	)	$	(33	)	$	(6	)	$	(39	)	$	(5	)	$	(21	)	$	(26	)	$	(7	)	$	(11	)	$	(18	)

The Company has designated ~~a portion of~~ its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying value of this debt was approximately ~~$1.9~~$2.6 billion and ~~$1.2~~$1.8 billion as of ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016, respectively.

The Company has elected not to offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of ~~October~~July 1, ~~2016~~2017 and ~~January 2,~~December 31, 2016 would be adjusted as detailed in the following table:


As of October 1, 2016:
As of July 1, 2017:
				Gross Amounts Not Offset in the Consolidated Balance Sheet										Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount		Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount
Total asset derivatives	$	38		$	(6	)	$	—	$	32	$	29		$	(18	)	$	—	$	11
Total liability derivatives	$	(44	)	$	6		$	38	$	—	$	(72	)	$	18		$	18	$	(36	)


As of January 2, 2016:
As of December 31, 2016:
				Gross Amounts Not Offset in the Consolidated Balance Sheet										Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount		Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount
Total asset derivatives	$	33		$	(12	)	$	—	$	21	$	41		$	(24	)	$	—	$	17
Total liability derivatives	$	(63	)	$	12		$	51	$	—	$	(83	)	$	24		$	48	$	(11	)

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016 was as follows:

Derivatives in fair value hedging relationships


(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income (a)				Location of gain (loss) recognized in income	Gain (loss) recognized in income (a)
		October 1, 2016		October 3, 2015			July 1, 2017		July 2, 2016
Interest rate contracts	Interest expense	$	6	$	6	Interest expense	$	5	$	3
Total		$	6	$	6		$	5	$	3


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

Derivatives in cash flow hedging relationships


(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)					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)
	October 1, 2016		October 3, 2015				October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015		July 1, 2017		July 2, 2016				July 1, 2017			July 2, 2016				July 1, 2017		July 2, 2016
Foreign currency exchange contracts	$	1	$	9		COGS	$	4		$	11		Other income (expense), net	$	(1	)	$	—	$	—	$	(1	)	COGS	$	—		$	—		Other income (expense), net	$	—	$	(1	)
Foreign currency exchange contracts	1		—			SGA expense	1			—			Other income (expense), net	—			—
Interest rate contracts	1		—			Interest expense	(2		)	(1		)	N/A	—			—		1		(3		)	Interest expense	(3		)	(2		)	N/A	—		—
Commodity contracts	—		(2		)	COGS	(3		)	(3		)	Other income (expense), net	—			—		—		1			COGS	—			(4		)	Other income (expense), net	—		—
Total	$	3	$	7			$	—		$	7			$	(1	)	$	—	$	1	$	(3	)		$	(3	)	$	(6	)		$	—	$	(1	)


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

Derivatives and non-derivatives in net investment hedging relationships


(millions)	Gain (loss) recognized in AOCI						Gain (loss) recognized in AOCI
	October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016
Foreign currency denominated long-term debt	$	(19	)	$	(13	)	$	(157	)	$	46
Foreign currency exchange contracts							—			(1		)
Total	$	(19	)	$	(13	)	$	(157	)	$	45

Derivatives not designated as hedging instruments


(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income						Location of gain (loss) recognized in income	Gain (loss) recognized in income
		October 1, 2016			October 3, 2015				July 1, 2017			July 2, 2016
Foreign currency exchange contracts	COGS	$	3		$	5		COGS	$	(4	)	$	(1	)
Foreign currency exchange contracts	Other income (expense), net	(1		)	(3		)	Other income (expense), net	(3		)	(1		)
Foreign currency exchange contracts								SG&A	(1		)	—
Commodity contracts	COGS	(14		)	(47		)	COGS	10			6
Commodity contracts	SGA	—			(2		)	SG&A	—			2
Total		$	(12	)	$	(47	)		$	2		$	6

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016 was as follows:

Derivatives in fair value hedging relationships

(millions)
Location of gain (loss)
recognized in income
Gain (loss)
recognized in
income (a)
October 1,
2016 October 3,
2015
Foreign currency exchange contracts Other income (expense), net $ —
$ (4 )
Interest rate contracts Interest expense 15
13
Total $ 15

$ 9

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




(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income (a)
		July 1, 2017		July 2, 2016
Foreign currency exchange contracts	Other income (expense), net	$	—	$	—
Interest rate contracts	Interest expense	10		9
Total		$	10	$	9

Derivatives in cash flow hedging relationships



(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)						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)
	October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015				October 1, 2016			October 3, 2015			July 1, 2017		July 2, 2016				July 1, 2017			July 2, 2016				July 1, 2017		July 2, 2016
Foreign currency exchange contracts	$	10		$	28		COGS	$	11		$	27		Other income (expense), net	$	(2	)	$	(2	)	$	—	$	9		COGS	$	1		$	7		Other income (expense), net	$	—	$	(1	)
Foreign currency exchange contracts	1			(6		)	SGA expense	1			(2		)	Other income (expense), net	—			—			—		—			SGA expense	—			—			Other income (expense), net	—		—
Interest rate contracts	(68		)	(9		)	Interest expense	(10		)	(2		)	N/A	—			—			1		(69		)	Interest expense	(5		)	(8		)	N/A	—		—
Commodity contracts	—			(2		)	COGS	(10		)	(9		)	Other income (expense), net	—			—			—		—			COGS	—			(7		)	Other income (expense), net	—		—
Total	$	(57	)	$	11			$	(8	)	$	14			$	(2	)	$	(2	)	$	1	$	(60	)		$	(4	)	$	(8	)		$	—	$	(1	)

~~(a)~~


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

Derivatives and non-derivatives in net investment hedging relationships

(millions)
Gain (loss)
recognized in
AOCI
October 1,
2016 October 3,
2015
Foreign currency denominated long-term debt $ (31 ) $ 30
Foreign currency exchange contracts (23 ) —
Total $ (54 )
$ 30




(millions)	Gain (loss) recognized in AOCI
	July 1, 2017			July 2, 2016
Foreign currency denominated long-term debt	$	(182	)	$	(12	)
Foreign currency exchange contracts	—			(23		)
Total	$	(182	)	$	(35	)

Derivatives not designated as hedging instruments


(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income						Location of gain (loss) recognized in income	Gain (loss) recognized in income
		October 1, 2016			October 3, 2015				July 1, 2017			July 2, 2016
Foreign currency exchange contracts	COGS	$	(7	)	$	6		COGS	$	(13	)	$	(10	)
Foreign currency exchange contracts	Other income (expense), net	9			4			Other income (expense), net	(8		)	10
Foreign currency exchange contracts								SGA	(1		)	—
Interest rate contracts	Interest expense	—			—			Interest expense	—			—
Commodity contracts	COGS	(4		)	(45		)	COGS	(3		)	10
Commodity contracts	SGA	2			(1		)	SGA	1			2
Total		$	—		$	(36	)		$	(24	)	$	12

During the next 12 months, the Company expects $9 million of net deferred losses reported in AOCI at ~~October~~July 1, ~~2016~~2017 to be reclassified to income, assuming market rates remain constant through contract maturities.

Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating is at or below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on ~~October~~July 1, ~~2016~~2017 was $3$54 million. If the credit-risk-related contingent features were triggered as of ~~October~~July 1, ~~2016,~~2017, the Company would be required to post additional collateral of $3$45 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting ~~requirements~~ as of ~~October~~July 1, ~~2016~~2017 triggered by credit-risk-related contingent features.

~~2016 fair~~Fair value measurements on a nonrecurring basis

As part of Project K, the Company will be consolidating the usage of and disposing certain long-lived assets, including manufacturing facilities and Corporate owned assets over the term of the program. See Note 5 for more information regarding Project K.

During the ~~year-to-date period~~quarter ended ~~October~~July 1, 2017, there were no long-lived asset impairment related to Project K.

During the quarter ended July 2, 2016, long-lived assets of $26 million related to a manufacturing facility in the Company's USU.S. Snacks reportable segment, were written down to an estimated fair value of $10 million due to Project K activities. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.

~~2015~~

The following table presents level 3 assets that were measured at fair value ~~measurements~~on the consolidated Balance Sheet on a nonrecurring basis as of July 2, 2016:

During the year-to-date period ended October 3, 2015, as part of Project K, long-lived assets of $31 million related to a manufacturing facility in the Company's North America Other reportable segment, were written down to an estimated fair value of $13 million due to Project K activities. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.

During the year-to-date period ended October 3, 2015, the Company moved from the CENCOEX foreign currency official exchange rate to the SIMADI foreign currency exchange rate for purposes of remeasuring the financial statements of its Venezuelan subsidiary. In connection with this change in foreign currency exchange rates, the Company also evaluated the carrying value of the long lived assets related to its Venezuelan subsidiary. See Note 13 for more information regarding Venezuela. During the year-to-date period ended October 3, 2015 long-lived assets with a carrying value of $51 million were written down to an estimated fair value of $2 million. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.



(millions)	Fair Value		Total Loss
Description:
Long-lived assets	$	10	$	(16	)
Total	$	10	$	(16	)

Financial instruments

The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was ~~$6,863~~$7,442 million and ~~$6,296~~$7,123 million, respectively, as of ~~October~~July 1, ~~2016.~~2017.

Counterparty credit risk concentration and collateral requirements

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company. As of ~~October~~July 1, ~~2016,~~2017, the Company was not in a significant net asset position with any counterparties with which a master netting agreement would apply.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of ~~October~~July 1, ~~2016,~~2017, the Company ~~had no collateral posting requirements~~posted $9 million related to reciprocal collateralization agreements. As of ~~October~~July 1, ~~2016~~2017 the Company posted ~~$38~~$9 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately ~~25%~~27% of consolidated trade receivables at ~~October~~July 1, ~~2016.~~2017.

~~Note 12 Contingencies~~

In connection with the Company’s previous labor negotiations with the union representing the work-force at its Memphis, TN cereal production facility, the National Labor Relations Board (NLRB) filed a complaint alleging unfair labor practices under the National Labor Relations Act in March 2014. In July 2014, a U.S. District Court judge ruled that the Memphis employees were entitled to return to work while the underlying litigation continues and employees subsequently returned to work. In August 2014, an NLRB Administrative Law Judge dismissed the complaint that initiated the underlying litigation. In May 2015, the NLRB reversed the decision of the Administrative Law Judge in favor of the union. In August 2016, the Sixth Circuit Court of Appeals vacated the NLRB’s order and found that the Company’s actions were lawful. This litigation is not expected to have a material effect on the production or distribution of products from the Memphis, TN facility or a material financial impact on the Company. As of October 1, 2016, the Company has not recorded a liability related to this matter as an adverse outcome is considered remote.

~~Note 13 Venezuela~~

Venezuela is considered a highly inflationary economy. As such, the functional currency for the Company's operations in Venezuela is the U.S. dollar, which in turn, requires bolivar denominated monetary assets and liabilities to be remeasured into U.S. dollars using an exchange rate at which such balances could be settled as of the balance sheet date. In addition, revenues and expenses are recorded in U.S. dollars at an appropriate rate on the date of the transaction. Gains and losses resulting from the remeasurement of the bolivar denominated monetary assets and liabilities are recorded in earnings.

From February 2013 through July 4, 2015, the Company used the CENCOEX, official rate, which was 6.3 bolivars to the U.S. dollar, to remeasure its Venezuelan subsidiary’s financial statements to U.S. dollars. The CENCOEX

official rate was restricted toward goods and services for industry sectors considered essential, which are primarily food, medicines and a few others. In February 2015, the Venezuelan government announced the addition of a new foreign currency exchange system referred to as the Marginal Currency System, or SIMADI.

During 2015, the Company experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the CENCOEX exchange. Due to this reduced availability of U.S. dollars and upon review of U.S. dollar cash needs in the Company's Venezuela operations as of the quarter ended July 4, 2015, the Company concluded that it was no longer able to obtain sufficient U.S. dollars on a timely basis through the CENCOEX exchange resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the SIMADI rate.

In connection with the change in rates, the Company evaluated the carrying value of its non-monetary assets for impairment and lower of cost or market adjustments. As a result of moving from the CENCOEX official rate to the SIMADI rate, the Company recorded pre-tax charges totaling $152 million in the quarter ended July 4, 2015. Of the total charges, $100 million was recorded in COGS, $3 million was recorded in SGA, and $49 million was recorded in Other income (expense), net. These charges consist of $47 million related to the remeasurement of net monetary assets denominated in Venezuelan bolivar at the SIMADI exchange rate (recorded in Other income (expense), net), $56 million related to reducing inventory to the lower of cost or market (recorded in COGS) and $49 million related to the impairment of long-lived assets in Venezuela (recorded primarily in COGS).

~~In February 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including~~a 59% devaluation of the CENCOEX (now named DIPRO) official rate from 6.3 bolivars to 10.0 bolivars to the U.S. dollar. Additionally the SIMADI exchange rate was replaced by the DICOM exchange rate, a new floating exchange rate for non-essential imports. The DICOM exchange rate was introduced at 206 bolivars to the U.S. dollar and the Venezuelan government has reported that the DICOM exchange rate will be allowed to float to meet market needs.

The Company has evaluated all of the facts and circumstances surrounding its Venezuelan business and determined that as of October 1, 2016, the DICOM (formerly SIMADI) rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements.

~~As of October 1, 2016, the published DIPRO and DICOM rates offered were 10.0 and 657.9 bolivars to the U.S. dollar, respectively.~~

For the year-to-date periods ended October 1, 2016 and October 3, 2015, Venezuela represented less than 1% and approximately 2% of total net sales, respectively. The Company’s net monetary assets denominated in the Venezuelan bolivar were immaterial after applying the DICOM and SIMADI exchange rates as of October 1, 2016 and January 2, 2016, respectively.

The Company continues to monitor and actively manage its investment and exposure in Venezuela. The Company’s Venezuelan business does not rely heavily on imports and when items are imported, they are largely exchanged at the DIPRO official rate; however, the Company considers it reasonably possible to utilize alternate exchange mechanisms in the future. The Company is continuing to take actions to further reduce its reliance on imports in order to run its operations without the need for U.S. dollars, including the elimination of imported ingredients where possible and developing a local supply for parts and materials. Less than 2% of the total raw material needs of the Company's Venezuela operations are imported. The Company will continue to monitor local conditions and its ability to obtain U.S. dollars through the various exchange mechanisms available to determine the appropriate rate for remeasurement.

Note 1412 Reportable segments

Kellogg Company is the world’s leading producer of cereal, second largest producer of cookies and crackers, and a leading producer of savory snacks and frozen foods. Additional product offerings include toaster pastries, cereal bars, fruit-flavored snacks and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom.

The Company manages its operations through nine operating segments that are based on product category or geographic location. These operating segments are evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. The reportable segments are discussed in greater detail below.

The U.S. Morning Foods operating segment includes cereal, toaster pastries, and health and wellness beverages and bars.

U.S. Snacks includes cookies, crackers, cereal bars, savory snacks and fruit-flavored snacks.

U.S. Specialty primarily represents food away from home channels, including food service, convenience, vending, Girl Scouts and food manufacturing. The food service business is mostly non-commercial, serving institutions such as schools and hospitals. The convenience business includes traditional convenience stores as well as alternate retail outlets.

North America Other includes the U.S. Frozen, Kashi and Canada operating segments. As these operating segments are not considered economically similar enough to aggregate with other operating segments and are immaterial for separate disclosure, they have been grouped together as a single reportable segment.

The three remaining reportable segments are based on geographic location – Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and Asia Pacific which consists of Sub-Saharan Africa, Australia and other Asian and Pacific markets.

The measurement of reportable segment results is based on segment operating profit which is generally consistent with the presentation of operating profit in the Consolidated Statement of Income. Intercompany transactions between operating segments were insignificant in all periods presented.


	Quarter ended						Year-to-date period ended						Quarter ended				Year-to-date period ended
(millions)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015			July 1, 2017		July 2, 2016		July 1, 2017			July 2, 2016
Net sales
U.S. Morning Foods	$	733		$	762		$	2,227		$	2,280		$	679	$	727	$	1,398		$	1,494
U.S. Snacks	796			795			2,431			2,484			803		803		1,584			1,635
U.S. Specialty	284			281			931			912			276		271		671			647
North America Other	402			426			1,222			1,298			391		406		784			820
Europe	594			628			1,821			1,885			566		629		1,078			1,227
Latin America	197			202			593			825			234		204		456			396
Asia Pacific	248			235			692			699			238		228		470			444
Consolidated	$	3,254		$	3,329		$	9,917		$	10,383		$	3,187	$	3,268	$	6,441		$	6,663
Operating profit
U.S. Morning Foods	$	144		$	110		$	457		$	368		$	176	$	165	$	336		$	313
U.S. Snacks ~~(a)~~	78			62			230			302			22		69		(22		)	152
U.S. Specialty	68			63			214			200			70		60		166			146
North America Other	43			44			135			140			59		47		108			92
Europe	78			73			216			191			76		68		142			138
Latin America ~~(b)~~(a)	27			7			70			2			26		20		59			43
Asia Pacific	21			14			50			36			19		12		41			29
Total Reportable Segments	459			373			1,372			1,239			448		441		830			913
Corporate ~~(c)~~(b)	(49		)	(39		)	(75		)	(109		)	5		8		(17		)	(26		)
Consolidated	$	410		$	334		$	1,297		$	1,130		$	453	$	449	$	813		$	887


(a)	Includes ~~a non-cash gain of $67 million associated with the deconsolidation of a VIE during the year-to-date period ended October 3, 2015.~~

~~(b)~~

~~Includes~~ non-cash losses totaling $7 million and $13 million associated with the remeasurement of the financial statements of the Company's Venezuela subsidiary during the quarter ~~ended October 3, 2015. Includes a non-cash loss of $13 million~~ and ~~$115 million associated with the remeasurement of the financial statements of the Company's Venezuela subsidiary during the~~ year-to-date periods ended ~~October 1,~~July 2, 2016, ~~and~~ ~~October 3, 2015,~~ respectively.

~~(c)~~(b)

Includes mark-to-market adjustments for pension and postretirement plans, commodity and foreign currency contracts totaling ~~$(31)~~$7 million and ~~($27)~~$20 million for the quarters ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 2016, respectively. Includes mark-to-market adjustments for pension and postretirement plans, commodity and foreign currency contracts totaling ($~~35)~~14) million and ($~~59)~~4) million for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 2016, respectively.

~~Note 15 Subsequent events~~

In October 2016, the Company announced that it entered into an agreement to acquire Ritmo Investimentos, the controlling shareholder of Parati, a manufacturer of biscuit, powdered beverage and pasta brands in Brazil for R$1.38 billion ($424 million USD at October 1, 2016). The agreement is subject to customary closing conditions, is expected to close in the fourth quarter of 2016 and be funded through anticipated reductions in share repurchases increasing cash on hand and short term borrowings.

KELLOGG COMPANY

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Kellogg Company, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this report.

For more than 100 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. Kellogg is the world’s leading producer of cereal, second largest producer of cookies and crackers, and a leading producer of savory snacks and frozen foods. Additional product offerings include toaster pastries, cereal bars, fruit-flavored snacks and veggie foods. Kellogg products are manufactured and marketed globally.

~~Segments~~Corporate responsibility and ~~growth~~sustainability

As a grain-based food company, our success is dependent on timely access to high quality, low cost ingredients, and water and energy for our global manufacturing operations. We rely on natural capital including energy for product manufacturing and distribution, water as an ingredient, for facility cleaning and steam power, and food crops and commodities as an ingredient. These natural capital dependencies are at risk of shortage, price volatility, regulation, and quality impacts due to climate change which is assessed as part of our overall enterprise risk management program. Due to these risks, we have implemented major short and long-term initiatives to mitigate and adapt to these environmental pressures, as well as the resulting challenges of food security.

To address these risks, we partner with suppliers, customers, governments and non-governmental organizations, including the World Business Council for Sustainable Development and the Consumer Goods Forum. We are also committed to improving efficiency and technologies in our owned manufacturing footprint by reducing water use, total waste, energy use, and greenhouse gas (GHG) emissions as well as working across our supply chain with the goal of reducing risk of disruptions from unexpected constraints in natural resource availability or impacts on raw material pricing. In addition, we established third-party approved science-based targets to measure progress against our goal to significantly reduce absolute GHG emissions across our own footprint and that of our suppliers. In 2016, we expanded our global signature cause platform, Breakfasts for Better Days, with the intent to help address hunger relief and food security.

We have incorporated the risks and opportunities of climate change and food security into the Global 2020 Growth Strategy and Global Heart and Soul Strategy by continuing to identify risk, incorporating environmental and social indicators into strategic priorities and reporting regularly to leadership, the board of directors, and publicly. Future reporting on our environmental and social risks and performance against targets will be included in our Annual Report on Form 10-K.

Segments

We manage our operations through nine operating segments that are based on product category or geographic location. These operating segments are evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. We report results of operations in the following reportable segments: U.S. Morning Foods; U.S. Snacks; U.S. Specialty; North America Other; Europe; Latin America; and Asia Pacific. The reportable segments are discussed in greater detail in Note 1412 within Notes to Consolidated Financial Statements.

We manage our Company for sustainable performance as defined by our long-range annual growth targets. Our targeted long-range annual growth is low-single-digit (1 to 3%) for currency-neutral comparable net sales, mid-single-digit (4 to 6%) for currency-neutral comparable operating profit, and high-single-digit (7 to 9%) for currency-neutral comparable diluted net earnings per share (EPS).

Operating ~~Margin Expansion by~~margin expansion through 2018

~~We have recently~~In 2016 we announced a plan to ~~expand~~increase our currency-neutral comparable operating ~~margin excluding Venezuela by~~margin. Specifically, we are targeting an expansion of 350 basis points during 2016 through 2018, reaching approximately 18%. This is an increase and acceleration from our previous guidance, which targeted a 17-18% currency-neutral comparable operating margin excluding Venezuela by 2020.

points. There are four elements to this ~~accelerated~~ margin expansion plan:

Productivity and savings - In addition to annual productivity savings to offset inflation, we ~~will expand~~have expanded our Project K restructuring program, and we have expanded our zero-based budgeting initiative in the U.S. and our international regions. ~~We also~~These initiatives are ~~working on additional Project K initiatives. The~~expected to result ~~of these initiatives should be~~in higher annual savings.

Price ~~Realization~~and Mix - We ~~will establish~~have established a more formal Revenue Growth Management discipline around the world, to help us ~~realize price in~~ensure our products and pack-sizes are priced correctly, and that we are generating a ~~more effective way.~~positive mix of sales volume.

Investing for Impact - We are updating our investment model to align with today's consumer and technology in order to optimize the return on investment in our brands.

On-Trend Foods and Packaging - We are adopting a more impactful approach to renovation and innovation of our foods.

~~While~~During this time period, we ~~intend~~will be working to ~~return to growth during the execution of this initiative, we believe it is prudent to moderate our currency-neutral comparable~~stabilize net sales, ~~growth excluding Venezuela outlook~~with an aim to ~~approximately flat. This reflects both the current industry dynamics as well as the result of some of the operating~~returning to growth. Accordingly, our margin expansion ~~efforts which could impact price elasticity~~target incorporates continued investment in food and ~~portfolio optimization. Nevertheless, these~~packaging, investment in new capabilities, and an increase in brand investment in our U.S. Snacks business. These margin-expansion actions are expected to drive accelerated growth in currency-neutral comparable operating profit ~~excluding Venezuela~~ and currency neutral comparable earnings ~~growth~~per share in 2017 and 2018.

In March 2017, the ~~third~~Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) changing the presentation of net periodic pension and postretirement benefit costs within the income statement. The ASU requires all components of net periodic benefit cost, other than service cost, be presented in the income statement outside of income from operations. We expect to adopt the ASU retrospectively in the first quarter of 2018. The impact of adoption, when applied retrospectively, is expected to reduce our ~~brand building declined~~2015 currency-neutral comparable operating margin, the basis for our 350 basis point improvement target, by approximately ~~1 point as a percent~~175-185 basis points. The adoption, which is anticipated to ~~net sales~~impact only the Corporate segment, and ~~we expect a similar level~~not expected to impact our ability to achieve 350 basis points of ~~reduction for the full year. This was driven~~currency-neutral comparable operation margin expansion from this new base by the ~~evolution~~end of 2018. See the Accounting standards to be adopted in future periods section of the model to build brands from traditional TV media to digital and social media as well as efficiency and effectiveness benefits associated with our zero-based budgeting initiative. We remain committed to investing behind our brands and ensuring our investment hasMD&A for additional information regarding the ~~appropriate~~ impact ~~and return on investment to drive profitable revenue growth.~~

of this ASU.

Guidance on operating profit margin expansion and net sales growth outlook is provided on a non-GAAP, currency-neutral comparable basis ~~excluding Venezuela~~ only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. Please refer to the "Non-GAAP Financial Measures" section for a further discussion of our use of non-GAAP measures, including quantification of known expected adjustment items.

Non-GAAP ~~Financial Measures~~financial measures

This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.

Non-GAAP financial measures used include comparable net sales, comparable gross margin, comparable ~~SGA,~~SG&A, comparable operating profit, comparable operating profit margin, comparable effective tax rate, comparable net income, ~~attributable to Kellogg Company,~~ comparable diluted EPS, and cash flow. These non-GAAP financial measures are also evaluated for year-over-year growth and on a currency-neutral basis to evaluate the underlying growth of the business and to exclude the effect of foreign currency. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.

Comparable net sales: We adjust the GAAP financial measures to exclude the pre-tax effect of acquisitions, ~~divestitures,~~ and ~~shipping day differences.~~divestitures. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing this non-GAAP net sales measure, management intends to

provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses this non-GAAP measure to evaluate the effectiveness of initiatives behind net sales growth, ~~pricing~~price realization, and the impact of mix on our business results. This non-GAAP measure is also used to make decisions regarding the future direction of our business, and for resource allocation decisions. Currency-neutral comparable net sales represents comparable net sales excluding the impact of foreign currency.

Comparable gross profit, comparable gross margin, comparable ~~SGA,~~SG&A, comparable ~~SGA%~~SG&A%, comparable operating profit, comparable operating profit margin, comparable net income, ~~attributable to Kellogg Company,~~ and comparable diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, acquisitions, divestitures, integration costs, mark-to-market adjustments for pension plans, commodities and certain foreign currency contracts, costs associated with the ~~VIE deconsolidation, costs associated with the~~ early redemption of debt outstanding, and ~~costs associated with~~impacts of the prior-year Venezuela ~~remeasurement.~~remeasurement and deconsolidation. We excluded the items which we believe may obscure trends in our underlying profitability. The impact of acquisitions and divestitures are not excluded from comparable diluted EPS. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, such as Project K, ZBB and Revenue Growth Management, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments. Currency-neutral comparable represents comparable excluding foreign currency impact.

Comparable effective tax rate: We adjust the GAAP financial measure to exclude tax effect of Project K and cost reduction activities, divestitures, integration costs, mark-to-market adjustments for pension plans, commodities and certain foreign currency contracts, costs associated with the ~~Venezuela remeasurement, costs associated with the VIE deconsolidation,~~early redemption of debt outstanding, and costs associated with ~~the early redemption of debt outstanding.~~prior-year Venezuela remeasurement. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our underlying tax rate. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.

Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.

These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.

Significant items impacting comparability

Project K and cost reduction activities

~~During 2013, we~~In February 2017, the Company announced ~~Project K, a four-year~~an expansion and an extension to its previously-announced global efficiency and effectiveness ~~program. The~~ program ("Project K"). Project K is expected to ~~generate~~continue generating a significant amount of savings that may be invested in key strategic areas of focus for the business. ~~We expect~~The Company expects that ~~this investment will~~these savings may be used to drive future growth in ~~revenues, gross margin, operating profit, and cash flow.~~the business. We recorded pre-tax charges related to this program of ~~$36~~$96 million and ~~$143~~$237 million for the quarter and year-to-date periods ended ~~October~~July 1, ~~2016,~~2017, respectively. We also recorded pre-tax charges of ~~$85~~$60 million and ~~$243~~$107 million for the quarter and year-to-date periods ended ~~October 3, 2015,~~July 2, 2016, respectively.

In 2015 we initiated the implementation of a ~~zero-based budgeting~~Zero-Based Budgeting (ZBB) program in our North America business. During 2016 ZBB ~~is being~~was expanded to include ~~the~~ international segments of the business. In support of the ZBB initiative, we incurred pre-tax charges of $4less than $1 million for the quarter ended July 1, 2017 and $1 million for the year-to-date period ended July 1, 2017. We also incurred pre-tax charges of $12 million and ~~$21~~$17 million for the quarter and year-to-date periods ended ~~October 1, 2016.~~July 2, 2016, respectively.

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

Acquisitions

In ~~September 2015, we completed~~December 2016, the ~~acquisition~~Company acquired Ritmo Investimentos, controlling shareholder of ~~Mass Foods, Egypt's~~Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading ~~cereal company~~Brazilian food group for ~~$46 million,~~approximately BRL 1.38 billion ($381 million) or ~~$44~~$379 million, net of cash and cash ~~equivalents acquired.~~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 ~~October~~July 1, ~~2016 represented the final reporting period~~2017 and resulted in ~~which year-over-year comparability was impacted for this acquisition.~~a purchase price reduction of BRL 14 million ($4 million). In our ~~European~~Latin America reportable segment, for the quarter ended ~~October~~July 1, ~~2016~~2017 the acquisition added $6$46 million in net sales and ~~less than $1~~$4 million of operating profit (before integration costs) that impacted the comparability of our reported results. For the year-to-date period ended ~~October~~July 1, ~~2016~~2017 the acquisition added ~~$16~~$93 million in net sales and ~~approximately $2 million in operating profit (before integration costs) that impacted comparability of our reported results.~~

In January 2015, we completed the acquisition of a majority interest in Bisco Misr, the number one packaged biscuits company in Egypt for $125 million, or $117 million net of cash and cash equivalents acquired. The quarter ended April 2, 2016 represented the final reporting period in which year-over-year comparability was impacted for this acquisition. In our European reportable segment, the acquisition added $9 million in net sales and less than $1$12 million of operating profit (before integration costs) that impacted the comparability of our reported ~~results for the year-to-date period ended October 1, 2016.~~

~~Integration costs~~

We have incurred integration costs related to the integration of the 2015 acquisitions of Bisco Misr and Mass Foods, the 2015 entry into a joint venture with Tolaram Africa, and the 2012 acquisition of Pringles (integration completed in 2015) as we move these businesses into the Kellogg business model. We recorded pre-tax integration costs that were approximately $2 million and $3 million for the quarter and year-to-date periods ended October 1, 2016, respectively. We also recorded integration costs of $8 million and $22 million for the quarter and year-to-date periods ended October 3, 2015, respectively.

results.

Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts

We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans are recognized in the year they occur. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur. ~~During the quarter~~We recorded total pre-tax mark-to-market benefit of $7 million and ~~year-to-date periods ended October 1, 2016, we recognized~~ a pre-tax ~~mark-to-market~~ charge of $28 million related to the remeasurement of a U.S. pension plan as a result of current year distributions in excess of service and interest costs. The amount of the remeasurement loss recognized during the quarter was due to an unfavorable change in the discount rate relative to prior year.

~~We also recorded a pre-tax mark-to-market charge of $3 million and $7~~$14 million for the quarter and year-to-date periods ended ~~October~~July 1, ~~2016,~~2017, respectively. We also recorded a pre-tax mark-to-market benefit of $20 million and a pre-tax charge of ~~$27 million and $59~~$4 million for the quarter and year-to-date periods ended ~~October 3, 2015,~~July 2, 2016, respectively.

Other costs impacting comparability

During the quarter ended April 2, 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031. ~~During that same quarter, in~~In connection with the debt redemption, we incurred $153 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees related to the tender offer. ~~Refer to Note 7 within the Notes to Consolidated Financial Statements for further information.~~

~~During~~Venezuela

There was a material change in the business environment, including a worsening of our access to key raw materials subject to restrictions, and a related significant drop in production volume in the fourth quarter of 2016. These supply chain disruptions, along with other factors such as the worsening economic environment in Venezuela and the limited access to dollars to import goods through the use of any of the available currency mechanisms, have impaired our ability to effectively operate and fully control our Venezuelan subsidiary.

As of December 31, 2016, we deconsolidated and changed to the cost method of accounting for our Venezuelan subsidiary. For the quarter ended July ~~4, 2015, a series~~2, 2016 the deconsolidation reduced net sales by $7 million and operating profit by less than $1 million which impacted the comparability of ~~previously executed agreements between Kellogg's and a third party variable interest entity (VIE) were terminated resulting in~~ our determination that we were no longer the primary beneficiary of the VIE. Accordingly, we deconsolidated the financial statements of the VIE as of the end of the quarter. As a result of the agreement terminations and related settlements, we recognized a gain of $6 million in Other income (expense), net during the quarter. This gain, in combination with a related $25 million charge that was recorded during the quarter ended April 4, 2015, resulted in a net loss of $19 million in Other income (expense), net forreported results. For the year-to-date period ended July ~~4, 2015.~~2, 2016 the deconsolidation reduced net sales by $16 million and operating profit by $5 million which impacted the comparability of our reported results.

In connection with the deconsolidation that occurred during the quarter, we 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 operating profit. Refer to Note 6 within the Notes to Consolidated Financial Statements for further information.

~~Venezuela remeasurement~~

During 2015 we experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the DIPRO (formerly CENCOEX) exchange. Due to this reduced availability of U.S. dollars and upon review of U.S. dollar cash needs in our Venezuela operations as of the quarter ended July 4, 2015, we concluded that we were no longer able to obtain sufficient U.S. dollars on a timely basis through the DIPRO exchange resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the DICOM (formerly SIMADI) rate. In connection with the change in rates, we evaluated the carrying value of our non-monetary assets for impairment and lower of cost or market adjustments. As a result of moving from the CENCOEX official rate to the SIMADI rate, we recorded pre-tax charges totaling $152 million in the quarter ended July 4, 2015, including $112 million in the Latin America operating segment and $40 million in the Corporate operating segment. Of the total charges, $100 million was recorded in COGS, $3 million was recorded in SGA, and $49 million was recorded in Other income (expense), net. These charges consisted of $47 million related to the remeasurement of net monetary assets denominated in Venezuelan bolivar at the SIMADI exchange rate (recorded in Other income (expense), net), $56 million related to reducing inventory to the lower of cost or market (recorded in COGS) and $49 million related to the impairment of long-lived assets in Venezuela (recorded primarily in COGS).

~~We have evaluated all of the facts and circumstances surrounding our Venezuelan business and determined that as of October 1,~~ 2016 ~~the DICOM rate continues to be the appropriate rate to use for remeasuring our Venezuelan subsidiary’s financial statements.~~

~~Following the change to the SIMADI rate as of July 4, 2015,~~ certain non-monetary assets related to our Venezuelan subsidiary continued to be remeasured at historical exchange rates. As these assets were utilized by our Venezuelan subsidiary during ~~the second half of 2015 and first quarter of~~ 2016 they were recognized in the income statement at historical exchange rates resulting in an unfavorable impact. ~~We experienced an unfavorable pre-tax impact~~As a result of ~~approximately $4 million in the year-to-date period ended October 1, 2016 and $13 million during the~~

~~quarter and year-to-date periods ended October 3, 2015 related to~~ the utilization of ~~these~~the remaining non-monetary ~~assets.~~

~~Additionally, with the introduction of the new DICOM floating rate in February 2016~~assets, we experienced an unfavorable pre-tax impact of approximately $7$5 million inand $11 million during the quarter and year-to-date ~~period~~periods ended ~~October 1,~~July 2, 2016, ~~related to the utilization of non-monetary assets. These non-monetary assets were recognized in the income statement at historical exchange rates and~~ primarily ~~impacted~~impacting COGS.

Foreign currency translation ~~and the impact of Venezuela~~

We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period.

As a result of our decision to change the exchange rate that we use to remeasure our Venezuela subsidiary from DIPRO (formerly CENCOEX) to the DICOM (formerly SIMADI) exchange rate beginning mid-2015, the methodology we use to calculate the impact of foreign currency translation, as described above, results in certain key performance metrics that are difficult to interpret when Venezuela is included in the financial results. The impact of this change in Venezuela exchange rates on year-over-year performance metrics is anticipated to be most significant for the four quarters ended July 2, 2016. To provide additional visibility to our business performance, we have also included key performance metrics excluding our Venezuela business. We believe the use of our standard currency-neutral methodology in combination with the additional visibility provided by excluding Venezuela from our key performance metrics provides important information to more fully understand currency-neutral operating results during this four-quarter transition.

Financial results

For the quarter ended ~~October~~July 1, ~~2016,~~2017, our reported net sales declined by ~~2.2%~~2.5% due to soft consumption trends in the ~~translational impact of foreign currency~~U.S. and ~~lower volume as a result of trade-inventory reductions~~reduced merchandising activity in ~~U.S. cereal and toaster pastries, softness in U.K. cereal, and the portfolio transitions in our U.S. Frozen and Kashi businesses.~~Europe related to pricing actions on Pringles. These declines were partially offset by the impact of the Parati acquisition, and growth in ~~several businesses including U.S. Snacks,~~ U.S. Specialty ~~Asia-Pacific~~ and ~~Latin America.~~Asia-Pacific. Currency-neutral comparable net sales were down ~~1.0%~~3.1% after eliminating the impact of acquisitions, foreign currency, and ~~down 1.6% excluding the impact of Venezuela.~~prior year Venezuela results.

Reported operating profit increased ~~by 22.9%~~0.7%, ~~primarily the result of reduced~~as productivity savings more than offset higher restructuring charges ~~expanded margins across all regions resulting from~~related to the Project K restructuring program, which includes this year's exit from its U.S. Snacks segment's Direct Store Delivery sales and ~~ZBB savings.~~delivery system. Currency-neutral comparable operating profit increased by ~~6.8% after eliminating the impact of lower restructuring charges,~~6.9% due to efficiencies in COGS and ~~increased by 5.0% after excluding the favorable impact of Venezuela.~~SG&A expense related to ZBB and Project K.

Reported operating margin for the quarter was favorable ~~260~~40 basis points due primarily to ~~the favorable impact to brand-building investment from ZBB efficiencies,~~COGS and SG&A savings realized from Project K and ZBB ~~and lower~~initiatives partially offset by higher restructuring ~~costs, integration costs, and Venezuela remeasurement.~~charges. Currency-neutral comparable operating margin was favorable ~~110~~160 basis points after excluding the year-over-year impact of restructuring, ~~integration costs,~~mark-to-market, acquisitions, and prior year Venezuela ~~remeasurement, and foreign currency.~~remeasurement.

Reported diluted EPS of ~~$.82~~$.80 for the quarter was up ~~41.4%~~1% compared to the prior year of ~~$.58. Reported diluted EPS for the quarter was impacted favorably by lower restructuring charges, higher~~$.79. Higher operating profit ~~margins~~ and a lower effective tax ~~rate.~~rate more than offset the impact of higher restructuring charges. Currency-neutral comparable diluted EPS of ~~$1.00~~$.98 increased by ~~17.6%~~8% compared to prior year of ~~$.85, ahead of our expectations,~~$.91, due to higher profit margins driven by productivity initiatives and ZBB ~~savings and a lower effective tax rate mainly due to the windfall tax benefit realized from stock option exercise activity in the quarter.~~

savings.

Reconciliation of certain non-GAAP Financial Measures


	Quarter ended						Year-to-date period ended						Quarter ended						Year-to-date period ended
Consolidated results (dollars in millions, except per share data)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Reported net income attributable to Kellogg Company	$	292		$	205		$	747		$	655
Reported net income													$	282		$	280		$	544		$	455
Mark-to-market (pre-tax)	(31		)	(27		)	(35		)	(59		)	7			20			(14		)	(4		)
Project K and cost reduction activities (pre-tax)	(40		)	(85		)	(164		)	(243		)	(96		)	(72		)	(238		)	(124		)
Other costs impacting comparability (pre-tax)	—			—			(153		)	48			—			—			—			(153		)
Integration costs (pre-tax)	(1		)	(7		)	(1		)	(19		)
Integration and transaction costs (pre-tax)													—			—			(1		)	(1		)
Venezuela operations impact (pre-tax)													—			—			—			5
Venezuela remeasurement (pre-tax)	—			(13		)	(11		)	(165		)	—			(5		)	—			(11		)
Income tax benefit applicable to adjustments, net*	24			36			109			115			31			16			81			83
Comparable net income attributable to Kellogg Company	$	340		$	301		$	1,002		$	978
Comparable net income													$	340		$	321		$	716		$	660
Foreign currency impact	(16		)				(179		)				(5		)				(14		)
Currency-neutral comparable net income attributable to Kellogg Company	$	356					$	1,181
Currency-neutral comparable net income													$	345					$	730
Reported diluted EPS	$	0.82		$	0.58		$	2.11		$	1.84		$	0.80		$	0.79		$	1.54		$	1.29
Mark-to-market (pre-tax)	(0.09		)	(0.08		)	(0.10		)	(0.17		)	0.02			0.05			(0.04		)	(0.01		)
Project K and cost reduction activities (pre-tax)	(0.11		)	(0.24		)	(0.46		)	(0.68		)	(0.27		)	(0.20		)	(0.67		)	(0.35		)
Other costs impacting comparability (pre-tax)	—			—			(0.43		)	0.13			—			—			—			(0.43		)
Integration costs (pre-tax)	(0.01		)	(0.01		)	(0.01		)	(0.05		)
Venezuela operations impact (pre-tax)													—			—			—			0.01
Venezuela remeasurement (pre-tax)	—			(0.04		)	(0.03		)	(0.46		)	—			(0.01		)	—			(0.03		)
Income tax benefit applicable to adjustments, net*	0.07			0.10			0.31			0.32			0.08			0.04			0.22			0.24
Comparable diluted EPS	$	0.96		$	0.85		$	2.83		$	2.75		$	0.97		$	0.91		$	2.03		$	1.86
Foreign currency impact	(0.04		)				(0.50		)				(0.01		)				(0.04		)
Currency-neutral comparable diluted EPS	$	1.00					$	3.33					$	0.98					$	2.07
Currency-neutral comparable diluted EPS growth	17.6		%	2.1		%	21.1		%	(0.3		)%	7.7		%	5.6		%	11.3		%	3.2		%

* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Net sales and operating profit

The following tables provide an analysis of net sales and operating profit performance for the ~~third~~second quarter of ~~2016~~2017 versus ~~2015:~~

2016:

Quarter ended October 1, 2016 ��
(millions)
U.S.
Morning
Foods

U.S.
Snacks

U.S.
Specialty

North
America
Other
Europe
Latin
America

Asia
Pacific
Corporate
Kellogg
Consolidated
Reported net sales $ 733
$ 796
$ 284
$ 402
$ 594
$ 197
$ 248
$ —
$ 3,254
Project K and cost reduction activities —
—
—
—
—
—
—
—
—
Integration costs and acquisitions/divestitures —
—
—
1
6
—
—
—
7
Differences in shipping days —
—
—
—
—
—
—
—
—
Comparable net sales $ 733
$ 796
$ 284
$ 401
$ 588
$ 197
$ 248
$ —
$ 3,247
Comparable net sales excluding Venezuela $ 190
$ 3,240
Foreign currency impact —
—
—
1
(33 ) (29 ) 12
—
(49 )
Currency-neutral comparable net sales $ 733
$ 796
$ 284
$ 400
$ 621
$ 226
$ 236
$ —
$ 3,296
Currency-neutral comparable net sales excluding Venezuela $ 200
$ 3,270
Quarter ended October 3, 2015
(millions)
U.S.
Morning
Foods

U.S.
Snacks

U.S.
Specialty

North
America
Other
Europe
Latin
America

Asia
Pacific
Corporate
Kellogg
Consolidated
Reported net sales $ 762
$ 795
$ 281
$ 426
$ 628
$ 202
$ 235
$ —
$ 3,329
Project K and cost reduction activities —
—
—
—
(2 ) —
—
—
(2 )
Integration costs and acquisitions/divestitures —
—
—
—
—
—
2
—
2
Differences in shipping days —
—
—
—
—
—
—
—
—
Comparable net sales $ 762
$ 795
$ 281
$ 426
$ 630
$ 202
$ 233
$ —
$ 3,329
Comparable net sales excluding Venezuela $ 198
$ 3,325
% change - 2016 vs. 2015:
Reported growth (3.8 )% 0.1 % 1.1 % (5.7 )% (5.4 )% (2.2 )% 5.4 % — % (2.2 )%
Project K and cost reduction activities — % — % — % — % 0.3 % — % — % — % 0.1 %
Integration costs and acquisitions/divestitures — % — % — % 0.2 % 0.9 % — % (0.7 )% — % 0.2 %
Differences in shipping days — % — % — % — % — % — % — % — % — %
Comparable growth (3.8 )% 0.1 % 1.1 % (5.9 )% (6.6 )% (2.2 )% 6.1 % — % (2.5 )%
Comparable growth excluding Venezuela (3.8 )% (2.6 )%
Foreign currency impact — % — % — % 0.3 % (5.2 )% (14.2 )% 5.1 % — % (1.5 )%
Currency-neutral comparable growth (3.8 )% 0.1 % 1.1 % (6.2 )% (1.4 )% 12.0 % 1.0 % — % (1.0 )%
Currency-neutral comparable growth excluding Venezuela 1.8 % (1.6 )%



Quarter ended July 1, 2017
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	679		$	803		$	276		$	391		$	566		$	234		$	238		$	—		$	3,187
Acquisitions	—			—			—			—			4			46			—			—			50
Comparable net sales	$	679		$	803		$	276		$	391		$	562		$	188		$	238		$	—		$	3,137
Foreign currency impact	—			—			—			(5		)	(23		)	(1		)	6			—			(23		)
Currency-neutral comparable net sales	$	679		$	803		$	276		$	396		$	585		$	189		$	232		$	—		$	3,160
Quarter ended July 2, 2016
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	727		$	803		$	271		$	406		$	629		$	204		$	228		$	—		$	3,268
Venezuela operations impact	—			—			—			—			—			7			—			—			7
Comparable net sales	$	727		$	803		$	271		$	406		$	629		$	197		$	228		$	—		$	3,261
% change - 2017 vs. 2016:
Reported growth	(6.6		)%	—		%	1.8		%	(3.6		)%	(10.0		)%	14.8		%	4.3		%	—		%	(2.5		)%
Acquisitions	—		%	—		%	—		%	—		%	0.6		%	22.4		%	—		%	—		%	1.5		%
Venezuela operations impact	—		%	—		%	—		%	—		%	—		%	(2.7		)%	—		%	—		%	(0.2		)%
Comparable growth	(6.6		)%	—		%	1.8		%	(3.6		)%	(10.6		)%	(4.9		)%	4.3		%	—		%	(3.8		)%
Foreign currency impact	—		%	—		%	—		%	(1.0		)%	(3.6		)%	(0.9		)%	2.2		%	—		%	(0.7		)%
Currency-neutral comparable growth	(6.6		)%	—		%	1.8		%	(2.6		)%	(7.0		)%	(4.0		)%	2.1		%	—		%	(3.1		)%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.


Quarter ended October 1, 2016
Quarter ended July 1, 2017																												Quarter ended July 1, 2017
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated				U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	144		$	78		$	68		$	43		$	78		$	27		$	21		$	(49	)	$	410			$	176		$	22		$	70		$	59		$	76		$	26		$	19		$	5		$	453
Mark-to-market	—			—			—			—			—			—			—			(31		)	(31		)		—			—			—			—			—			—			—			7			7
Project K and cost reduction activities	(4		)	(8		)	(1		)	(7		)	(6		)	(2		)	(2		)	(10		)	(40		)		(1		)	(79		)	(1		)	(2		)	(2		)	(3		)	(3		)	(5		)	(96		)
Other costs impacting comparability	—			—			—			—			—			—			—			—			—
Integration costs and acquisitions/divestitures	—			—			—			—			—			1			—			(2		)	(1		)
Differences in shipping days	—			—			—			—			—			—			—			—			—
Venezuela remeasurement	—			—			—			—			—			—			—			—			—
Acquisitions																													—			—			—			—			—			4			—			—			4
Comparable operating profit	$	148		$	86		$	69		$	50		$	84		$	28		$	23		$	(6	)	$	482			$	177		$	101		$	71		$	61		$	78		$	25		$	22		$	3		$	538
Comparable operating profit excluding Venezuela																$	25					$	(6	)	$	479
Foreign currency impact	—			—			—			1			(8		)	(9		)	2			(3		)	(17		)		—			—			—			(1		)	(4		)	—			1			(2		)	(6		)
Currency-neutral comparable operating profit	$	148		$	86		$	69		$	49		$	92		$	37		$	21		$	(3	)	$	499			$	177		$	101		$	71		$	62		$	82		$	25		$	21		$	5		$	544
Currency-neutral comparable operating profit excluding Venezuela																$	28					$	(4	)	$	489
Quarter ended October 3, 2015
Quarter ended July 2, 2016																												Quarter ended July 2, 2016
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated				U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	110		$	62		$	63		$	44		$	73		$	7		$	14		$	(39	)	$	334			$	165		$	69		$	60		$	47		$	68		$	20		$	12		$	8		$	449
Mark-to-market	—			—			—			—			—			—			—			(27		)	(27		)		—			—			—			—			—			—			—			20			20
Project K and cost reduction activities	(30		)	(15		)	(1		)	(11		)	(12		)	(1		)	(2		)	(13		)	(85		)		(4		)	(34		)	(1		)	(4		)	(14		)	(4		)	(4		)	(7		)	(72		)
Other costs impacting comparability	—			—			—			—			—			—			—			—			—
Integration costs and acquisitions/divestitures	—			—			—			—			—			(2		)	(4		)	(1		)	(7		)
Differences in shipping days	—			—			—			—			—			—			—			—			—
Venezuela remeasurement	—			—			—			—			—			(13		)	—			—			(13		)		—			—			—			—			—			(7		)	—			—			(7		)
Comparable operating profit	$	140		$	77		$	64		$	55		$	85		$	23		$	20		$	2		$	466			$	169		$	103		$	61		$	51		$	82		$	31		$	16		$	(5	)	$	508
Comparable operating profit excluding Venezuela																$	22					$	2		$	465
% change - 2016 vs. 2015:
% change - 2017 vs. 2016:																												% change - 2017 vs. 2016:
Reported growth	31.8		%	26.7		%	7.8		%	(5.2		)%	8.8		%	255.8		%	59.2		%	(28.6		)%	22.9		%		6.4		%	(68.0		)%	16.9		%	26.1		%	11.9		%	29.2		%	57.1		%	(44.9		)%	0.7		%
Mark-to-market	—		%	—		%	—		%	—		%	—		%	—		%	—		%	45.0		%	0.9		%		—		%	—		%	—		%	—		%	—		%	—		%	—		%	(126.2		)%	(3.1		)%
Project K and cost reduction activities	25.8		%	14.5		%	0.3		%	7.3		%	9.2		%	(13.5		)%	11.3		%	420.8		%	14.4		%		1.4		%	(66.6		)%	1.6		%	8.6		%	16.9		%	6.6		%	16.8		%	(110.3		)%	(4.2		)%
Other costs impacting comparability	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Integration costs and acquisitions/divestitures	—		%	—		%	—		%	(0.1		)%	0.4		%	34.3		%	29.1		%	(124.2		)%	1.2		%
Differences in shipping days	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Integration and transaction costs																													—		%	—		%	—		%	—		%	0.4		%	(2.0		)%	1.5		%	—		%	—		%
Acquisitions																													—		%	—		%	—		%	—		%	(0.3		)%	19.2		%	—		%	—		%	0.8		%
Venezuela operations impact																													—		%	—		%	—		%	—		%	—		%	(0.8		)%	—		%	(1.5		)%	—		%
Venezuela remeasurement	—		%	—		%	—		%	—		%	—		%	206.6		%	—		%	—		%	3.1		%		—		%	—		%	—		%	—		%	—		%	22.5		%	—		%	—		%	1.3		%
Comparable growth	6.0		%	12.2		%	7.5		%	(12.4		)%	(0.8		)%	28.4		%	18.8		%	(370.2		)%	3.3		%		5.0		%	(1.4		)%	15.3		%	17.5		%	(5.1		)%	(16.3		)%	38.8		%	193.1		%	5.9		%
Comparable growth excluding Venezuela																20.8		%				(360.3		)%	2.9		%
Foreign currency impact	—		%	—		%	—		%	0.4		%	(9.0		)%	(40.4		)%	12.4		%	(96.7		)%	(3.5		)%		—		%	—		%	—		%	(1.0		)%	(4.0		)%	(1.7		)%	3.9		%	(41.2		)%	(1.0		)%
Currency-neutral comparable growth	6.0		%	12.2		%	7.5		%	(12.8		)%	8.2		%	68.8		%	6.4		%	(273.5		)%	6.8		%		5.0		%	(1.4		)%	15.3		%	18.5		%	(1.1		)%	(14.6		)%	34.9		%	234.3		%	6.9		%
Currency-neutral comparable growth excluding Venezuela																30.8		%				(262.3		)%	5.0		%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

U.S. Morning Foods

~~As Reported and Currency-neutral comparable net sales declined 3.8% as a result of decreased volume and unfavorable pricing/mix.~~ This segment consists of cereal, toaster pastries, and health and wellness bars.

As reported and Currency-neutral comparable net sales declined 6.6% as a result of decreased volume partially offset by favorable pricing/mix. Volume declined as a ~~slight category decline and a sharp reduction in trade inventories, net sales decreased. Despite~~result of lower ~~sales, we gained 20 basis points of~~category-wide consumption.

Our Core 6 cereal brands collectively held share induring the quarter, led by ~~our six core~~taste-oriented brands ~~due~~like Froot Loops and Frosted Flakes, which continue to ~~focused investment activity.~~

~~We have many of the highest velocity 2016 innovations, maintaining~~gain share behind effective media and innovation, ~~share leadership, led by~~respectively. Special K

~~Nourish~~shipments were down year-on-year, ~~Smorz~~, but improved sequentially and ~~our~~ returned to share growth in June~~Finding Dory~~ licensed cereal. In addition, we executed well during the key Back-to-School period, which coincided with our Olympics activation. This year’s Olympics program generated over 1.8 billion impressions at 30% less cost than our prior summer Olympics programs – this was driven by a greater focus on social activation and it demonstrates our new marketing model at work..

Toaster pastries grew share by 50 basis points during the ~~quarter. However, net sales declined for~~quarter despite lower consumption in the ~~quarter due to a reduction in trade inventories.~~category.

As ~~Reported~~reported operating profit increased ~~31.8%~~6.4% due to ~~Project K savings, brand-building efficiencies resulting from ZBB,~~productivity initiatives and reduced restructuring ~~charges. This was~~charges partially offset by ~~unfavorable sales performance.~~lower net sales. Currency-neutral comparable operating profit increased ~~6.0%, less than As Reported~~5.0% after ~~eliminating the benefit of reduced~~excluding restructuring charges.

U.S. Snacks

This segment consists of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks. As ~~Reported~~reported and Currency-neutral comparable net sales were ~~approximately~~ flat ~~as a result~~versus the comparable quarter. Price/mix and volume were both roughly flat compared to the second quarter of ~~increased volume partially~~2016. The inventory pipeline-fill of customer warehouses offset ~~by unfavorable pricing/mix. This segment consists~~the consumption impact of ~~crackers, cereal bars, cookies, savory snacks, and fruit-flavored snacks.~~reduced promotional activity in conjunction with conversion from DSD to warehouse distribution.

Crackers ~~posted net sales growth for~~consumption in the ~~quarter. Our~~second quarter declined on category softness and a reduction of promotion activity related to our efforts to smoothly transition out of DSD. However, our big-three brands (Cheez-it^®, Club^®, and Townhouse^®) ~~in combination continued to post good consumption growth and improved share.~~held share during the quarter.

~~The Wholesome Snacks business~~Cookies posted a decline in ~~net sales~~consumption and share for the quarter, owing to reduced promotion activity during our transition out of DSD. However, Keebler Fudge Shoppe maintained consumption and share growth during the quarter.

Wholesome Snacks posted a decline in consumption and share primarily due to certain lines of Special K^® bars and cracker-chips. However, Rice Krispies Treats^® ~~posted sales gains and~~ grew share during the quarter.

~~The cookies business~~Savory snacks posted a ~~sales~~ decline ~~for~~in shipments and share during the quarter ~~as a result of decreased brand-building activity compared to the prior year.~~

~~The savory snacks~~business posted a sales decline. However, core products and our single-serve offerings reported consumption growth. During the remainder of the year, we expect a reduced impact from the elimination of certain non-core products.

~~Single-serve, a key element of our growth strategy, performed well with double-digit consumption gains in cookie/cracker caddy packs and in~~ ~~Pringles~~^®~~snack stacks.~~partially mitigated by favorable price/mix.

As ~~Reported~~reported operating profit ~~improved 26.7%~~declined 68.0% due to increased Project K ~~and brand-building efficiencies resulting from ZBB as well as lower~~ restructuring charges in the current ~~year.~~year associated with our DSD transition. Additionally, we increased brand building investment, as planned, and we also added incremental logistics costs as we resource our warehousing distribution ahead of the exit from DSD. Currency-neutral comparable operating profit ~~increased 12.2%~~decreased 1.4% after excluding the impact of restructuring charges.

U.S. Specialty

As ~~Reported~~reported and Currency-neutral comparable net sales improved ~~1.1%~~1.8% as a result of higher volume and improved pricing/mix ~~which was partially offset~~aided by ~~lower volume.~~innovation and expansion in core and emerging growth channels.

~~Our~~Shipments grew for our three core ~~channels,~~channels; Foodservice, Convenience Stores, and Vending. In Foodservice, our growth was led by the K-12 segment, and in Convenience Stores and Vending ~~posted sales~~ growth ~~for~~was aided by innovation.

In the ~~quarter. We held or gained share in most categories during the~~second quarter ~~driven by increased distribution, effective promotions around the Olympics, and strong innovation performance in K-12.~~we implemented a transformation of our salesforce to a hybrid, direct-and-broker model. This is ~~a critical business for~~expected to offer us stronger focus on core accounts, while expanding our ~~strategic priority to "Win Where~~market coverage across the ~~Shopper Shops".~~Foodservice and Convenience Store channels.

As Reported operating profit increased ~~7.8%~~16.9% due to the ~~favorable~~higher net sales ~~performance~~and savings from Project K and ZBB ~~savings.~~initiatives. Currency-neutral comparable operating profit increased ~~7.5%~~15.3% after excluding the impact of restructuring charges.

North America Other

This segment is composed of our U.S. Frozen Foods, Kashi, and Canada businesses. As ~~Reported~~reported net sales declined ~~5.7%~~3.6% due to decreased volume and unfavorable foreign currency partially offset by favorable pricing/~~mix as each of the businesses in this segment progressed through transitions.~~mix. Currency-neutral comparable net sales declined ~~6.2%~~2.6% after excluding the impact of foreign currency.

The U.S. Frozen business ~~saw a decline in sales in the quarter.~~posted increased shipments due to higher volume partially mitigated by unfavorable price/mix. Eggo^®~~posted sales growth for~~grew share and consumption during the quarter, benefiting from the removal of artificial ingredients and the launch of kid-loved shapes, with ~~particular success with Disney-licensed products, more than offset by~~Mickey Mouse-shaped waffles leading the ~~impact of distribution lost on~~way. Our frozen veggie business, under the Morningstar Farms^®~~as we transitioned~~and Gardenburger^®brands, added another quarter of consumption growth, due to ~~new packaging over the past few quarters. Even as we made these significant changes, the business posted improvement in profit margins, driven by Project K and ZBB.~~our focus on core burger offerings.

In Canada, ~~net sales were down, as expected, resulting from~~shipments decreased during the quarter due to lower volume ~~declines,~~and foreign currency partially offset by ~~improved~~favorable pricing/mix. ~~Beginning~~We are seeing the impacts of our efforts to improve price realization due to transactional foreign exchange pressure and we have started to lap our initial pricing action in the second quarter. Our in-market performance has started to improve, as well. In cereal, our consumption declines moderated sharply, and our base consumption remains strong, and we gained share as a result. In wholesome snacks, we gained share, also with strong base consumption, and Pringles gained consumption and share in the quarter, ~~we increased prices to help offset higher input costs due to significant transactional foreign exchange pressure.~~as well.

Kashi posted lower ~~sales~~shipments in the quarter due to last year's exiting of non-core or less profitable SKUs, promotions, or categories. Our overhauled cereal business grew consumption and share. We also saw improved trends in these channels for the wholesome snacks business, as ~~the business continues to go through the transition of its portfolio. Cereal saw flat share in measured channels~~recent innovations and ~~5% growth in the natural channel. Our substantial innovation and renovation efforts~~media are starting to take hold, and we haven't turned on broad-scale consumer communication yet. Wholesome Snacks sales continue to decline as consumption declined as distribution losses have continued prior to renovation and innovation initiatives planned for 2017.hold.

As Reported operating profit ~~declined 5.2%~~increased 26.1% due to ~~unfavorable sales performance partially offset by~~ lower restructuring charges in addition to Project K and ZBB savings ~~realized in the U.S. Frozen~~partially offset by lower net sales and ~~Canada businesses.~~foreign currency. Currency-neutral comparable operating profit ~~declined 12.8%~~increased 18.5% after excluding the impact of restructuring charges and translational foreign currency.

Europe

As Reported net sales declined ~~5.4%~~10.0% due to unfavorable foreign currency and ~~unfavorable pricing/mix which was~~lower volume partially offset by ~~a slight increase in volume resulting from an acquisition.~~the favorable impact of pricing/mix and acquisitions. Currency-neutral comparable net sales declined ~~1.4%~~7.0% after excluding the impact of foreign currency and ~~the acquisition.~~acquisitions.

Pringles volume was lower due primarily to prolonged negotiations with our customers as we sought to price behind our food and packaging upgrades. These negotiations were resolved by April but caused us to miss out on several second quarter merchandising programs.

~~Currency neutral comparable net sales were off slightly, almost solely due to our~~Cereal shipments declined on lower volume and foreign currency. However, the U.K. cereal business realized sequential improvement as consumption was down significantly less than in the U.K. In the rest of Europe, we posted growth in virtually all of our sub-regions: France/Benelux grew high single-digits, Southern Europe and Mediterrannean/Middle East posted low single-digit growth, and Russia recorded a double-digit gain.recent quarters. We ~~are holding or gaining~~gained share in ~~over half of our Cereal markets, while sustaining strong~~All-family brands like ~~Pringles~~Corn Flakes, Rice Krispies^®, and ~~momentum.~~Crunchy Nut.

As ~~Reported~~reported operating profit increased ~~8.8%~~11.9% due to ~~a reduction in~~lower restructuring charges as well as incremental Project K savings ~~and brand-building efficiencies. This was~~ partially ~~offset~~mitigated by ~~unfavorable~~ foreign ~~currency impact.~~currency. Currency-neutral comparable operating profit ~~improved 8.2%~~declined 1.1% after excluding the impact of restructuring charges, acquisitions and foreign currency.

Latin America

As ~~Reported~~reported net sales ~~declined 2.2%~~improved 14.8% due to ~~unfavorable foreign currency~~increased volume as a result of the Parati acquisition and ~~a decline in volume.~~favorable pricing/mix. This was partially offset by lower volume in the ~~favorable~~base business and the unfavorable impact of ~~pricing/mix, as a result of the inflationary environment in Venezuela. Excluding Venezuela, As Reported net sales declined 3.8% due to unfavorable~~ foreign currency. Currency-neutral comparable net sales ~~increased 12.0%, due to the impact of inflation in Venezuela. Excluding Venezuela, currency-neutral comparable net sales improved 1.8%.~~

We continue to manage well through a difficult business environment. The economic environment throughout the region, including Venezuela, is challenging. We are working through these challenges, and in the quarter we saw broad-based growth across the region in both cereal and snacks. Excluding Venezuela, cereal category share was flat compared to the prior year, with share gains posted in Brazil, Colombia and Puerto Rico.

As Reported operating profit increased 255.8% due to the year-over-year change in Venezuela remeasurement impact, inflation within Venezuela, the favorable impact of brand-building efficiencies, and our productivity efforts and price realization which are starting to flow through to profit margin. This was partially offset by unfavorable foreign currency impact. Currency-neutral comparable operating profit improved 68.8%declined 4.0% after excluding the impact of acquisitions, prior year Venezuela results, and foreign currency.

The integration of Parati, our acquisition in Brazil, continues to progress well, as the business posted solid growth.

Offsetting the impact of Parati, volume of the base business was adversely impacted by softness related to market conditions and distributor transitions in the Caribbean/Central America sub-region. However, our large Mexico business continued to perform well, as did our legacy South America operations.

As reported operating profit increased 29.2%, primarily due to efficiencies from productivity initiatives, the impact of the Parati acquisition, lower restructuring costs, and Venezuela remeasurement. Currency-neutral comparable operating profit decreased 14.6% after excluding the impact of restructuring costs, acquisitions, prior year Venezuela remeasurement and foreign currency. ~~Excluding Venezuela, currency-neutral comparable operating profit improved 30.8%.~~

Asia Pacific

As ~~Reported~~reported net sales improved ~~5.4%~~4.3% due to favorable pricing/mix and foreign currency ~~and favorable pricing/mix~~ partially offset by ~~a slight decrease in~~lower volume. Currency-neutral comparable net sales increased ~~1.0%~~2.1%, after excluding the impact of foreign currency.

~~Our~~Shipments increased in Australia, ~~business continued~~our largest market in the region, due primarily to ~~stabilize, as cereal category share grew slightly versus the same quarter last year as a result of Nutri-Grain renovation, the launch of gluten free products,~~innovation and ~~improved store execution. Additionally,~~renovation. In Asia, we generated growth in ~~emerging markets has reduced~~Korea and Japan with India down modestly because of a short-term disruption from the ~~region's dependence on Australia, as Sub-Saharan Africa~~country's new Goods and Services Tax.

Across the region, our Pringles business posted ~~double-digit net sales~~high single-digit growth for the quarter.

~~Pringles~~^®~~share~~Outside of our reported results, our joint ventures in ~~the region grew at a double-digit rate during the quarter, including strong performance~~West Africa and China continued to perform extremely well. Growth in ~~Japan, Korea, Thailand, Indonesia and South Africa. Share growth~~West Africa was driven by ~~distribution expansion in emerging markets, and innovation, including the introduction of sweet flavors in Korea and the launch of~~ ~~Pringles~~^® ~~Tortilla across the region.~~strong noodles volume. The China JV more than tripled its e-commerce sales.

As ~~Reported~~reported operating profit increased ~~59.2%~~57.1% due to ~~improved~~higher net sales, ~~performance,~~ lower ~~integration costs,~~restructuring charges, and brand-building efficiencies. Currency-neutral comparable operating profit improved ~~6.4%~~34.9% after excluding the impact of restructuring, prior year integration costs and foreign currency.

Corporate

As ~~Reported~~reported operating profit declined $3 million due primarily to higher mark-to-market costs. Currency-neutral comparable operating profit improved $10 million due to ~~increased~~lower pension ~~costs partially offset by favorable year-over-year mark-to-market adjustments related to commodity~~ and ~~foreign currency contracts. Currency-neutral comparable operating profit declined $5 million~~postretirement benefit costs after excluding the impact of mark-to-market, restructuring charges, ~~integration costs~~ and foreign currency.

The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods ~~of 2016 as compared to 2015:~~ended July 1, 2017 versus July 2, 2016:

Year-to-date period ended October 1, 2016
(millions)
U.S.
Morning
Foods

U.S.
Snacks

U.S.
Specialty

North
America
Other
Europe
Latin
America

Asia
Pacific
Corporate
Kellogg
Consolidated
Reported net sales $ 2,227
$ 2,431
$ 931
$ 1,222
$ 1,821
$ 593
$ 692
$ —
$ 9,917
Project K and cost reduction activities —
—
—
—
—
—
—
—
—
Integration costs and acquisitions/divestitures —
—
—
2
25
—
—
—
27
Differences in shipping days —
—
—
—
—
—
—
—
—
Comparable net sales $ 2,227
$ 2,431
$ 931
$ 1,220
$ 1,796
$ 593
$ 692
$ —
$ 9,890
Comparable net sales excluding Venezuela $ 570
$ 9,867
Foreign currency impact —
—
—
(14 ) (80 ) (889 ) (10 ) —
(993 )
Currency-neutral comparable net sales $ 2,227
$ 2,431
$ 931
$ 1,234
$ 1,876
$ 1,482
$ 702
$ —
$ 10,883
Currency-neutral comparable net sales excluding Venezuela $ 630
$ 10,031
Year-to-date period ended October 3, 2015
(millions)
U.S.
Morning
Foods

U.S.
Snacks

U.S.
Specialty

North
America
Other
Europe
Latin
America

Asia
Pacific
Corporate
Kellogg
Consolidated
Reported net sales $ 2,280
$ 2,484
$ 912
$ 1,298
$ 1,885
$ 825
$ 699
$ —
$ 10,383
Project K and cost reduction activities —
—
—
(2 ) (2 ) —
—
—
(4 )
Integration costs and acquisitions/divestitures —
—
—
—
—
—
10
—
10
Differences in shipping days —
—
—
—
(3 ) —
—
—
(3 )
Comparable net sales $ 2,280
$ 2,484
$ 912
$ 1,300
$ 1,890
$ 825
$ 689
$ —
$ 10,380
Comparable net sales excluding Venezuela $ 635
$ 10,190
% change - 2016 vs. 2015:
Reported growth (2.3 )% (2.1 )% 2.1 % (5.8 )% (3.4 )% (28.1 )% (1.1 )% — % (4.5 )%
Project K and cost reduction activities — % — % — % 0.2 % 0.1 % — % — % — % — %
Integration costs and acquisitions/divestitures — % — % — % 0.2 % 1.3 % — % (1.4 )% — % 0.2 %
Differences in shipping days — % — % — % — % 0.2 % — % — % — % — %
Comparable growth (2.3 )% (2.1 )% 2.1 % (6.2 )% (5.0 )% (28.1 )% 0.3 % — % (4.7 )%
Comparable growth excluding Venezuela (10.1 )% (3.2 )%
Foreign currency impact — % — % — % (1.1 )% (4.2 )% (107.9 )% (1.5 )% — % (9.5 )%
Currency-neutral comparable growth (2.3 )% (2.1 )% 2.1 % (5.1 )% (0.8 )% 79.8 % 1.8 % — % 4.8 %
Currency-neutral comparable growth excluding Venezuela (0.5 )% (1.6 )%



Year-to-date period ended July 1, 2017
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	1,398		$	1,584		$	671		$	784		$	1,078		$	456		$	470		$	—		$	6,441
Acquisitions	—			—			—			1			7			93			—			—			101
Comparable net sales	$	1,398		$	1,584		$	671		$	783		$	1,071		$	363		$	470		$	—		$	6,340
Foreign currency impact	—			—			—			(1		)	(62		)	(7		)	15			—			(55		)
Currency-neutral comparable net sales	$	1,398		$	1,584		$	671		$	784		$	1,133		$	370		$	455		$	—		$	6,395
Year-to-date period ended July 2, 2016
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	1,494		$	1,635		$	647		$	820		$	1,227		$	396		$	444		$	—		$	6,663
Venezuela operations impact	—			—			—			—			—			16			—			—			16
Comparable net sales	$	1,494		$	1,635		$	647		$	820		$	1,227		$	380		$	444		$	—		$	6,647
% change - 2017 vs. 2016:
Reported growth	(6.5		)%	(3.1		)%	3.7		%	(4.3		)%	(12.1		)%	15.3		%	5.7		%	—		%	(3.3		)%
Acquisitions	—		%	—		%	—		%	0.2		%	0.6		%	23.4		%	—		%	—		%	1.5		%
Venezuela operations impact	—		%	—		%	—		%	—		%	—		%	(3.7		)%	—		%	—		%	(0.2		)%
Comparable growth	(6.5		)%	(3.1		)%	3.7		%	(4.5		)%	(12.7		)%	(4.4		)%	5.7		%	—		%	(4.6		)%
Foreign currency impact	—		%	—		%	—		%	(0.1		)%	(5.1		)%	(1.9		)%	3.2		%	—		%	(0.8		)%
Currency-neutral comparable growth	(6.5		)%	(3.1		)%	3.7		%	(4.4		)%	(7.6		)%	(2.5		)%	2.5		%	—		%	(3.8		)%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.



Year-to-date period ended July 1, 2017
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	336		$	(22	)	$	166		$	108		$	142		$	59		$	41		$	(17	)	$	813
Mark-to-market	—			—			—			—			—			—			—			(14		)	(14		)
Project K and cost reduction activities	(2		)	(199		)	(1		)	(9		)	(8		)	(4		)	(4		)	(11		)	(238		)
Integration and transaction costs	—			—			—			—			—			(1		)	—			—			(1		)
Acquisitions	—			—			—			(2		)	—			12			—			—			10
Comparable operating profit	$	338		$	177		$	167		$	119		$	150		$	52		$	45		$	8		$	1,056
Foreign currency impact	—			—			—			(1		)	(11		)	(3		)	2			(2		)	(15		)
Currency-neutral comparable operating profit	$	338		$	177		$	167		$	120		$	161		$	55		$	43		$	10		$	1,071
Year-to-date period ended July 2, 2016
(millions)	U.S. Morning Foods			U.S. Snacks			U.S. Specialty			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	313		$	152		$	146		$	92		$	138		$	43		$	29		$	(26	)	$	887
Mark-to-market	—			—			—			—			—			—			—			(4		)	(4		)
Project K and cost reduction activities	(9		)	(54		)	(3		)	(13		)	(28		)	(4		)	(4		)	(9		)	(124		)
integration and transaction costs	—			—			—			—			(1		)	—			—			—			(1		)
Venezuela operations impact	—			—			—			—			—			5			—			—			5
Venezuela remeasurement	—			—			—			—			—			(13		)	—			—			(13		)
Comparable operating profit	$	322		$	206		$	149		$	105		$	167		$	55		$	33		$	(13	)	$	1,024
% change - 2017 vs. 2016:
Reported growth	7.4		%	(114.5		)%	13.7		%	17.7		%	3.3		%	36.7		%	43.0		%	30.6		%	(8.4		)%
Mark-to-market	—		%	—		%	—		%	—		%	—		%	—		%	—		%	(53.6		)%	(1.2		)%
Project K and cost reduction activities	2.2		%	(100.5		)%	2.1		%	6.2		%	12.8		%	2.6		%	4.9		%	(79.3		)%	(12.1		)%
Integration and transaction costs	—		%	—		%	—		%	—		%	0.3		%	(2.3		)%	1.1		%	(1.8		)%	—		%
Acquisitions	—		%	—		%	—		%	(1.7		)%	(0.3		)%	25.5		%	—		%	—		%	1.0		%
Venezuela operations impact	—		%	—		%	—		%	—		%	—		%	(15.1		)%	—		%	(1.1		)%	(0.6		)%
Venezuela remeasurement	—		%	—		%	—		%	—		%	—		%	29.7		%	—		%	—		%	1.3		%
Comparable growth	5.2		%	(14.0		)%	11.6		%	13.2		%	(9.5		)%	(3.7		)%	37.0		%	166.4		%	3.2		%
Foreign currency impact	—		%	—		%	—		%	(0.2		)%	(6.0		)%	(5.2		)%	5.7		%	(27.8		)%	(1.4		)%
Currency-neutral comparable growth	5.2		%	(14.0		)%	11.6		%	13.4		%	(3.5		)%	1.5		%	31.3		%	194.2		%	4.6		%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Year-to-date period ended October 1, 2016
(millions)
U.S.
Morning
Foods

U.S.
Snacks

U.S.
Specialty

North
America
Other
Europe
Latin
America

Asia
Pacific
Corporate
Kellogg
Consolidated
Reported operating profit $ 457
$ 230
$ 214
$ 135
$ 216
$ 70
$ 50
$ (75 ) $ 1,297
Mark-to-market —
—
—
—
—
—
—
(35 ) (35 )
Project K and cost reduction activities (13 ) (62 ) (4 ) (20 ) (34 ) (6 ) (6 ) (19 ) (164 )
Other costs impacting comparability —
—
—
—
—
—
—
—
—
Integration costs and acquisitions/divestitures —
—
—
—
1
1
—
(2 ) —
Differences in shipping days —
—
—
—
—
—
—
—
—
Venezuela remeasurement —
—
—
—
—
(13 ) —
—
(13 )
Comparable operating profit $ 470
$ 292
$ 218
$ 155
$ 249
$ 88
$ 56
$ (19 ) $ 1,509
Comparable operating profit excluding Venezuela $ 80
$ (19 ) $ 1,501
Foreign currency impact —
—
—
(2 ) (17 ) (246 ) 2
3
(260 )
Currency-neutral comparable operating profit $ 470
$ 292
$ 218
$ 157
$ 266
$ 334
$ 54
$ (22 ) $ 1,769
Currency-neutral comparable operating profit excluding Venezuela $ 87
$ (13 ) $ 1,531
Year-to-date period ended October 3, 2015
(millions)
U.S.
Morning
Foods

U.S.
Snacks

U.S.
Specialty

North
America
Other
Europe
Latin
America

Asia
Pacific
Corporate
Kellogg
Consolidated
Reported operating profit $ 368
$ 302
$ 200
$ 140
$ 191
$ 2
$ 36
$ (109 ) $ 1,130
Mark-to-market —
—
—
—
—
—
—
(59 ) (59 )
Project K and cost reduction activities (51 ) (34 ) (3 ) (40 ) (56 ) (2 ) (10 ) (47 ) (243 )
Other costs impacting comparability —
67
—
—
—
—
—
—
67
Integration costs and acquisitions/divestitures —
—
—
—
(8 ) (2 ) (6 ) (2 ) (18 )
Differences in shipping days —
—
—
—
—
—
—
—
—
Venezuela remeasurement —
—
—
—
—
(115 ) —
(1 ) (116 )
Comparable operating profit $ 419
$ 269
$ 203
$ 180
$ 255
$ 121
$ 52
$ —
$ 1,499
Comparable operating profit excluding Venezuela $ 90
$ 5
$ 1,473
% change - 2016 vs. 2015:
Reported growth 24.3 % (23.7 )% 6.9 % (4.1 )% 13.6 % 2,892.2 % 40.0 % 31.4 % 14.8 %
Mark-to-market — % — % — % — % — % — % — % 11.3 % 2.7 %
Project K and cost reduction activities 12.1 % (10.6 )% (0.7 )% 10.3 % 12.2 % 1,004.8 % 18.4 % 848.9 % 7.6 %
Other costs impacting comparability — % (21.5 )% — % — % — % — % — % — % (5.1 )%
Integration costs and acquisitions/divestitures — % — % — % (0.1 )% 3.8 % 433.7 % 12.8 % N/M
1.4 %
Differences in shipping days — % — % — % — % 0.2 % — % — % — % — %
Venezuela remeasurement — % — % — % — % — % 1,480.3 % — % N/M
7.5 %
Comparable growth 12.2 % 8.4 % 7.6 % (14.3 )% (2.6 )% (26.6 )% 8.8 % (2,069.2 )% 0.7 %
Comparable growth excluding Venezuela (11.0 )% (434.7 )% 1.9 %
Foreign currency impact — % — % — % (1.3 )% (6.8 )% (205.4 )% 4.3 % 473.4 % (17.2 )%
Currency-neutral comparable growth 12.2 % 8.4 % 7.6 % (13.0 )% 4.2 % 178.8 % 4.5 % (2,542.6 )% 17.9 %
Currency-neutral comparable growth excluding Venezuela (2.5 )% (337.9 )% 3.9 %

~~N/M = Not meaningful~~

U.S. Morning Foods

~~As Reported and Currency-neutral comparable net sales declined 2.3% as a result of unfavorable pricing/mix and a reduction in volume.~~ This segment consists of cereal, toaster pastries, and health and wellness ~~bars,~~bars. As reported and ~~beverages.~~

~~The cereal category is down slightly as were several of our non-core brands resulting in overall~~Currency-neutral comparable net sales ~~decline for our cereal business. However, our six core cereals in combination gained share.~~declined 6.5% as a result of decreased volume partially offset by favorable pricing/mix. Volume declined as a result of lower category-wide consumption.

Frosted Flakes grew consumption and share during the first half of the year behind effective media and innovation, including new Cinnamon Frosted Flakes. Froot Loops also grew share during the year-to-date period ended July 1, 2017. Special K shipments were down year-on-year, but improved sequentially and returned to share growth in June.

Toaster pastries ~~posted an increase~~grew share by 60 basis points during the first half of the year despite lower consumption in ~~net sales and share gains, with good contribution from~~ the ~~new~~ ~~Orange Crush~~^® ~~and~~ ~~A&W~~^® ~~root beer flavors.~~category.

As Reported operating profit increased ~~24.3%~~7.4% due to ~~Project K savings, brand-building efficiencies resulting from ZBB, net deflation of input costs~~productivity initiatives and reduced restructuring ~~charges. This was~~charges partially offset by ~~the unfavorable sales performance.~~lower net sales. Currency-neutral comparable operating profit increased ~~12.2%,~~5.2% after eliminating the ~~benefit~~impact of ~~reduced~~ restructuring charges.

U.S. Snacks

This segment consists of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks. As ~~Reported~~reported and Currency-neutral comparable net sales declined ~~2.1%~~3.1% as a result of decreased volume ~~and unfavorable pricing/mix. This segment consists of crackers, cereal bars, cookies, savory snacks, and fruit-flavored snacks.~~

~~The net sales decline was primarily~~ due to ~~the reorganization of our sales force~~lower category-wide consumption and ~~the continued decline of the bars business.~~

~~We reorganized the U.S. Snacks~~reduced promotional activity in conjunction with conversion from DSD ~~sales force~~ to create more clearly defined roles for selling, merchandising, and support. We did see some disruption in our sales and display activity as we transitioned employees to new roles, zones, and customer responsibilities. The impact was most visible in Cookies and Crackers during the first half of the year. The impact is behind us now and we’ve already started to see signs of improved effectiveness.warehouse distribution.

Crackers ~~posted an increase in sales. Our~~share declined compared to the prior year due to slowing consumption. Despite reduced promotional activity, our big-three brands (Cheez-it^®, Club^®, and Townhouse^®) ~~in combination posted good consumption growth and~~gained share ~~gains, led by accelerated base consumption. We have continued to invest in these brands, both in brand-building and innovations, and it continues to drive results.~~during the first half of the year.

~~The bars business~~Wholesome Snacks posted a decline in ~~net sales as~~consumption and share primarily due to certain lines of Special K^® bars ~~continued to decline as the change in weight-management trends away from counting calories. We have plans in 2017 to reposition the brand with Snacks.~~and cracker-chips. However, Rice Krispies Treats^® grew share during the ~~year-to-date period.~~first half of the year.

~~The cookies business~~Cookies posted a ~~sales decline. This category was~~decline in consumption and share for the ~~most affected by our DSD sales force reorganization~~quarter. However, Keebler Fudge Shoppe maintained consumption and ~~is impacted by a tail~~share growth during the first half of ~~smaller and regional brands. Advertising behind~~ the ~~Keebler~~^®~~brand has returned after several years without advertising support. With these investments, we anticipate improved performance in future periods.~~year.

~~The savory~~Savory snacks~~business~~ posted a ~~slight~~ decline ~~as a result of lower volume. During~~in shipments and share during the ~~fourth quarter, we expect a reduced impact from the elimination of certain non-core products.~~year-to-date period partially mitigated by favorable price/mix.

As ~~Reported~~reported operating profit declined ~~23.7%~~114.5% due to ~~the prior-year benefit of the VIE deconsolidation,~~ increased Project K restructuring charges in the current year and ~~the unfavorable~~ sales performance. ~~This was partially offset by net deflation of input costs, Project K savings, and brand-building efficiencies resulting from ZBB.~~ Currency-neutral comparable operating profit ~~increased 8.4%~~decreased 14.0% after excluding ~~the impact of the prior-year VIE deconsolidation and~~ the impact of restructuring charges.

U.S. Specialty

As ~~Reported~~reported and Currency-neutral comparable net sales improved ~~2.1%~~3.7% as a result of higher volume and improved pricing/mix ~~which was partially offset~~aided by ~~reduced volume.~~

~~Sales~~innovation and expansion in core and emerging growth was posted by each of our three core channels: Foodservice, Convenience, and Vending. In Foodservice, we sustained growth in the categories in which we have leading shares. In Convenience, we gained share in cereal, salty snacks and crackers. Share gains were driven by increased distribution, effective promotions, and strong innovation.channels.

As ~~Reported~~reported operating profit increased ~~6.9%~~13.7% due to the ~~favorable~~higher net sales, ~~performance~~savings from Project K and ZBB ~~savings.~~initiatives, and lower restructuring charges. Currency-neutral comparable operating profit increased ~~7.6%~~11.6% after excluding the ~~minor~~ impact of restructuring charges.

North America Other

This segment is composed of our U.S. Frozen Foods, Kashi, and Canada businesses. As ~~Reported~~reported net sales declined ~~5.8%~~4.3% due to decreased volume and ~~the unfavorable impact of~~ foreign currency ~~which was~~ partially offset by ~~favorable pricing/mix.~~acquisitions. Currency-neutral comparable net sales declined ~~5.1%~~4.4% after excluding the impact of acquisitions and foreign currency.

The U.S. Frozen business ~~saw a decline in sales. During the first half of the year we reshaped the portfolio for~~ posted slightly lower As reported net sales due to lower volume. Eggo^®grew share and ~~transitioned packaging for~~consumption during the year-to-date period, benefiting from the removal of artificial ingredients and the launch of kid-loved shapes, with Mickey Mouse-shaped waffles leading the way. Our frozen veggie business, under the Morningstar Farms^®~~. Despite the impact of these significant changes, the business posted improvement in profit margins, driven by Project K~~ and ~~ZBB.~~

~~In Canada, net sales were down as a result of volume declines and unfavorable foreign currency impact, partially offset by improved pricing/mix. Beginning~~Gardenburger^®brands, returned to growth in the second quarter ~~we increased prices to help offset higher input costs~~as our renovated product lines are on the shelf and supported by a solid commercial plan.

In Canada, shipments decreased during the period due to ~~significant~~lower volume and foreign currency partially offset by favorable pricing/mix. We are seeing the impacts of our efforts to improve price realization due to transactional foreign exchange ~~pressure. These~~pressure and we have started to lap our pricing ~~actions have resulted~~action in ~~lower volume. We continue to see share gains in our renovated and repositioned~~ ~~Special K~~^®.the second quarter.

Kashi posted lower ~~sales~~shipments during the period ~~as the~~on lower volume due to last year's exiting of non-core or less profitable SKUs, promotions, or categories. Our cereal business ~~continues to go through the transition of its portfolio. We have exited several non-core product lines, including frozen pizza, hot cereal,~~grew consumption and trail mix. While these exits negatively impacted sales, they provide tighter focus and better economics going forward. We are investing heavily in our food. During the period, we completed an overhaul of our portfolio, making every product Non-GMO Project Verified.share. We also ~~launched several new products. Finally, we have redesigned our packaging across our Kashi portfolio. Our substantial innovation~~saw improved trends for the wholesome snacks business, as recent innovations and ~~renovation efforts~~media are starting to take ~~hold, and we haven't turned on broad-scale consumer communication yet.~~hold.

As Reported operating profit ~~decreased 4.1%~~increased 17.7% due to ~~the sales decline, unfavorable foreign currency impact, and investments in food and packaging in the Kashi business. This was partially offset by a reduction in~~lower restructuring charges in addition to Project K and ~~brand-building efficiencies resulting from~~ ZBB ~~realized in the U.S. Frozen~~savings partially offset by lower net sales and ~~Canada businesses.~~foreign currency. Currency-neutral comparable operating profit ~~declined 13.0%~~increased 13.4% after excluding the impact of restructuring charges and translational foreign currency.

Europe

As Reported net sales declined ~~3.4%~~12.1% due to unfavorable foreign currency and ~~pricing/mix~~lower volume partially offset by ~~a slight increase in volume resulting from an acquisition.~~the favorable impact of pricing/mix and acquisitions. Currency-neutral comparable net sales declined ~~0.8%~~7.6% after excluding the impact of foreign currency and ~~the acquisition.~~acquisitions.

~~The~~ Pringles^® ~~business posted net sales growth~~ volume was lower due primarily to ~~sustained momentum in key markets and expansion of~~ ~~Pringles~~^®~~Tortilla into new markets. The business also benefited from an effective soccer-themed promotion. The wholesome snacks business returned~~prolonged negotiations with our customers as we sought to ~~growth in most of Europe, driven by the introduction of on-trend~~price behind our food and packaging upgrades. These negotiations were resolved by April but caused us to miss out on ~~Special K~~^® ~~bars and new Kellogg-branded Fruit and Nut bars.~~several second quarter merchandising programs.

Cereal ~~sales remained soft in most markets~~shipments declined on lower volume and foreign currency. However, the U.K. cereal business realized sequential improvement as consumption was down significantly less in the ~~region. Over the balance of the year we plan to invest in our food. Specifically, we have new innovation launches including~~ ~~Ancient Legends~~^®~~and~~ ~~Special K~~^®Nourish, which is similar to the product that recently launched in the United States. In the U.K., the category remains very soft in a difficult economic and retailer environment. We lost share as we work to reposition and renovate ~~Special K~~^®.second quarter.

As ~~Reported~~reported operating profit increased ~~13.6%~~3.3% due to ~~a reduction in~~lower restructuring charges ~~and integration costs,~~ as well as incremental Project K savings ~~and brand-building efficiencies. This was~~ partially ~~offset~~mitigated by ~~unfavorable~~ foreign ~~currency impact and net inflation of input costs.~~currency. Currency-neutral comparable operating profit ~~improved 4.2%~~declined 3.5% after excluding the impact of restructuring charges, prior year integration costs, acquisitions and foreign currency.

Latin America

As Reported net sales ~~declined 28.1%~~improved 15.3% due to ~~unfavorable foreign currency~~increased volume as a result of the Parati acquisition and ~~a decline in volume.~~the impact of favorable pricing/mix. This was partially offset by lower volume in the ~~favorable~~base business and the unfavorable impact of ~~pricing/mix, primarily due to Venezuela. Excluding Venezuela, As Reported net sales declined 10.1% due to unfavorable~~ foreign currency. Currency-neutral comparable net sales ~~increased 79.8%, due to~~declined 2.5% after excluding the impact of ~~Venezuela. Excluding~~acquisitions, prior year Venezuela ~~currency-neutral comparable net sales declined 0.5%.~~results, and foreign currency.

The ~~reduction~~integration of Parati, our acquisition in ~~sales is~~Brazil, continues to progress well, as the business posted solid growth.

Offsetting the impact of Parati, volume of the base business was adversely impacted by softness related to market conditions and distributor transitions in the Caribbean/Central America sub-region.

Across the region, we sustained strong momentum in Pringles, including gains in Chile, Argentina, Mexico, Colombia and Brazil.

As Reported operating profit increased 36.7%, primarily due to the impact of the ~~recessionary environment in~~Parati acquisition, which more than offset the ~~region. However, we continue to see good results in Mexico, our largest business in the region, due to strong innovation and commercial activities. Innovations like~~ ~~Special K~~ ~~Protein cereal are helping to stabilize that key brand. We have realized price across the region, particularly as we are impacted by adverse transactional foreign currency.~~

~~As Reported operating profit increased 2,892.2% due to the year-over-year change in Venezuela remeasurement impact, the favorable~~ impact of ~~pricing actions in Venezuela, and the favorable impact of brand-building efficiencies. This was partially offset by unfavorable~~ foreign ~~currency impact.~~currency. Currency-neutral comparable operating profit ~~improved 178.8%~~increased 1.5% after excluding the impact of ~~the~~restructuring costs, acquisitions, prior year Venezuela remeasurement and foreign currency. ~~Excluding Venezuela, currency-neutral comparable operating profit declined 2.5%.~~

Asia Pacific

As Reported net sales ~~declined 1.1%~~improved 5.7% due to ~~unfavorable~~favorable foreign currency ~~disposition of~~and pricing/mix as well as a ~~small business, and unfavorable pricing/mix. This was partially offset by improved volume resulting in a strong~~slight increase in ~~sales in Asia, Sub-Saharan Africa and~~ ~~Pringles~~^®.volume. Currency-neutral comparable net sales increased ~~1.8%~~2.5%, after excluding the impact of foreign ~~currency and the disposition of a small business.~~currency.

~~Our~~Shipments increased in Australia, ~~business continued to stabilize, as we continue to execute a cereal recovery plan similar to what we’ve done for cereal~~our largest market in the ~~U.S. and Canada. The business is focusing media behind our priority brands, executing big “tent-pole” promotions during key shopper weeks, and launching consumer-driven~~region, due primarily to innovation and renovation. ~~Our largest cereal brand in Australia,~~ ~~Nutri-Grain~~^®~~, has recently returned to~~In Asia, we generated broad-based growth, ~~as a result of these efforts.~~where Korea, India, and Southeast Asia all posted higher shipments.

~~In Asia, modest growth was led by Southeast Asia~~Across the region, our Pringles business posted high single-digit growth.

Outside of our reported results, our joint ventures in West Africa and ~~Korea. The Sub-Saharan Africa business~~China continued to perform extremely well. ~~Pringles grew at a mid-single-digit rate on the strength of effective promotions as well as renovations like the re-stage of sweet flavors~~Growth was driven by strong noodles volume in ~~Korea~~West Africa and ~~the roll-out of Tortilla~~e-commerce sales in ~~Australia and South Africa.~~China.

As ~~Reported~~reported operating profit increased ~~40.0%~~43.0% due to ~~improved~~higher net sales, ~~performance, Project K savings, reduced~~lower restructuring charges, ~~reduced integration costs,~~ and brand-building efficiencies. Currency-neutral comparable operating profit improved ~~4.5%~~31.3% after excluding the impact of restructuring, ~~charges,~~prior year integration costs and foreign currency.

Corporate

As Reported operating profit improved ~~$34~~$9 million due primarily to ~~favorable year-over-year impact of mark-to-market charges for certain commodity~~lower pension and ~~foreign exchange contracts, and lower restructuring charges. This was partially offset by a current year mark-to-market charge related to the remeasurement of a U.S. pension plan.~~postretirement benefit costs. Currency-neutral comparable operating profit ~~decreased $22~~improved $23 million after excluding the impact of mark-to-market, restructuring charges, and foreign currency.

Margin performance

Margin performance for the quarter and year-to-date periods of ~~2016~~2017 versus ~~2015~~2016 is as follows:

Quarter 2016 2015
Change vs. prior
year (pts.)
Reported gross margin (a) 38.9 % 37.0 % 1.9
Mark-to-market (COGS) (0.1 ) (0.8 ) 0.7
Project K and cost reduction activities (COGS) (0.4 ) (1.7 ) 1.3
Other costs impacting comparability (COGS) —
—
—
Integration costs and acquisitions/divestitures (COGS) —
(0.2 ) 0.2
Venezuela remeasurement (COGS) —
(0.3 ) 0.3
Comparable gross margin 39.4 % 40.0 % (0.6 )
Comparable gross margin excluding Venezuela 39.4 % 40.0 % (0.6 )
Foreign currency impact —
—
Currency-neutral comparable gross margin 39.4 %

(0.6 )
Currency-neutral comparable gross margin excluding Venezuela 39.4 % (0.6 )
Reported SGA% (26.3 )% (27.0 )% 0.7
Mark-to-market (SGA) (0.8 ) —
(0.8 )
Project K and cost reduction activities (SGA) (0.9 ) (0.9 ) —
Other costs impacting comparability (SGA) —
—
—
Integration costs and acquisitions/divestitures (SGA) —
—
—
Venezuela remeasurement (SGA) —
(0.1 ) 0.1
Comparable SGA% (24.6 )% (26.0 )% 1.4
Comparable SGA% excluding Venezuela (24.6 )% (26.0 )% 1.4
Foreign currency impact (0.3 )

(0.3 )
Currency-neutral comparable SGA% (24.3 )%

1.7
Currency-neutral comparable SGA% excluding Venezuela (24.5 )%

1.5
Reported operating margin 12.6 % 10.0 % 2.6
Mark-to-market (0.9 ) (0.8 ) (0.1 )
Project K and cost reduction activities (1.3 ) (2.6 ) 1.3
Other costs impacting comparability —
—
—
Integration costs and acquisitions/divestitures —
(0.2 ) 0.2
Venezuela remeasurement —
(0.4 ) 0.4
Comparable operating margin 14.8 % 14.0 % 0.8
Comparable operating margin excluding Venezuela 14.8 % 14.0 % 0.8
Foreign currency impact (0.3 ) (0.3 )
Currency-neutral comparable operating margin 15.1 %

1.1
Currency-neutral comparable operating margin excluding Venezuela 14.9 % 0.9

Reported gross margin for the quarter was favorable 190 basis points due to Project K and ZBB savings initiatives, as well as the year-over-year benefit of mark-to-market, restructuring, integration costs, and Venezuela remeasurement. This was partially offset by the impact of investments we are making in our food and packaging at Kashi, unfavorable transactional foreign currency impact, adverse mix in Snacks resulting from softness in our Wholesome Snacks business, and a deflationary retailer environment in Europe. Currency-neutral comparable gross margin was down 60 basis points after eliminating the impact of mark-to-market, restructuring, integration costs, Venezuela remeasurement, and foreign currency.

Reported SGA% for the quarter was favorable 70 basis points due to overhead savings realized from Project K and ZBB, the impact to brand-building investment from ZBB efficiencies, and Venezuela remeasurement. This was partially offset by mark-to-market charges related to the remeasurement of a U.S. pension plan. Currency-neutral comparable SGA% was favorable 170 basis points after excluding the impact of mark-to-market, Venezuela remeasurement, and foreign currency.

Reported operating margin for the quarter was favorable 260 basis points due to the favorable impact to brand-building investment from ZBB efficiencies, and savings realized from Project K and ZBB, restructuring costs, integration costs, and Venezuela remeasurement. This was partially offset by the impact of investments in our food

and packaging, mark-to-market charges related to the remeasurement of a U.S. pension plan, and unfavorable transactional foreign currency impact. Currency-neutral comparable operating margin was favorable 110 basis points after excluding the year-over-year impact of restructuring, integration costs, Venezuela remeasurement, and foreign currency.

Year-to-date 2016 2015
Change vs. prior
year (pts.)
Reported gross margin (a) 38.1 % 35.8 % 2.3
Mark-to-market (COGS) (0.1 ) (0.6 ) 0.5
Project K and cost reduction activities (COGS) (0.7 ) (1.5 ) 0.8
Other costs impacting comparability (COGS) —
—
—
Integration costs and acquisitions/divestitures (COGS) —
(0.2 ) 0.2
Differences in shipping days (COGS) —
—
—
Venezuela remeasurement (COGS) (0.1 ) (1.0 ) 0.9
Comparable gross margin 39.0 % 39.1 % (0.1 )
Comparable gross margin excluding Venezuela 39.0 % 39.4 % (0.4 )
Foreign currency impact 0.3
0.3
Currency-neutral comparable gross margin 38.7 %

(0.4 )
Currency-neutral comparable gross margin excluding Venezuela 39.0 % (0.4 )
Reported SGA% (25.0 )% (24.9 )% (0.1 )
Mark-to-market (SGA) (0.2 ) —
(0.2 )
Project K and cost reduction activities (SGA) (1.0 ) (0.8 ) (0.2 )
Other costs impacting comparability (SGA) —
0.6
(0.6 )
Integration costs and acquisitions/divestitures (SGA) —
—
—
Differences in shipping days (SGA) —
—
—
Venezuela remeasurement (SGA) (0.1 ) (0.1 ) —
Comparable SGA% (23.7 )% (24.6 )% 0.9
Comparable SGA% excluding Venezuela (23.8 )% (24.9 )% 1.1
Foreign currency impact (1.3 )

(1.3 )
Currency-neutral comparable SGA% (22.4 )%

2.2
Currency-neutral comparable SGA% excluding Venezuela (23.7 )%

1.2
Reported operating margin 13.1 % 10.9 % 2.2
Mark-to-market (0.3 ) (0.6 ) 0.3
Project K and cost reduction activities (1.7 ) (2.3 ) 0.6
Other costs impacting comparability —
0.6
(0.6 )
Integration costs and acquisitions/divestitures —
(0.2 ) 0.2
Differences in shipping days —
—
—
Venezuela remeasurement (0.2 ) (1.1 ) 0.9
Comparable operating margin 15.3 % 14.5 % 0.8
Comparable operating margin excluding Venezuela 15.2 % 14.5 % 0.7
Foreign currency impact (1.0 ) (1.0 )
Currency-neutral comparable operating margin 16.3 %

1.8
Currency-neutral comparable operating margin excluding Venezuela 15.3 % 0.8



Quarter	2017		2016		Change vs. prior year (pts.)
Reported gross margin (a)	39.7	%	38.9	%	0.8
Mark-to-market (COGS)	0.3		0.5		(0.2	)
Project K and cost reduction activities (COGS)	(0.7	)	(1.0	)	0.3
Acquisitions (COGS)	0.1		—		0.1
Venezuela operations impact (COGS)	—		(0.1	)	0.1
Venezuela remeasurement (COGS)	—		(0.2	)	0.2
Comparable gross margin	40.0	%	39.7	%	0.3
Foreign currency impact	—				—
Currency-neutral comparable gross margin	40.0	%			0.3
Reported SG&A%	(25.5	)%	(25.1	)%	(0.4	)
Mark-to-market (SG&A)	(0.1	)	0.1		(0.2	)
Project K and cost reduction activities (SG&A)	(2.3	)	(1.2	)	(1.1	)
Acquisitions (SG&A)	(0.3	)	—		(0.3	)
Venezuela operations impact (SG&A)	—		0.1		(0.1	)
Comparable SG&A%	(22.8	)%	(24.1	)%	1.3
Foreign currency impact	—				—
Currency-neutral comparable SG&A%	(22.8	)%			1.3
Reported operating margin	14.2	%	13.8	%	0.4
Mark-to-market	0.2		0.6		(0.4	)
Project K and cost reduction activities	(3.0	)	(2.2	)	(0.8	)
Acquisitions	(0.2	)	—		(0.2	)
Venezuela remeasurement	—		(0.2	)	0.2
Comparable operating margin	17.2	%	15.6	%	1.6
Foreign currency impact	—				—
Currency-neutral comparable operating margin	17.2	%			1.6

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

(a) Reported gross ~~margin~~profit as a percentage of net sales. Gross profit is equal to net sales less cost of goods sold.

Reported gross margin for the quarter was favorable 80 basis points driven by good productivity and cost-savings under Project K and ZBB, favorable net input costs as well as the benefit of acquisitions, lower restructuring costs, Venezuela prior year operations, and Venezuela remeasurement. This was partially offset by the impact of mark-to-market accounting for pension, commodities and foreign currency contracts. Currency-neutral comparable gross margin improved 30 basis points after eliminating the impact of mark-to-market, restructuring, acquisitions, Venezuela remeasurement, and Venezuela prior year operations.

Reported SG&A% for the quarter was unfavorable 40 basis points due primarily to increased Project K restructuring charges associated with our Direct Store Delivery (DSD) exit. The impact of restructuring charges was partially mitigated by overhead savings realized from Project K and ZBB and the impact to brand-building investment from ZBB efficiencies. Currency-neutral comparable SG&A% was favorable 130 basis points after excluding the impact of restructuring, mark-to-market, acquisitions, and prior year Venezuela operations.

Reported operating margin for the quarter was favorable 40 basis points due primarily to COGS and SG&A savings realized from Project K and ZBB initiatives partially offset by higher restructuring charges. Currency-neutral comparable operating margin was favorable 160 basis points after excluding the year-over-year impact of restructuring, mark-to-market, acquisitions, and Venezuela remeasurement.



Year-to-date	2017		2016		Change vs. prior year (pts.)
Reported gross margin (a)	38.3	%	37.7	%	0.6
Mark-to-market (COGS)	(0.4	)	(0.2	)	(0.2	)
Project K and cost reduction activities (COGS)	(0.5	)	(0.8	)	0.3
Acquisitions (COGS)	0.1		—		0.1
Venezuela remeasurement (COGS)	—		(0.2	)	0.2
Comparable gross margin	39.1	%	38.9	%	0.2
Foreign currency impact	—				—
Currency-neutral comparable gross margin	39.1	%			0.2
Reported SG&A%	(25.7	)%	(24.4	)%	(1.3	)
Mark-to-market (SG&A)	0.2		0.1		0.1
Project K and cost reduction activities (SG&A)	(3.2	)	(1.1	)	(2.1	)
Integration and transaction costs (SG&A)	(0.1	)	—		(0.1	)
Acquisitions (SG&A)	(0.2	)	—		(0.2	)
Venezuela operations impact (SG&A)	—		0.1		(0.1	)
Comparable SG&A%	(22.4	)%	(23.5	)%	1.1
Foreign currency impact	—				—
Currency-neutral comparable SG&A%	(22.4	)%			1.1
Reported operating margin	12.6	%	13.3	%	(0.7	)
Mark-to-market	(0.2	)	(0.1	)	(0.1	)
Project K and cost reduction activities	(3.7	)	(1.9	)	(1.8	)
Integration and transaction costs	(0.1	)	—		(0.1	)
Acquisitions	(0.1	)	—		(0.1	)
Venezuela operations impact	—		0.1		(0.1	)
Venezuela remeasurement	—		(0.2	)	0.2
Comparable operating margin	16.7	%	15.4	%	1.3
Foreign currency impact	—				—
Currency-neutral comparable operating margin	16.7	%			1.3

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

(a) Reported gross profit as a percentage of net sales. Gross profit is equal to net sales less cost of goods sold.

Reported gross margin for the year-to-date period was favorable ~~230~~60 basis points ~~due to savings realized from~~driven by good productivity and cost-savings under Project K and ZBB, ~~Venezuela remeasurement,~~favorable net input costs, lower restructuring costs ~~mark-to-market~~as well as the year-over-year benefit of acquisitions and ~~integration costs.~~Venezuela remeasurement. This was partially offset by the impact of ~~investments we are making in our food~~mark-to-market accounting for pension plans, commodities and ~~packaging, unfavorable transactional~~ foreign currency ~~impact, and unfavorable mix.~~contracts. Currency-neutral comparable gross margin ~~declined 40~~improved 20 basis points after ~~excluding~~eliminating the impact of ~~market-to-market,~~mark-to-market, restructuring, ~~integration costs,~~acquisitions, Venezuela remeasurement, and foreign currency.

Reported ~~SGA%~~SG&A% for the ~~year-to-date period~~quarter was unfavorable 10130 basis points ~~primarily~~ due to ~~mark-to-market~~increased Project K restructuring charges ~~related to the remeasurement of a U.S. pension plan and the unfavorable year-over-year~~associated with our Direct Store Delivery (DSD) exit. The impact of ~~a VIE~~

~~deconsolidation, continued reinvestment of~~restructuring charges was partially mitigated by overhead savings realized from Project K ~~savings into sales capabilities including adding sales representatives~~ and ~~re-establishing~~ZBB, the ~~Kashi business, and foreign currency. This was partially offset by the favorable year-over-year~~ impact to brand-building investment from ZBB efficiencies, and ~~overhead savings realized from Project K and ZBB.~~mark-to-market. Currency-neutral comparable ~~SGA%~~SG&A% was favorable ~~220~~110 basis points after excluding the impact of restructuring, mark-to-market, ~~VIE deconsolidation,~~integration costs, acquisitions, prior year Venezuela operations, and foreign currency.

Reported operating margin for the ~~year-to-date period~~quarter was ~~favorable 220~~unfavorable 70 basis points primarily due to increased Project K restructuring charges. These impacts were partially offset by the favorable ~~year-over-year~~ impact to ~~brand-building investment from ZBB efficiencies~~COGS and ~~overhead savings~~SG&A expense realized from Project K and ZBB Venezuela remeasurement, mark-to-market, restructuring costs, and integration costs. This was partially offset by the impact of investments we are making in our food and packaging, unfavorable transactional foreign currency impact, the continued reinvestment of Project K savings into sales capabilities including adding sales representatives and re-establishing the Kashi business, the unfavorable year-over-year impact of foreign currency, and VIE deconsolidation.initiatives. Currency-neutral comparable operating margin was favorable ~~180~~130 basis points after excluding the year-over-year impact of restructuring, mark-to-market, integration costs, acquisitions, Venezuela remeasurement, ~~VIE deconsolidation,~~prior year Venezuela operations, and foreign currency.

Our currency-neutral comparable gross profit, currency-neutral comparable ~~SGA,~~SG&A, and currency-neutral comparable operating profit measures are reconciled to the directly comparable GAAP measures as follows:

Quarter ended Year-to-date period ended
(dollars in millions) October 1,
2016 October 3,
2015 October 1,
2016 October 3,
2015
Reported gross profit (a) $ 1,264
$ 1,233
$ 3,779
$ 3,719
Mark-to-market (COGS) (3 ) (26 ) (12 ) (60 )
Project K and cost reduction activities (COGS) (12 ) (59 ) (66 ) (158 )
Other costs impacting comparability (COGS) —
—
—
—
Integration costs and acquisitions/divestitures (COGS) 3
(2 ) 8
(8 )
Venezuela remeasurement (COGS) —
(10 ) (12 ) (110 )
Comparable gross profit $ 1,276
$ 1,330
$ 3,861
$ 4,055
Comparable gross profit excluding Venezuela $ 1,275
$ 1,329
$ 3,852
$ 4,006
Foreign currency impact (24 ) (346 )
Currency-neutral comparable gross profit $ 1,300

$ 4,207

Currency-neutral comparable gross profit excluding Venezuela $ 1,288
$ 3,915

Reported SGA $ 854
$ 899
$ 2,482
$ 2,589
Mark-to-market (SGA) 28
1
23
(1 )
Project K and cost reduction activities (SGA) 28
26
98
85
Other costs impacting comparability (SGA) —
—
—
(67 )
Integration costs and acquisitions/divestitures (SGA) 4
5
8
10
Venezuela remeasurement (SGA) —
3
1
6
Comparable SGA $ 794
$ 864
$ 2,352
$ 2,556
Comparable SGA excluding Venezuela $ 796
$ 864
$ 2,351
$ 2,533
Foreign currency impact (7 )

(86 )

Currency-neutral comparable SGA $ 801

$ 2,438

Currency-neutral comparable SGA excluding Venezuela $ 799

$ 2,384

Reported operating profit $ 410
$ 334
$ 1,297
$ 1,130
Mark-to-market (31 ) (27 ) (35 ) (59 )
Project K and cost reduction activities (40 ) (85 ) (164 ) (243 )
Other costs impacting comparability —
—
—
67
Integration costs and acquisitions/divestitures (1 ) (7 ) —
(18 )
Venezuela remeasurement —
(13 ) (13 ) (116 )
Comparable operating profit $ 482
$ 466
$ 1,509
$ 1,499
Comparable operating profit excluding Venezuela $ 479
$ 465
$ 1,501
$ 1,473
Foreign currency impact (17 ) (260 )
Currency-neutral comparable operating profit $ 499

$ 1,769

Currency-neutral comparable operating profit excluding Venezuela $ 489
$ 1,531



	Quarter ended						Year-to-date period ended
(dollars in millions)	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Reported gross profit (a)	$	1,265		$	1,270		$	2,469		$	2,515
Mark-to-market (COGS)	8			16			(21		)	(9		)
Project K and cost reduction activities (COGS)	(20		)	(36		)	(35		)	(54		)
Integration and transaction costs (COGS)	—			—			—			(1		)
Acquisitions (COGS)	21			—			43			—
Venezuela operations impact (COGS)	—			2			—			7
Venezuela remeasurement (COGS)	—			(7		)	—			(12		)
Comparable gross profit	$	1,256		$	1,295		$	2,482		$	2,584
Foreign currency impact	(7		)				(20		)
Currency-neutral comparable gross profit	$	1,263					$	2,502
Reported SG&A	$	812		$	821		$	1,656		$	1,628
Mark-to-market (SG&A)	1			(4		)	(7		)	(5		)
Project K and cost reduction activities (SG&A)	76			36			203			70
Integration and transaction costs (SG&A)	—			—			1			—
Acquisitions (SG&A)	17			—			33			—
Venezuela operations impact (SGA)	—			2			—			2
Venezuela remeasurement (SG&A)	—			—			—			1
Comparable SG&A	$	718		$	787		$	1,426		$	1,560
Foreign currency impact	(1		)				(5		)
Currency-neutral comparable SG&A	$	719					$	1,431
Reported operating profit	$	453		$	449		$	813		$	887
Mark-to-market	7			20			(14		)	(4		)
Project K and cost reduction activities	(96		)	(72		)	(238		)	(124		)
Integration and transaction costs	—			—			(1		)	(1		)
Acquisitions	4			—			10			—
Venezuela operations impact	—			—			—			5
Venezuela remeasurement	—			(7		)	—			(13		)
Comparable operating profit	$	538		$	508		$	1,056		$	1,024
Foreign currency impact	(6		)				(15		)
Currency-neutral comparable operating profit	$	544					$	1,071

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

(a) Gross profit is equal to net sales less cost of goods sold.

Restructuring and cost reduction activities

We view our ~~continued spending on~~ restructuring and cost reduction activities as part of our ~~ongoing~~ operating principles to provide greater visibility in achieving our 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.

We continue to deliver our original expectations for Project K pre-tax charges, after-tax cash costs, and savings to be realized. In addition we are now working on additional Project K initiatives that will help us achieve our 350-basis-point currency-neutral comparable profit margin improvement plan, with the potential for further savings beyond 2018.

Project K

expected to continue generating a significant amount of savings that may be invested in key strategic areas of focus for the ~~business. We expect that these savings will~~business to drive future growth inor utilized to achieve our 2018 Margin Expansion target.

In addition to the ~~business.~~

We currently anticipate that Project K will result in total pre-tax charges, once all phases are approved and implemented, of ~~$1.2~~$1.5 to ~~$1.4~~$1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be ~~$900 million to~~approximately $1.1 billion. Cash expenditures of approximately ~~$625~~$725 million have been incurred through the end of fiscal year ~~2015.~~2016. Total cash expenditures, as defined, are expected to be approximately ~~$150~~$300 million for ~~2016~~2017 and the balance ~~of $125 to $325 million~~ thereafter. Total charges for Project K in ~~2016~~2017 are expected to be approximately ~~$175~~$400 to ~~$200~~$450 million.

We now expect annual cost savings generated from Project K will be approximately ~~$425~~$600 to ~~$475~~$700 million ~~by 2018, with approximately two-thirds of the cost~~in 2019. The savings towill be realized primarily in selling, general and administrative expense with additional benefit realized in gross profit as cost of goods ~~sold.~~sold savings are partially offset by negative volume and price impacts resulting from go-to-market business model changes. The overall savings profile of the project has been updated to reflect our go-to-market initiatives that will impact both selling, general and administrative expense and gross profit. We have realized approximately ~~$180~~$300 million of annual savings through the end of ~~fiscal 2015. We expect approximately $100 million of incremental savings in 2016, approximately 75 to 80 percent of which will come from cost of goods sold.~~2016. Cost savings will continue to be utilized to increase margins and be strategically invested in areas such as in-store execution, sales capabilities, including adding sales representatives, re-establishing the Kashi business unit, and in the design and quality of our products. We have also invested in production capacity in developing and emerging markets, and in global category teams.

As a result of Project K, capital spending levels were increased to 4% of net sales during both 2014 and 2015. Our long-term targets assume capital spending to be approximately 3-4% of net sales annually.

~~Thus far, we have~~We funded much of the initial cash requirements for Project K through ~~the cash benefits of~~ our supplier financing initiative. ~~Due~~We are now able to fund much of the ~~difference in timing between expected~~ cash costs for the project ~~and expected future cash savings, we anticipate funding the project~~ through ~~a combination of~~ cash on hand ~~and short-term debt.~~as we have started to realize cash savings from the project.

We also expect that the project will have an impact on our consolidated effective income tax rate during the execution of the project due to the timing of charges being taken in different tax jurisdictions. The impact of this project on our consolidated effective income tax rate will be excluded from the comparable income tax rate that will be disclosed on a quarterly basis.

Refer to Note 5 within Notes to Consolidated Financial Statements for further information related to Project K and other restructuring activities.

Other Projects

In 2015 we ~~initiated the implementation of~~implemented a zero-based budgeting (ZBB) program in our North America business and during the first half of 2016 the program was expanded into our international businesses. ~~This~~We expect cumulative savings from the ZBB program ~~is now expected~~ to ~~deliver visibility~~be approximately $450 to ~~$150 to $180~~$500 million by the end of 2018, realized largely in ~~annual savings in 2016. Our North America business is finding more savings than anticipated at inception of the program~~selling, general and ~~our international businesses now have savings commencing in the second half of 2016.~~

administrative expense.

In support of the ZBB initiative, we incurred pre-tax charges of approximately $4$1 million and ~~$21~~$17 million induring the ~~quarter~~year-to-date periods ended July 1, 2017 and ~~year-to-date period ended October 1,~~July 2, 2016, respectively. Total charges of $38 million have been recognized since the inception of the ZBB program. We anticipate that ZBB will result in total cumulative pre-tax charges ~~up to~~of approximately ~~$50~~$40 million through ~~2016~~2017 which will consist primarily of the design and implementation of business capabilities.

Foreign currency translation

The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar, including the euro, British pound, Australian dollar, Canadian dollar, Mexican peso ~~Venezuelan bolivar fuerte~~ and Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have a significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.

Interest expense

For the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 2016, interest expense was ~~$343~~$124 million and ~~$168~~$285 million, respectively. ~~Current~~Prior year interest expense includes $153 million charge to redeem $475 million of 7.45% U.S. Dollar Debentures due 2031. The charge consisted 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. ~~Additionally, increased weighting of fixed rate debt versus the prior year as well as higher average debt levels resulted in higher interest expense.~~

For the full year ~~2016,~~2017, we expect gross interest expense to be approximately ~~$400~~$250 million. Full year interest expense for 2016 was $406 million, including $153 million related to the ~~first quarter~~ tender offer. ~~Full year interest expense for 2015 was $231 million.~~

Income taxes

Our reported effective tax rate for the quarters ended ~~October~~July 1, 2017 and July 2, 2016 was 26% and ~~October 3, 2015 was 18% and 24%~~27%, respectively. The reported effective tax rate for the year-to-date periods ended ~~October~~July 1, 2017 and July 2, 2016 was 21% and ~~October 3, 2015 was 22% and 26%~~25%, respectively.

For the ~~quarter~~year-to-date period ended ~~October~~July 1, ~~2016,~~2017, the effective tax rate benefited from ~~excess~~a deferred tax ~~benefits~~benefit of $38 million resulting from ~~share-based compensation totaling $16 million. Additionally,~~ the intercompany transfer of intellectual property. The effective tax rate for the quarter ~~benefited from the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.~~

~~The effective tax rate for the~~and year-to-date ~~period~~periods ended ~~October 1,~~July 2, 2016, benefited from excess tax benefits from share-based compensation ~~totaling $34 million, the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.~~

~~The effective tax rate for the year-to-date period ended October 3, 2015, benefited from a reduction in tax related to current year remitted and unremitted earnings~~ and the completion of certain tax examinations.

The comparable effective tax rate for the quarters ended July 1, 2017 and July 2, 2016 was 28%. The comparable effective tax rate for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015~~July 2, 2016 was 24% and 26%, respectively. Refer to Note 10 within Notes to Consolidated Financial Statements for further information.

For the full year ~~2016,~~2017, we currently expect the comparable effective tax rate to be approximately ~~25%~~26-27%. Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted by tax legislation and if pending uncertain tax matters, including tax positions that could be affected by planning initiatives, are resolved more or less favorably than we currently expect.

The following table provides a reconciliation of as reported to ~~currency-neutral~~ comparable income taxes and effective tax rate for the quarter and year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015.~~July 2, 2016.


	Quarter ended						Year-to-date period ended						Quarter ended						Year-to-date period ended
Consolidated results (dollars in millions, except per share data)	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Reported income taxes	$	62		$	66		$	215		$	227		$	102		$	106		$	144		$	153
Mark-to-market	(13		)	(10		)	(11		)	(18		)	3			7			(1		)	2
Project K and cost reduction activities	(11		)	(22		)	(43		)	(69		)	(34		)	(23		)	(80		)	(32		)
Other costs impacting comparability	—			—			(54		)	(2		)	—			—			—			(54		)
Integration costs	—			(4		)	(1		)	(6		)
Venezuela operations impact													—			—			—			1
Venezuela remeasurement	—			—			—			(20		)	—			—			—			—
Comparable income taxes	$	86		$	102		$	324		$	342		$	133		$	122		$	225		$	236
Reported effective income tax rate	17.5		%	24.2		%	22.3		%	25.7		%	26.4		%	27.4		%	20.9		%	25.2		%
Mark-to-market	(1.8		)%	(1.1		)%	(0.3		)%	(0.3		)%	0.1		%	0.5		%	0.2		%	0.5		%
Project K and cost reduction activities	(0.8		)%	(0.2		)%	(0.5		)%	(0.5		)%	(1.9		)%	(1.0		)%	(3.3		)%	(0.2		)%
Other costs impacting comparability	—		%	—		%	(1.4		)%	(1.2		)%	—		%	—		%	—		%	(1.7		)%
Integration costs	—		%	(0.5		)%	(0.1		)%	(0.1		)%
Venezuela operations impact													—		%	—		%	—		%	(0.1		)%
Venezuela remeasurement	—		%	0.8		%	0.2		%	2.0		%	—		%	0.3		%	—		%	0.3		%
Comparable effective income tax rate	20.1		%	25.2		%	24.4		%	25.8		%	28.2		%	27.6		%	24.0		%	26.4		%



		~~2016~~2017 full year guidance
Reported effective income tax rate		*
Mark-to-market		*
Project K and cost reduction activities		—	%
~~Other costs impacting comparability~~		(12	)%
Integration costs		*
~~Venezuela remeasurement~~		*
Comparable effective income tax rate	Approx.	25		%26-27%
* Full year guidance for this measure cannot be reasonably estimated as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.

Liquidity and capital resources

Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.

We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables. In addition, we have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts. We had negative working capital of ~~$1.7~~$1.5 billion and $1.9 billion as of ~~October~~July 1, 2017 and July 2, 2016, ~~and October 3, 2015.~~respectively.

We believe that our operating cash flows, together with our credit facilities and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.

The following table sets forth a summary of our cash flows:


	Year-to-date period ended						Year-to-date Period ended
(millions)	October 1, 2016			October 3, 2015			July 1, 2017			July 2, 2016
Net cash provided by (used in):
Operating activities	$	1,021		$	969		$	654		$	648
Investing activities	(381		)	(963		)	(262		)	(250		)
Financing activities	(521		)	(110		)	(372		)	(94		)
Effect of exchange rates on cash and cash equivalents	(24		)	(40		)	34			(24		)
Net increase (decrease) in cash and cash equivalents	$	95		$	(144	)	$	54		$	280

Operating activities

The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture and market our products.

Net cash provided by our operating activities for the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, totaled ~~$1.0 billion,~~$654 million, an increase of ~~$52~~$6 million over the same period in ~~2015. The increase compared to~~2016. Pre-tax cash costs totaling $144 million in the ~~prior year is primarily due to lower after-tax Project K payments, lower tax payments, and changes in other working capital mitigated somewhat by $97 million~~first half of ~~after-tax cash costs~~2016 related to the $475 million redemption of our 7.45% U.S. Dollar Debentures due 2031 and $59 million cash settlement of forward starting swaps were offset by $120 million increase in tax cash payments during the first ~~quarter~~half of ~~2016.~~2017 as well as a lower year-over-year cash flow impact from the supplier financing initiative.

After-tax Project K cash payments were ~~$112~~$95 million and ~~$164~~$82 million for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015, respectively. Core working capital includes the positive impact of a supplier financing initiative of approximately $183 million and $161 million for the quarters ended October 1,~~July 2, 2016, ~~and October 3, 2015,~~ respectively.

Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average) ~~is relatively short, equating to~~, was approximately 3zero days and 197 days for the 12 month periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 2016, respectively. Compared with the 12 month period ended ~~October 3, 2015,~~July 2, 2016, the ~~2016~~2017 cash conversion cycle was positively impacted by an increase in the days of trade payables outstanding attributable to a supplier financing initiative.

Our pension and other postretirement benefit plan contributions amounted to ~~$29~~$28 million and ~~$21~~$23 million for the year-to-date periods ended ~~October~~July 1, ~~2016~~2017 and ~~October 3, 2015,~~July 2, 2016, respectively. For the full year ~~2016,~~2017, we currently expect that our contributions to pension and other postretirement plans will total approximately ~~$43~~$42 million. Plan funding strategies may be modified in response to our evaluation of tax deductibility, market conditions and competing investment alternatives.

We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:


	Year-to-date period ended									Quarter ended
(millions)	October 1, 2016			October 3, 2015			Approximate 2016 full year guidance			July 1, 2017			July 2, 2016			Approximate 2017 full year guidance
Net cash provided by operating activities	$	1,021		$	969		$	1,600		$	654		$	648		$1,600-$1,700
Additions to properties	(376		)	(389		)	(500		)	(268		)	(249		)	(500)
Cash flow	$	645		$	580		$	1,100		$	386		$	399		$1,100-$1,200

Investing activities

Our net cash used in investing activities totaled ~~$381~~$262 million for the year-to-date period ended ~~October~~July 1, ~~2016~~2017 compared to ~~$963~~$250 million in the same period of ~~2015.~~2016. The ~~decrease~~increase was primarily due to ~~acquisitions~~higher current year capital expenditures and and a purchase price adjustment on our investment in Multipro resulting in a refund of $28 million during the ~~year-to-date period ended October 3, 2015. In~~second quarter of 2016 mitigated by an $18 million acquisition during the first quarter of ~~2015, we acquired Bisco Misr for $117 million. In the third quarter of 2015, we acquired a 50% interest in Multipro for $445 million.~~2016.

Financing activities

Our net cash used in financing activities for the year-to-date period ended ~~October~~July 1, ~~2016~~2017 totaled ~~$521~~$372 million compared to ~~$110~~$94 million in the same period of ~~2015.~~2016.

In May 2017, we issued €600 million of five-year 0.80% Euro Notes due 2022 and repaid our 1.75% fixed rate $400 million U.S. Dollar Notes due 2017 at maturity. Additionally, we repaid our 2.05% fixed rate Cdn. $300 million Canadian Dollar Notes at maturity.

In November 2016, we issued $600 million of seven-year 2.65% U.S. Dollar Notes and repaid our 1.875% $500 million U.S. Dollar Notes due 2016 at maturity.

In May 2016, we issued €600 million of eight-year 1.00% Euro Notes due 2024 and repaid our 4.45% fixed rate $750 million U.S. Dollar Notes due 2016 at maturity.

In March 2016, we issued $750 million of ten-year 3.25% U.S. Dollar Notes and $650 million of thirty-year 4.50% U.S. Dollar Notes. Also in March 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031.

~~In February 2015, we repaid our floating-rate $250 million U.S. Dollar Notes due 2015 at maturity and in March 2015, we issued €600 million of ten-year 1.25% Euro Notes due 2025.~~

~~In February 2014, the board of directors approved a share repurchase program authorizing us to repurchase up to $1.5 billion in shares through December 2015.~~ In December 2015, the board of directors approved a new authorization to repurchase up to $1.5 billion in shares beginning in 2016 through December 2017. Total purchases for the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, were 6 million shares for ~~$426 million.~~$435 million, of which $390 million was paid during the year-to-date period and $45 million was payable at July 1, 2017. Total purchases for the year-to-date period ended ~~October 3, 2015,~~July 2, 2016, were 65 million shares for ~~$381~~$386 million.

The Company expects lower share repurchases for the remainder of 2016 to fund, in part, the anticipated acquisition of Ritmo Investimentos, the controlling shareholder of Parati, a manufacturer of biscuit, powdered beverage and pasta brands in Brazil.

We paid cash dividends of ~~$533~~$363 million in the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, compared to ~~$523~~$351 million during the same period in ~~2015.~~2016. The increase in dividends paid reflects our third quarter ~~2015~~2016 increase in the quarterly dividend to ~~$.50~~$.52 per common share from the previous ~~$.49~~$.50 per common share. In ~~October 2016,~~July 2017, the board of directors declared a dividend of ~~$.52~~$.54 per common share, payable on ~~December~~September 15, ~~2016~~2017 to shareholders of record at the close of business on ~~December~~September 1, ~~2016.~~2017. The dividend is broadly in line with our current plan to maintain our long-term dividend pay-out of approximately 50% of comparable net income.

In February 2014, we entered into an unsecured five year credit agreement expiring in 2019, which allows us to borrow, on a revolving credit basis, up to $2.0 billion.

In January 2017, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $800 million at any time outstanding. The new credit facility contains customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agent may terminate the commitments under the credit facility, accelerate any outstanding loans under the agreement, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest. There are no borrowings outstanding under the new credit facility.

We are in compliance with all debt covenants. We continue to believe that we will be able to meet our interest and principal repayment obligations and maintain our debt covenants for the foreseeable future. We expect our access to public debt and commercial paper markets, along with operating cash flows, will be adequate to meet future operating, investing and financing needs, including the pursuit of selected acquisitions.

During the first half of 2016, we executed a discrete customer program to extend customer payment ~~terms.~~terms in exchange for the elimination of the discount we had offered for early payment. In order to mitigate the net working capital impact of the extended payment terms, we entered into an agreement to sell, on a revolving basis, certain trade accounts receivable balances of the customer to a third party financial institution. The agreement is intended to directly offset the impact that extended customer payment terms would have on our days-sales-outstanding (DSO) metric that is critical to the effective management of our accounts receivable balance and our overall working capital. Consequently, we realize no negative effect on our net income or cash flow associated with the extended customer payment terms. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from our

Consolidated Balance Sheet. The agreement provides for the continuing sale of certain receivables on a revolving basis until terminated by either ~~party;~~party to the agreement; however the maximum funding from receivables that may be sold at any time is currently ~~$550~~$700 million, but may be increased as additional financial institutions are added to the agreement. We currently estimate that the amount of these receivables held at any time by the financial institution(s) will be approximately $550 to $650 million. During the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, approximately ~~$1.0~~$1.1 billion ~~million~~ of accounts receivable have been sold via this arrangement. Accounts receivable sold of ~~$546~~$655 million remained outstanding under this arrangement as of ~~October~~July 1, ~~2016.~~2017.

In addition to the discrete customer program above, in ~~the quarter-ended October 1,~~July 2016 we established an accounts receivable securitization program for certain customers which allows for extended customer payment ~~terms.~~terms in exchange for the elimination of the discount we had offered for early payment. In order to mitigate the net working capital impact of the extended payment terms, we entered into an agreement with a financial institution to sell these receivables resulting in the receivables being de-recognized from our consolidated balance sheet. The agreement is intended to directly offset the impact that extended customer payment terms would have on our days-sales-outstanding (DSO) metric that is critical to the effective management of our accounts receivable balance and our overall working capital. Consequently, we realize no negative effect on our net income or cash flow associated with the extended customer payment terms. The maximum funding from receivables that may be sold at any time is currently ~~$400~~$600 million, but may be increased as additional financial institutions are added to the agreement. We currently estimate that the amount of these receivables held at any time by the financial institution(s) will be up to approximately $1 billion. During the year-to-date period ended ~~October~~July 1, ~~2016, $341 million~~2017, $1.3 billion of accounts receivable have been sold through this program. As of ~~October~~July 1, ~~2016,~~2017, approximately ~~$260~~$443 million of accounts receivable sold under the securitization program remained outstanding, for which we received cash of approximately ~~$222~~$404 million and a deferred purchase price asset of approximately ~~$38~~$39 million.

Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.

Accounting standards to be adopted in future periods

In ~~October 2016,~~March 2017, the ~~Financial Accounting Standards Board (FASB), as part of their simplification initiative,~~FASB issued an ASU to improve the ~~accounting for income tax consequences~~presentation of ~~intra-entity transfers of assets other than inventory. Current Generally Accepted Accounting Principles (GAAP) prohibit recognition of current~~net periodic pension cost and ~~deferred income taxes for intra-entity asset transfers until~~net periodic postretirement benefit cost. The ASU requires that an employer report 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~~service cost component in the ~~ASU eliminate~~same line item or items as other compensation costs arising from services rendered by the ~~exception, such that entities should recognize~~pertinent employees during the period. The other components of net benefit cost are required to be presented in the income ~~tax consequences~~statement separately from the service cost component and outside a subtotal of ~~an intra-entity transfer of an asset other than inventory when the transfer occurs.~~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. We will adopt the ASU in the first quarter of 2018. If we had adopted the ASU in the first quarter of 2017, on an as reported basis, the impact to our Corporate segment would have been an increase to COGS and SG&A of $70 million and $54 million, respectively, with an offsetting decrease to other income (expense), net (OIE) of $124 million in the year-to-date period ended July 1, 2017. For the year-to-date period ended July 2, 2016, the impact to our Corporate segment would have been an increase to COGS and SG&A of $38 million and $42 million, respectively, with an offsetting decrease to OIE of $80 million. Adoption will have no impact on net income or cash flow. The impact to the Consolidated Balance Sheet at July 1, 2017 and July 2, 2016 would have been insignificant.

On a comparable basis, the impact would have been an increase to COGS and SG&A of $79 million and $47 million, respectively, with an offsetting decrease to OIE of $126 million in the year-to-date period ended July 1, 2017, and an increase to COGS and SG&A of $72 million and $42 million, respectively, with a decrease to OIE of $114 million in the year-to-date period ended July 2, 2016. On a comparable basis for the year ended December 31, 2016, the impact would have been an increase to COGS and SG&A of $144 million and $83 million, respectively, with an offsetting decrease to OIE of $227 million.

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 ~~modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the period of adoption.~~prospective basis. We are currently assessing the impact and timing of adoption of ~~the~~this ASU.

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. We ~~are currently assessing~~will adopt the ~~impact~~new ASU in the first quarter of 2018. If we had adopted the ASU in the first quarter of 2017, cash flow from operations would have decreased $24 million and ~~timing of adoption of~~cash flow from investing activities would have increased $24 million for the ~~ASU.~~year-to-date period ended July 1, 2017.

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 ~~Generally Accepted Accounting Principles (GAAP)~~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. We will adopt the ASU in the first quarter of 2019, and are currently evaluating the impact that implementing this ASU will have on our financial ~~statements and disclosures, as well as timing of implementation.~~statements.

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 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. We will adopt the updated standard in the first quarter of 2018. We do not expect the adoption of this ~~guidance~~ASU to have a significant impact on our financial statements.

In May 2014, the FASB issued an ASU which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled 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. 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. We will adopt the updated standard in the first quarter of ~~2018. We are currently evaluating~~2018, using a modified retrospective transition method, and the adoption is not expected to have a significant impact ~~that implementing this ASU will have~~ on our historical financial statements or future financial position or results of operations.

Future outlook

We affirm our guidance for currency-neutral comparable net sales, operating profit and ~~disclosures,~~earnings per share, as well as ~~whether we will use~~for cash flow, as strong productivity performance offsets a softened outlook for currency neutral comparable net sales. The company affirms its guidance for about 3% decline in currency-neutral comparable net sales in 2017. This figure includes the ~~retrospective or modified retrospective method of adoption.~~

expected (1%) impact from the U.S. Snacks transition to warehouse distribution from DSD, an estimate that has not changed.

Guidance is affirmed for currency-neutral comparable operating profit, which we believe will grow 7-9% year on year, as productivity savings offset the impact of lower net sales. The exit from DSD is still expected to be neutral to operating profit, as overhead savings later in the year offset the negative net sales impact from list-price

adjustments, rationalization of stockkeeping units, and potential disruption during the transition. The Company's currency-neutral comparable operating profit margin is still expected to improve by more than a full percentage

point, keeping it well on track toward its goal of 350 basis points of expansion from 2015 through

2018.

Guidance is also affirmed for earnings per share on a currency-neutral comparable basis. Specifically, we expect to generate growth of 8-10% off a 2016 base that excludes after-tax $0.02 from deconsolidated Venezuela results, to $4.03-$4.09. The growth should be driven by the aforementioned 7-9% growth in operating profit, with roughly 1% of additional leverage from modestly lower shares outstanding and other items, which slightly more than offsets a higher effective tax rate and flat interest expense. This earnings per share guidance excludes currency translation impact, which we now believe may come in at roughly half of our previous forecast of after-tax ($0.12) per share, owing to the year-to-date weakening of the U.S. dollar against certain currencies. Including this impact, comparable-basis earnings per share are expected to be $3.97-4.03.

Comparable-basis and currency-neutral comparable-basis earnings per share guidance by definition excludes up-front costs of about after-tax $(0.80)-(0.90) per share, or $(400)-(450) million pretax, related to the Project K program, and these cost estimates are unchanged. The EPS guidance also continues to exclude after-tax $(0.01)-(0.03) per share of integration costs, related to the recent acquisition in Brazil, as well as previous acquisitions. Excluding these integration costs, the Brazil acquisition is expected to be neutral to currency-neutral comparable earnings per share.

We also affirmed our guidance for 2017 cash flow. Specifically, cash from operating activities should be approximately $1.6-1.7 billion, which after capital expenditure translates into cash flow of $1.1-1.2 billion. The latter would be an increase over 2016's $1.1 billion, as higher earnings and continued trimming of working capital and capital expenditure more than cover increased cash outlays related to Project K restructuring programs.



Reconciliation of Non-GAAP amounts - 2017 Full Year Guidance*
	Net sales	Operating profit	EPS
Currency-Neutral Comparable Guidance	Approx. (3.0%)	7.0% - 9.0%	$4.03 - $4.09
Foreign currency impact	(1.3%)	(1.6%)	Approx. ($.06)
Comparable Guidance	Approx. (4.3%)	5.4% - 7.4%	$3.97 - $4.03

Impact of certain items excluded from Non-GAAP guidance:
Project K and cost reduction activities (pre-tax)	-	(2.8%) - (6.3%)	($1.28) - ($1.14)
Integration costs (pre-tax)	-	0.3%	($.03) - ($.02)
Acquisitions/dispositions (pre-tax)	1.4%	1.0%	$.08
Income tax benefit applicable to adjustments, net**			$.37 - $.33

* 2017 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP, comparable and currency-neutral comparable basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. The Company is providing quantification of known adjustment items where available.

** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.



Reconciliation of Non-GAAP amounts - Cash Flow Guidance
	Approximate
(millions)	Full Year 2017
Net cash provided by (used in) operating activities	$1,600 - $1,700
Additions to properties	($500)
Cash Flow	$1,100 - $1,200

Forward-looking statements

This Report contains “forward-looking statements” with projections concerning, among other things, the Company’s global growth and efficiency program (Project K), the integration of acquired businesses, our strategy, zero-based budgeting, financial principles, and plans; initiatives, improvements and growth; sales, gross margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures; asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction; effective income tax rate; cash flow and core working capital improvements; interest expense; commodity, and energy prices; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “can,” “anticipate,” “project,” “should,” “estimate,” or words or phrases of similar meaning. For example, forward-looking statements are found in Item 1 and in several sections of Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions. Our future results could be affected by a variety of factors, including:

the ability to implement Project K, including exiting our Direct-Store-Door distribution system, as planned, whether the expected amount of costs associated with Project K will exceed forecasts, whether the Company will be able to realize the anticipated benefits from Project K in the amounts and times expected;

the ability to realize the benefits we expect from the adoption of zero-based budgeting in the amounts and at the times expected;

the ability to realize the anticipated benefits from revenue growth management;

the ability to realize the anticipated benefits and synergies from acquired businesses in the amounts and at the times expected;

the impact of competitive conditions;

the effectiveness of pricing, advertising, and promotional programs;

the success of innovation, renovation and new product introductions;

the recoverability of the carrying value of goodwill and other intangibles;

the success of productivity improvements and business transitions;

commodity and energy prices;

labor costs;

disruptions or inefficiencies in supply chain;

the availability of and interest rates on short-term and long-term financing;

actual market performance of benefit plan trust investments;

the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs;

changes in consumer behavior and preferences;

the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability;

legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations;

the ultimate impact of product recalls;

adverse changes in global climate or extreme weather conditions;

business disruption or other losses from natural disasters, war, terrorist acts, or political unrest; and,

the risks and uncertainties described herein under Part II, Item 1A.

Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our Company is exposed to certain market risks, which exist as a part of our ongoing business operations. We use derivative financial and commodity instruments, where appropriate, to manage these risks. Refer to Note 11 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.

Refer to disclosures contained within Item 7A of our ~~2015~~2016 Annual Report on Form 10-K. Other than changes noted here, there have been no material changes in the Company’s market risk as of ~~October~~July 1, ~~2016.~~2017.

During ~~2016,~~2017, we entered into forward starting interest swaps with notional amounts totaling ~~$1.6 billion and €600~~€300 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate ~~U.S, Dollar and~~ Euro debt ~~respectively,~~ to be used for general corporate purposes. These swaps were designated as cash flow hedges. Approximately $1.4 billion of the U.S. Dollar forward starting interest rate swaps were settled during the quarter ended April 2, 2016, upon the issuance of fixed rate U.S. Dollar debt. A resulting aggregate loss of $59 million was recorded in accumulated other comprehensive income (loss) and will be amortized as interest expense over the life of the related fixed rate debt. The Euro forward starting interest rate swaps were settled during the quarter ended July ~~2, 2016~~1, 2017 upon issuance of fixed rate Euro debt. A resulting aggregate ~~loss~~gain of ~~$10~~$1 million was recorded in accumulated other comprehensive income (loss) and will be amortized as interest expense over the life of the related fixed rate debt. Refer to Note 7 within Notes to Consolidated Financial Statements for further information related to the fixed rate debt issuance.

~~The total notional amount of forward starting interest rate swaps outstanding at October 1, 2016 was $200 million, with a related asset with a fair value of $1 million.We had no forward starting interest rate swaps outstanding at January 2, 2016.~~

During ~~2016~~the quarter ended July 1, 2017, we entered into interest rate swaps with notional amounts totaling approximately ~~$2.5 billion and~~ €600 million that are designated as fair value hedges of certain ~~U.S. Dollar and~~ Euro ~~debt, respectively. Approximately $958 million of~~debt. Additionally during the ~~U.S. Dollar~~year-to-date period ended July 1, 2017 we settled interest rate swaps with notional amounts totaling approximately $700 million which were ~~settled during the quarter ended July 2, 2016 for~~previously designated as fair value hedges of certain U.S. Dollar Notes.

We recorded an aggregate ~~gain~~loss of ~~$12~~$14 million ~~that will be amortized as interest expense over~~related to the ~~life of the related fixed rate debt. The Euro interest rate~~settled swaps ~~were settled during the quarter ended October 1, 2016 for an aggregate gain of $13 million~~ that will be amortized as interest expense over the life of the related fixed rate debt. Refer to Note 7 within Notes to Consolidated ~~Financial~~financial Statements.

~~The total notional amount of~~We have interest rate swaps with notional amounts totaling $2.2 billion outstanding at ~~October~~July 1, 2017 and December 31, 2016, ~~was approximately $1.6 billion, with~~representing a ~~related net asset with a fair value~~settlement obligation of ~~$2 million.We had no~~$46 million and $64 million, respectively. The interest rate swaps ~~outstanding at January 2, 2016.~~are designated as fair value hedges of certain U.S. Dollar and Euro debt. Assuming average variable rate debt levels during the year, a one percentage point increase in interest rates would have increased ~~annual~~ interest expense by approximately ~~$14~~$26 million and $17 million at ~~October~~July 1, ~~2016. As there were no interest rate swaps or variable rate debt outstanding at January 2,~~2017 and December 31, 2016, ~~changes in interest rates would have no impact to annual interest expense.~~respectively.

Venezuela is considered a highly inflationary economy. As such, the functional currency for our operations in Venezuela is the U.S. dollar, which in turn, requires bolivar denominated monetary assets and liabilities to be remeasured into U.S. dollars using an exchange rate at which such balances could be settled as of the balance sheet date. In addition, revenues and expenses are recorded in U.S. dollars at an appropriate rate on the date of the transaction. Gains and losses resulting from the remeasurement of the bolivar denominated monetary assets and liabilities are recorded in earnings.

During 2015 we experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the CENCOEX exchange. Due to this reduced availability of U.S. dollars and upon review of current U.S. dollar cash needs in our Venezuela operations as of the quarter ended July 4, 2015, we concluded that we are no longer able to obtain sufficient U.S. dollars on a timely basis through the CENCOEX exchange, resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the SIMADI rate.

In February 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including a 59% devaluation of the CENCOEX (now named DIPRO) official rate from 6.3 bolivars to 10.0 bolivars to the U.S. dollar. Additionally the SIMADI exchange rate was replaced by the DICOM exchange rate, a new floating exchange rate for non-essential imports. The DICOM exchange rate was introduced at 206 bolivars to the U.S. dollar and the Venezuelan government has reported that the DICOM exchange rate will be allowed to float to meet market needs.

~~Please refer to Note 13 for more information regarding our operations in Venezuela and our change in foreign exchange rates.~~

Following the change to the SIMADI rate as of July 4, 2015, certain non-monetary assets related to our Venezuelan subsidiary continued to be remeasured at historical exchange rates. As these assets were utilized by our Venezuelan subsidiary during the second half of 2015 and first quarter of 2016 they were recognized in the income statement at historical exchange rates resulting in an unfavorable impact. During 2015, we recognized expense related to the utilization of a portion of these non-monetary assets, resulting in an unfavorable impact of approximately $17 million. We experienced an additional unfavorable impact of approximately $4 million in the year-to-date ended October 1, 2016 related to the utilization of these remaining non-monetary assets.

Additionally, with the introduction of the new DICOM floating rate we experienced an unfavorable impact, primarily in COGS, of approximately $7 million in the year-to-date period ended October 1, 2016 related to the utilization of non-monetary assets that were originally acquired after our conversion to the SIMADI rate at July 4, 2015. These non-monetary assets were recognized in the income statement at historical exchange rates during the quarter.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.

As of ~~October~~July 1, ~~2016,~~2017, we carried out an evaluation under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

~~During the third quarter of 2014, we went live with the first phase of our Global Business Services (GBS) initiative, in conjunction with~~

Kellogg’s Project K initiative which includes the reorganization and relocation of certain financial, ~~service processes,~~information technology, and logistics and distribution processes; internal to the ~~organization.~~organization was initiated in 2014. This initiative is expected to continue through ~~2016~~2018 and will continue to impact the

design of our control framework. During ~~the transition to GBS,~~efforts associated with Project K, we have ~~put~~implemented additional controls ~~in place~~ to monitor and maintain appropriate internal controls ~~impacting~~over financial reporting.

There ~~have been~~were no other changes ~~in our internal control over financial reporting~~during the quarter ended July 1, 2017, that ~~have~~ materially affected, or are reasonably likely to materially affect our internal ~~control~~controls over financial reporting.

KELLOGG COMPANY

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In April, 2016, the United States Environmental Protection Agency (the “EPA”) issued to The Eggo Company, a subsidiary of the Company, a notice of potential violation alleging that the Company’s Rossville, Tennessee facility had violated certain recordkeeping and reporting requirements under Section 112(r)(7) of the Clean Air Act (the “Notification”). The Notification was based on the findings of an August 2013 inspection of the Company’s Rossville, Tennessee facility by the EPA relating to the ammonia refrigeration system operated at the facility. The Company and the EPA resolved this matter through a Consent Agreement and Final Order which was signed and filed with the EPA Region 4 Clerk on April 6, 2017. In accordance with the provisions of the Consent Agreement and Final Order, the Company paid a civil penalty of $133,000 in full settlement of the allegations set forth in the Consent Agreement and Final Order, but without admitting or denying the factual allegations set forth in that Consent Agreement and Final Order.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended ~~January 2,~~December 31, 2016. The risk factors disclosed under those Reports in addition to the other information set forth in this Report, could materially affect our business, financial condition, or results. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(millions, except per share data)

Period
(a) Total Number
of Shares
Purchased
(b) Average Price
Paid Per Share
(c) Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
(d) Approximate
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs
Month #7:
7/03/2016 - 7/30/2016 —
$ —
—
$ 1,114
Month #8:
7/31/2016 - 8/27/2016 —
$ —
—
$ 1,114
Month #9:
8/28/2016 - 10/01/2016 0.5
$ 78.41
0.5
$ 1,074
Total 0.5
$ 78.41
0.5



Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1:
4/02/2017 - 4/29/2017	—	$	—	—	$	949
Month #2:
4/30/2017 - 5/27/2017	2.3	$	70.79	2.3	$	789
Month #3:
5/28/2017 - 7/01/2017	2.1	$	70.67	2.1	$	639
Total	4.4	$	70.73	4.4

In December 2015, our board of directors approved a share repurchase program authorizing us to repurchase shares of our common stock amounting to $1.5 billion beginning in January 2016 through December 2017. This authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. During the second quarter of 2017, the Company repurchased 4.4 million shares for a total of $310 million, of which $265 million was paid during the quarter and $45 million was payable at July 1, 2017.

Item 6. Exhibits


(a)	Exhibits:




31.1	Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant
31.2	Rule 13a-14(e)/15d-14(a) Certification from ~~Ronald L. Dissinger~~Fareed Khan
32.1	Section 1350 Certification from John A. Bryant
32.2	Section 1350 Certification from ~~Ronald L. Dissinger~~Fareed Khan
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

KELLOGG COMPANY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KELLOGG COMPANY

/s/ ~~Ronald L. Dissinger~~Fareed Khan

~~Ronald L. Dissinger~~Fareed Khan

Principal Financial Officer;

Senior Vice President and Chief Financial Officer

/s/ Donald O. Mondano

Donald O. Mondano

Principal Accounting Officer;

Vice President and Corporate Controller

Date: ~~November 7, 2016~~August 4, 2017

KELLOGG COMPANY

EXHIBIT INDEX



Exhibit No.	Description	Electronic (E) Paper (P) Incorp. By Ref. (IBRF)
31.1	Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant	E
31.2	Rule 13a-14(e)/15d-14(a) Certification from ~~Ronald L. Dissinger~~Fareed Khan	E
32.1	Section 1350 Certification from John A. Bryant	E
32.2	Section 1350 Certification from ~~Ronald L. Dissinger~~Fareed Khan	E
101.INS	XBRL Instance Document	E
101.SCH	XBRL Taxonomy Extension Schema Document	E
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	E
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	E
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	E
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	E

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