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EX-32.2 - EXHIBIT 32.2 - KELLOGG COk-2018q1ex322.htm
EX-32.1 - EXHIBIT 32.1 - KELLOGG COk-2018q1ex321.htm
EX-31.2 - EXHIBIT 31.2 - KELLOGG COk-2018q1ex312.htm
EX-31.1 - EXHIBIT 31.1 - KELLOGG COk-2018q1ex311.htm

 
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 March 31, 2018
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 1-4171
KELLOGG COMPANY
 
State of Incorporation—Delaware
  
IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting  company  ¨
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Common Stock outstanding as of April 28, 2018 — 346,848,322 shares
 



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




Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
 
March 31,
2018 (unaudited)
December 30,
2017
Current assets
 
 
Cash and cash equivalents
$
370

$
281

Accounts receivable, net
1,601

1,389

Inventories
1,214

1,217

Other current assets
135

149

Total current assets
3,320

3,036

Property, net
3,713

3,716

Goodwill
5,514

5,504

Other intangibles, net
2,650

2,639

Investments in unconsolidated entities
425

429

Other assets
1,080

1,027

Total assets
$
16,702

$
16,351

Current liabilities
 
 
Current maturities of long-term debt
$
408

$
409

Notes payable
469

370

Accounts payable
2,230

2,269

Other current liabilities
1,408

1,474

Total current liabilities
4,515

4,522

Long-term debt
7,881

7,836

Deferred income taxes
357

355

Pension liability
812

839

Other liabilities
583

605

Commitments and contingencies


Equity
 
 
Common stock, $.25 par value
105

105

Capital in excess of par value
852

878

Retained earnings
7,334

7,069

Treasury stock, at cost
(4,346
)
(4,417
)
Accumulated other comprehensive income (loss)
(1,407
)
(1,457
)
Total Kellogg Company equity
2,538

2,178

Noncontrolling interests
16

16

Total equity
2,554

2,194

Total liabilities and equity
$
16,702

$
16,351

See accompanying Notes to Consolidated Financial Statements.


3


Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
 
Quarter ended
(Results are unaudited)
March 31,
2018
April 1,
2017
Net sales
$
3,401

$
3,248

Cost of goods sold
2,149

2,088

Selling, general and administrative expense
742

880

Operating profit
510

280

Interest expense
69

61

Other income (expense), net
70

88

Income before income taxes
511

307

Income taxes
67

43

Earnings (loss) from unconsolidated entities

2

Net income
$
444

$
266

Per share amounts:
 
 
Basic earnings
$
1.28

$
0.76

Diluted earnings
$
1.27

$
0.75

Dividends
$
0.54

$
0.52

Average shares outstanding:
 
 
Basic
346

351

Diluted
348

354

Actual shares outstanding at period end
347

350

See accompanying Notes to Consolidated Financial Statements.


4


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

Quarter ended
March 31, 2018
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
444

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
$
30

$
19

49

Cash flow hedges:
 
 
 
Reclassification to net income
2


2

Postretirement and postemployment benefits:
 
 
 
Reclassification to net income:
 
 
 
Net experience loss
(1
)

(1
)
Other comprehensive income (loss)
$
31

$
19

$
50

Comprehensive income
 
 
$
494








 
Quarter ended
April 1, 2017
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
266

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
$
76

$
9

85

Cash flow hedges:
 
 
 
Reclassification to net income
2

(1
)
1

Postretirement and postemployment benefits:
 
 
 
Reclassification to net income:
 
 
 
Net experience loss
1


1

Other comprehensive income (loss)
$
79

$
8

$
87

Comprehensive income
 
 
$
353

See accompanying Notes to Consolidated Financial Statements.


5


Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
 
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellogg
Company
equity
Non-controlling
interests
Total
equity
(unaudited)
shares
amount
shares
amount
Balance, December 31, 2016
420

$
105

$
806

$
6,552

69

$
(3,997
)
$
(1,575
)
$
1,891

$
16

$
1,907

Common stock repurchases
 
 


 
7

(516
)
 
(516
)
 
(516
)
Net income
 
 
 
1,254

 
 
 
1,254


1,254

Dividends
 
 
 
(736
)
 
 
 
(736
)


(736
)
Other comprehensive income
 
 
 
 
 
 
118

118


118

Stock compensation
 
 
66

 
 
 
 
66

 
66

Stock options exercised and other
1

 
6

(1
)
(1
)
96

 
101

 
101

Balance, December 30, 2017
421

$
105

$
878

$
7,069

75

$
(4,417
)
$
(1,457
)
$
2,178

$
16

$
2,194

Common stock repurchases
 
 


 


 

 

Net income
 
 
 
444

 
 
 
444



444

Dividends
 
 
 
(187
)
 
 
 
(187
)
 
(187
)
Other comprehensive income
 
 
 
 
 
 
50

50


50

Stock compensation
 
 
16

 
 
 
 
16

 
16

Stock options exercised and other
 
 
(42
)
8

(1
)
71

 
37



37

Balance, March 31, 2018
421

$
105

$
852

$
7,334

74

$
(4,346
)
$
(1,407
)
$
2,538

$
16

$
2,554

See accompanying Notes to Consolidated Financial Statements.


6


Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
 
 
Quarter ended
(unaudited)
March 31,
2018
April 1,
2017
Operating activities
 
 
Net income
$
444

$
266

Adjustments to reconcile net income to operating cash flows:
 
 
Depreciation and amortization
122

121

Postretirement benefit plan expense (benefit)
(47
)
(56
)
Deferred income taxes
(1
)
(66
)
Stock compensation
16

17

Other
(30
)
30

Postretirement benefit plan contributions
(19
)
(24
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
Trade receivables
(175
)
(437
)
Inventories
13

58

Accounts payable
(4
)
11

All other current assets and liabilities
(91
)
46

Net cash provided by (used in) operating activities
228

(34
)
Investing activities
 
 
Additions to properties
(132
)
(130
)
Collections of deferred purchase price on securitized trade receivables

245

Other
1

(1
)
Net cash provided by (used in) investing activities
(131
)
114

Financing activities
 
 
Net issuances (reductions) of notes payable
99

191

Reductions of long-term debt

(1
)
Net issuances of common stock
50

40

Common stock repurchases

(125
)
Cash dividends
(187
)
(182
)
Net cash provided by (used in) financing activities
(38
)
(77
)
Effect of exchange rate changes on cash and cash equivalents
30

15

Increase (decrease) in cash and cash equivalents
89

18

Cash and cash equivalents at beginning of period
281

280

Cash and cash equivalents at end of period
$
370

$
298

 
 
 
Supplemental cash flow disclosures
 
 
Interest paid
$
14

$
16

Income taxes paid
$
31

$
16

 
 
 
Supplemental cash flow disclosures of non-cash investing activities:
 
 
Beneficial interests obtained in exchange for securitized trade receivables
$

$
256

   Additions to properties included in accounts payable
$
92

$
106

See accompanying Notes to Consolidated Financial Statements.


7


Notes to Consolidated Financial Statements
for the quarter ended March 31, 2018 (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 2017 Annual Report on Form 10-K.

The condensed balance sheet information at December 30, 2017 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 March 31, 2018 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 March 31, 2018, $724 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $547 million of those payment obligations to participating financial institutions. As of December 30, 2017, $850 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $674 million of those payment obligations to participating financial institutions.

Revenue
The Company recognizes revenue from the sale of food products which are sold to retailers through direct sales forces, broker and distributor arrangements. The Company also recognizes revenue from the license of our trademarks granted to third parties who uses these trademarks on their merchandise. Revenue from these licenses are not material to the Company. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable provisions for discounts, returns, allowances, and various government withholding taxes.

Contract balances where revenue is recognized in the current period that is not a result of current period performance is not material to the Company. The Company also does not incur costs to obtain or fulfill contracts.

Performance obligations

The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. At the time of delivery, the customer is invoiced with payment terms which are commensurate with the customer’s credit profile. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.

The Company assesses the goods and services promised in its customers’ purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised, whether explicitly stated or implied based on customary business practices. For a purchase order that has more

8


than one performance obligation, the Company allocates the total consideration to each distinct performance obligation on a relative standalone selling price basis.

Significant Judgments

The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Where applicable, future provisions are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.

Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally insignificant and recognized as a change in management estimate in a subsequent period.

Practical expedients

For the quarter ended March 30, 2018, the Company elected the following practical expedients in accordance with ASU 2014-09:

Significant financing component - The Company elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Shipping and handling costs - The Company elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service.
Measurement of transaction price - The Company has elected to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.

New accounting standards adopted in the period

Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued an ASU intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. The new guidance is effective on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company adopted the ASU in the first quarter of 2018. The impact of adoption was immaterial to the financial statements.

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 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 adopted the ASU in the first quarter of 2018.

9



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 adopted the ASU in the first quarter of 2018 with no impact.

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 adopted the new ASU in the first quarter of 2018.

Recognition and measurement of financial assets and liabilities. In January 2016, the FASB issued an ASU which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and which updates certain presentation and disclosure requirements. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. Entities should apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted the updated standard in the first quarter of 2018. The impact of adoption was immaterial to the 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. The Company adopted the updated standard in the first quarter of 2018 using the full retrospective method and restated previously reported amounts. In connection with the adoption, the Company made reclassification of certain customer allowances. The adoption effects relate to the timing of recognition and classification of certain promotional allowances. The updated revenue standard also required additional disaggregated revenue disclosures. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.
Impacts to Previously Reported Results
Adoption of the standards related to revenue recognition, pension and cash flow impacted our previously reported results as follows:
 
As of December 30, 2017
Consolidated Balance Sheet
Previously Reported
Revenue Recognition ASU
Restated
Other assets
$
1,026

$
1

$
1,027

Other current liabilities
$
1,431

$
43

$
1,474

Deferred income taxes
$
363

$
(8
)
$
355

Retained earnings
$
7,103

$
(34
)
$
7,069



10


 
Quarter ended April 1, 2017
Consolidated Statement of Income
Previously Reported
Revenue Recognition ASU
Pension ASU
Restated
Net sales
$
3,254

$
(6
)
$

$
3,248

Cost of goods sold
$
2,050

$
(16
)
$
54

$
2,088

Selling, general and administrative expense
$
844

$
5

$
31

$
880

Other income (expense), net
$
3

$

$
85

$
88

Income taxes
$
42

$
1

$

$
43

Net income
$
262

$
4

$

$
266

Per share amounts:
 
 
 
 
Basic earnings
$
0.75

$
0.01

$

$
0.76

Diluted earnings
$
0.74

$
0.01

$

$
0.75



 
Quarter ended April 1, 2017
Consolidated Statement of Cash Flows
Previously Reported
Revenue Recognition ASU
Cash Flow ASU
Restated
Net income
$
262

$
4

$

$
266

Deferred income taxes
$
(67
)
$
1

$

$
(66
)
Trade receivables
$
(192
)
$

$
(245
)
$
(437
)
Other
$
30

$

$

$
30

All other current assets and liabilities
$
51

$
(5
)
$

$
46

Net cash provided by (used in) operating activities
$
211

$

$
(245
)
$
(34
)
Collections of deferred purchase price on securitized trade receivables
$

$

$
245

$
245

Net cash provided by (used in) investing activities
$
(131
)
$

$
245

$
114

 
Accounting standards to be adopted in future periods

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued an ASU permitting a company to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income (AOCI). The reclassification is optional. Regardless of whether or not a company opts to make the reclassification, the new guidance requires all companies to include certain disclosures in their financial statements. The guidance is effective for all fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing whether to adopt the ASU and the impact of adoption.

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.


11


Note 2 Sale of accounts receivable

During 2016, The Company initiated a program in which a customer could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).

The Company has two Receivable Sales Agreements (Monetization Programs) and previously had a separate U.S. accounts receivable securitization program (Securitization Program), both described below, which are intended to directly offset the impact the Extended Terms Program 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. The Company terminated the Securitization Program at the end of 2017 and entered into the second monetization program during the quarter ended March 31, 2018.

The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of March 31, 2018 and December 30, 2017 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
Monetization Programs
The Company has two Monetization Programs, for a discrete group of customers, to sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide 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 $988 million (increased from $800 million as of December 30, 2017, reflecting the execution of a second monetization program on March 20, 2018).  Accounts receivable sold of $927 million and $601 million remained outstanding under these arrangement as of March 31, 2018 and December 30, 2017, 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 was $7 million for the quarter ended March 31, 2018 and was immaterial for the quarter ended April 1, 2017. The recorded loss is included in Other income and expense.
Securitization Program
Between July 2016 and December 2017, the Company had a Securitization Program with a third party financial institution. Under the program, the Company received cash consideration of up to $600 million and a deferred purchase price asset for the remainder of the purchase price. Transfers under the Securitization Program were accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. This Securitization Program utilized Kellogg Funding Company (Kellogg Funding), a wholly-owned subsidiary of the Company. Kellogg Funding's sole business consisted of the purchase of receivables, from its parent or other subsidiary and subsequent transfer of such receivables and related assets to financial institutions. Although Kellogg Funding is included in the Company's consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of Kellogg Funding assets prior to any assets or value in Kellogg Funding becoming available to the Company or its subsidiaries. The assets of Kellogg Funding are not available to pay creditors of the Company or its subsidiaries. The Securitization Program was structured to expire in July 2018, but was terminated at the end of 2017. In March 2018 the Company substantially replaced the securitization program with the second monetization program.

As of December 30, 2017, approximately $433 million of accounts receivable sold to Kellogg Funding under the Securitization Program remained outstanding, for which the Company received net cash proceeds of approximately $412 million and a deferred purchase price asset of approximately $21 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 current assets on the Consolidated Balance Sheet. Upon final settlement of the program in March 2018, the outstanding deferred purchase price asset of $21 million was exchanged for previously sold trade accounts receivable.

The recorded net loss on sale of receivables for the quarter ended April 1, 2017 is included in Other income and expense and is not material.


12


Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $43 million and $86 million remained outstanding under these programs as of March 31, 2018 and December 30, 2017, 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 the sale of these receivables is included in Other income and expense and is not material.

Note 3 Goodwill and other intangible assets

RXBAR acquisition
In October 2017, the Company completed its acquisition of Chicago Bar Co., LLC, the manufacturer of RXBAR, for $600 million, or $596 million net of cash and cash equivalents. The purchase price was subject to certain working capital adjustments based on the actual working capital on the acquisition date compared to targeted amounts. These adjustments were finalized during the quarter ended March 31, 2018 and resulted in a purchase price reduction of $1 million. The acquisition was accounted for under the purchase price method and was financed with short-term borrowings.

For the quarter ended March 31, 2018, the acquisition added $51 million in net sales in the Company's North America Other reporting segment.

The assets and liabilities are included in the Consolidated Balance Sheet as of March 31, 2018 within the North America Other reporting segment. The acquired assets and assumed liabilities include the following:
(millions)
 
 
October 27, 2017
Current assets
 
 
$
42

Goodwill
 
 
373

Intangible assets, primarily indefinite-lived brands
 
 
203

Current liabilities
 
 
(23
)
 
 
 
$
595


The amounts in the above table represent the allocation of purchase price as of March 31, 2018 and represent the finalization of the valuations for intangible assets, which resulted in a $2 million increase in amortizable intangible assets with a corresponding reduction of goodwill.

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

Carrying amount of goodwill
(millions)
U.S.
Snacks
U.S.
Morning
Foods
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 30, 2017
$
3,568

$
131

$
82

$
836

$
414

$
244

$
229

$
5,504

Purchase price allocation adjustment



(1
)



(1
)
Purchase price adjustment



(1
)



(1
)
Currency translation adjustment



(1
)
10

3


12

March 31, 2018
$
3,568

$
131

$
82

$
833

$
424

$
247

$
229

$
5,514



13


Intangible assets subject to amortization
Gross carrying amount
 
 
 
 
 
 
 
 
(millions)
U.S.
Snacks
U.S.
Morning
Foods
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 30, 2017
$
42

$
8

$

$
22

$
45

$
74

$
10

$
201

Purchase price allocation adjustment



2




2

Currency translation adjustment




1



1

March 31, 2018
$
42

$
8

$

$
24

$
46

$
74

$
10

$
204

 
 
 
 
 
 
 
 
 
Accumulated Amortization
 
 
 
 
 
 
 
 
December 30, 2017
$
22

$
8

$

$
5

$
18

$
10

$
4

$
67

Amortization
1




1

1


3

Currency translation adjustment








March 31, 2018
$
23

$
8

$

$
5

$
19

$
11

$
4

$
70

 
 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
 
 
 
 
 
 
December 30, 2017
$
20

$

$

$
17

$
27

$
64

$
6

$
134

Purchase price allocation adjustment



2




2

Amortization
(1
)



(1
)
(1
)

(3
)
Currency translation adjustment




1



1

March 31, 2018
$
19

$

$

$
19

$
27

$
63

$
6

$
134

For intangible assets in the preceding table, amortization was $3 million and $2 million for the quarters ended March 31, 2018 and April 1, 2017, respectively. The currently estimated aggregate annual amortization expense for full-year 2018 is approximately $12 million.
Intangible assets not subject to amortization
(millions)
U.S.
Snacks
U.S.
Morning
Foods
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 30, 2017
$
1,625

$

$

$
360

$
434

$
86

$

$
2,505

Purchase price allocation adjustment








Currency translation adjustment




11



11

March 31, 2018
$
1,625

$

$

$
360

$
445

$
86

$

$
2,516


Note 4 Investments in unconsolidated entities
In 2015, the Company acquired, for a final net purchase price of $418 million, a 50% interest in Multipro Singapore Pte. Ltd. (Multipro), a leading distributor of a variety of food products in Nigeria and Ghana and also obtained a call option to indirectly 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). 

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



14


The acquisition of the 50% interest is accounted for under the equity method of accounting.  The Purchase Option, is recorded at cost and has been monitored for impairment through March 31, 2018 with no impairment being required.  In July 2017, the Company received notification that the entity, through June 30, 2017, had achieved the level of earnings as defined in the agreement for the purchase option to become exercisable for a one year period.

See Note 14 Subsequent Events for additional information related to Multipro and the Purchase Option.
Note 5 Restructuring and cost reduction activities
The Company views its restructuring and cost reduction activities as part of its operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.

Total Projects
During the quarter ended March 31, 2018, the Company recorded total charges of $20 million across all restructuring and cost reduction activities. The charges were comprised of $13 million recorded in cost of goods sold (COGS) and a $7 million expense recorded in selling, general and administrative (SG&A) expense.
During the quarter ended April 1, 2017, the Company recorded total charges of $142 million across all restructuring and cost reduction activities. The charges were comprised of $13 million recorded in COGS, $125 million recorded in SG&A expense and $4 million recorded in other (income) expense, net (OIE).
Project K
Project K is expected to continue generating savings that may be invested in key strategic areas of focus for the business or utilized to achieve our growth initiatives.
The program’s focus is on strengthening existing businesses in core markets, increasing growth in developing and emerging markets, driving an increased level of value-added innovation, implementing a more efficient go-to-market model for certain businesses and creating a more efficient organizational design in several markets. Since inception, Project K has provided significant benefits and is expected to continue to provide a number of benefits in the future, including an optimized supply chain infrastructure, the implementation of global business services, a new global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market strategies.
The Company currently anticipates that the program will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be approximately $1.1 billion. Based on current estimates and actual charges to date, the Company expects the total project charges will consist of asset-related costs of approximately $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $500 million which will include severance, pension and other termination benefits; and other costs of approximately $600 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.
The Company currently expects that total pre-tax charges related to Project K will impact reportable segments as follows: U.S. Snacks (approximately 34%), U.S. Morning Foods (approximately 17%), U.S. Specialty (approximately 1%), North America Other (approximately 13%), Europe (approximately 22%), Latin America (approximately 2%), Asia-Pacific (approximately 6%), and Corporate (approximately 5%).

Since the inception of Project K, the Company has recognized charges of $1,397 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $807 million recorded in COGS, $721 million recorded in SG&A, and ($137 million) recorded in OIE.



15


The tables below provide the details for charges incurred during the quarters ended March 31, 2018 and April 1, 2017 and program costs to date for programs currently active as of March 31, 2018.
 
Quarter ended
 
Program costs to date
(millions)
March 31, 2018
April 1, 2017
 
March 31, 2018
Employee related costs
$
4

$
107

 
$
538

Pension curtailment (gain) loss, net

4

 
(137
)
Asset related costs
4

10

 
273

Asset impairment


 
155

Other costs
12

21

 
568

Total
$
20

$
142

 
$
1,397

 
 
 
 
 
 
Quarter ended
 
Program costs to date
(millions)
March 31, 2018
April 1, 2017
 
March 31, 2018
U.S. Snacks
$
6

$
120

 
$
509

U.S. Morning Foods
2

1

 
253

U.S. Specialty


 
21

North America Other
2

7

 
142

Europe
7

6

 
337

Latin America
2

1

 
29

Asia Pacific

1

 
87

Corporate
1

6

 
19

Total
$
20

$
142

 
$
1,397

Employee related costs consist primarily of severance and related benefits. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives. Asset related costs consist primarily of accelerated depreciation. Asset impairments were recorded for fixed assets that were determined to be impaired and were written down to their estimated fair value. Other costs consist of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.
At March 31, 2018 total project reserves were $94 million, related to severance payments and other costs of which a substantial portion will be paid in 2018 and 2019. The following table provides details for exit cost reserves.
 
Employee
Related
Costs
Pension curtailment (gain) loss, net
Asset
Impairment
Asset
Related
Costs
Other
Costs
Total
Liability as of December 31, 2017
$
97

$

$

$

$
63

$
160

2018 restructuring charges
4



4

12

20

Cash payments
(28
)



(54
)
(82
)
Non-cash charges and other



(4
)

(4
)
Liability as of March 31, 2018
$
73

$

$

$

$
21

$
94


16


Note 6 Equity
Earnings per share
Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table. There were 6 million anti-dilutive potential common shares excluded from the reconciliation for the quarter ended March 31, 2018. There were 4 million anti-dilutive potential common shares excluded from the reconciliation for the quarter ended April 1, 2017, respectively.

Quarters ended March 31, 2018 and April 1, 2017:
 
 
 
 
(millions, except per share data)
Net income

Average
shares
outstanding
Earnings
per share
2018
 
 
 
Basic
$
444

346

$
1.28

Dilutive potential common shares
 
2

(0.01
)
Diluted
$
444

348

$
1.27

2017
 
 
 
Basic
$
266

351

$
0.76

Dilutive potential common shares
 
3

(0.01
)
Diluted
$
266

354

$
0.75


In December 2017, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock beginning in January 2018 through December 2019. As of March 31, 2018, $1.5 billion remains available under the authorization.
During the quarter ended March 31, 2018, the Company did not repurchase any shares of common stock. During the quarter ended April 1, 2017, the Company repurchased 2 million shares of common stock for a total of $125 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.

17


Reclassifications out of AOCI for the quarters ended March 31, 2018 and April 1, 2017, consisted of the following:
(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
March 31, 2018
Quarter ended
April 1, 2017
  
(Gains) losses on cash flow hedges:
 
 
 
Foreign currency exchange contracts
$

$
(1
)
COGS
Interest rate contracts
2

2

Interest expense
 
$
2

$
1

Total before tax
 


Tax expense (benefit)
 
$
2

$
1

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

OIE
 
$
(1
)
$
1

Total before tax
 


Tax expense (benefit)
 
$
(1
)
$
1

Net of tax
Total reclassifications
$
1

$
2

Net of tax
 
 
 
 
Accumulated other comprehensive income (loss), net of tax, as of March 31, 2018 and December 30, 2017 consisted of the following:
(millions)
March 31,
2018
December 30, 2017
Foreign currency translation adjustments
$
(1,377
)
$
(1,426
)
Cash flow hedges — unrealized net gain (loss)
(59
)
(61
)
Postretirement and postemployment benefits:
 
 
Net experience loss
33

34

Prior service cost
(4
)
(4
)
Total accumulated other comprehensive income (loss)
$
(1,407
)
$
(1,457
)
Note 7 Debt
The following table presents the components of notes payable at March 31, 2018 and December 30, 2017:
 
March 31, 2018
 
December 30, 2017
(millions)
Principal
amount
Effective
interest rate (a)
 
Principal
amount
Effective
interest rate (a)
U.S. commercial paper
$
191

2.15
 %
 
$
196

1.76
 %
Europe commercial paper
197

(0.31
)%
 
96

(0.32
)%
Bank borrowings
81

 
 
78

 
Total
$
469

 
 
$
370

 
(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.

The Company has entered into interest rate swaps with notional amounts totaling $1.4 billion, which effectively converts a portion of the associated U.S. Dollar Notes and Euro Notes from fixed rate to floating rate obligations. These derivative instruments are designated as fair value hedges. The effective interest rates on debt obligations resulting from the Company’s interest rate swaps as of March 31, 2018 were as follows: (a) seven-year 3.25% U.S. Dollar Notes due 20182.57%; (b) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.51%; (c) ten-year 4.00% U.S. Dollar Notes due 2020 – 3.39%; (d) ten-year 3.125% U.S. Dollar Notes due 2022 – 3.97%; (e) ten-year 2.75% U.S. Dollar Notes due 2023 – 4.09%; (f) seven-year 2.65% U.S. Dollar Notes due 2023 – 3.47%; (g) eight-year

18


1.00% Euro Notes due 2024 – 0.75%; (h) ten-year 1.25% Euro Notes due 2025 - 1.28% and (i) ten-year 3.25% U.S. Notes due 2026 – 3.82%.
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 2017 Annual Report on Form 10-K.
The Company classifies pre-tax stock compensation expense in COGS and SG&A expense principally within its Corporate segment. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized was as follows:
 
Quarter ended
(millions)
March 31, 2018
April 1, 2017
Pre-tax compensation expense
$
17

$
18

Related income tax benefit
$
4

$
6

As of March 31, 2018, total stock-based compensation cost related to non-vested awards not yet recognized was $130 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Stock options
During the quarters ended March 31, 2018 and April 1, 2017, 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 2017 Annual Report on Form 10-K.
Quarter ended March 31, 2018:
 
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
14

$
64

 
 
 
Granted
3

70

 
 
 
Exercised
(1
)
57

 
 
 
Forfeitures and expirations


 
 
 
Outstanding, end of period
16

$
65

6.9
$
52

 
Exercisable, end of period
11

$
63

5.9
$
52

Quarter ended April 1, 2017:
 
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
)
56

 
 
 
Forfeitures and expirations


 
 
 
Outstanding, end of period
16

$
64

7.2
$
147

 
Exercisable, end of period
11

$
60

6.3
$
140


19



The weighted-average grant date fair value of options granted was $10.00 per share and $10.14 per share for the quarters ended March 31, 2018 and April 1, 2017, 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 March 31, 2018:
18
%
6.6
2.82
%
3.00
%
Grants within the quarter ended April 1, 2017:
18
%
6.6
2.26
%
2.80
%
The total intrinsic value of options exercised was $10 million and $12 million for the quarters ended March 31, 2018 and April 1, 2017, respectively.
Performance shares
In the first quarter of 2018, 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 adjusted net sales growth and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.
A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of adjusted net sales growth achievement. Compensation cost related to adjusted net sales growth performance is revised for changes in the expected outcome. The 2018 target grant currently corresponds to approximately 188,000 shares, with a grant-date fair value of $72 per share.
Based on the market price of the Company’s common stock at March 31, 2018, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:
(millions)
March 31, 2018
2016 Award
$
17

2017 Award
$
15

2018 Award
$
24

The 2015 performance share award, payable in stock, was settled at 75% of target in February 2018 for a total dollar equivalent of $8 million.
Other stock-based awards
During the quarter ended March 31, 2018, 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 2017 Annual Report on Form 10-K.

20


Quarter ended March 31, 2018:
Employee restricted stock units
Shares (thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
1,673

$
65

Granted
635

64

Vested
(399
)
59

Forfeited
(44
)
67

Non-vested, end of period
1,865

$
66

Quarter ended April 1, 2017:
Employee restricted stock and restricted stock units
Shares (thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
1,166

$
63

Granted
629

67

Vested
(25
)
55

Forfeited
(22
)
64

Non-vested, end of period
1,748

$
65

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 2017 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

21


Pension
 
Quarter ended
(millions)
March 31, 2018
April 1, 2017
Service cost
$
22

$
25

Interest cost
42

41

Expected return on plan assets
(92
)
(90
)
Amortization of unrecognized prior service cost
2

2

Recognized net (gain) loss
(9
)
3

Net periodic benefit cost
(35
)
(19
)
Curtailment (gain) loss

1

Total pension (income) expense
$
(35
)
$
(18
)
Other nonpension postretirement
 
Quarter ended
(millions)
March 31, 2018
April 1, 2017
Service cost
$
5

$
5

Interest cost
9

9

Expected return on plan assets
(24
)
(24
)
Amortization of unrecognized prior service (gain)
(2
)
(2
)
Recognized net (gain) loss

(29
)
Net periodic benefit cost
(12
)
(41
)
Curtailment loss

3

Total postretirement benefit (income) expense
$
(12
)
$
(38
)
Postemployment
 
Quarter ended
(millions)
March 31, 2018
April 1, 2017
Service cost
$
1

$
1

Interest cost

1

Recognized net (gain) loss
(1
)
1

Total postemployment benefit expense
$

$
3


During the quarter ended March 31, 2018, the Company recognized a gain of $9 million related to the remeasurement of a U.S. pension plan as current year distributions are expected to exceed service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurement gain recognized during the quarter was due primarily to a favorable change in the discount rate relative to prior year end.

During the quarter ended April 1, 2017, the Company recognized curtailment losses of $1 million and $3 million within pension and nonpension postretirement plan, 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 lower discount rate.

22


Company contributions to employee benefit plans are summarized as follows:
(millions)
Pension
Nonpension postretirement
Total
Quarter ended:
 
 
 
March 31, 2018
$
15

$
4

$
19

April 1, 2017
$
21

$
3

$
24

Full year:
 
 
 
Fiscal year 2018 (projected)
$
24

$
13

$
37

Fiscal year 2017 (actual)
$
31

$
13

$
44


Actual 2018 contributions could be different from current projections, as influenced by potential discretionary funding of our benefit trusts versus other competing investment priorities.

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
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code including but not limited to, reducing the corporate tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may be electively paid over eight years, and accelerating first year expensing of certain capital expenditures.

The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company may complete the accounting for the impacts of the Tax Act under ASC Topic 740. Per SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a Company cannot determine a provisional estimate to be included in the financial statements, the Company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a Company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.

The transition tax is on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. The Company's estimate was unchanged during the first quarter of 2018. The Company is awaiting further interpretative guidance, continuing to assess available tax methods and elections, and continuing to gather additional information in order to finalize calculations and complete the accounting for the transition tax liability.

In addition to the transition tax, the Tax Act introduced a territorial tax system, which was effective beginning in 2018. The territorial tax system will impact the Company’s overall global capital and legal entity structure, working capital, and repatriation plan on a go-forward basis. In light of the territorial tax system, and other new international provisions within the Tax Act effective beginning in 2018, the Company is currently analyzing its global capital and legal entity structure, working capital requirements, and repatriation plans. Based on the Company's analysis of the territorial tax system and other new international tax provisions as of March 31, 2018, the Company continues to support the assertion to indefinitely reinvest $2.6 billion of accumulated foreign earnings and profits in Europe and other non-U.S. jurisdictions. As a result, as a reasonable provisional estimate, the Company did not record any new deferred tax liabilities associated with the territorial tax system or any changes to the indefinite reinvestment

23


assertion. Further, it is impracticable for the Company to estimate any future tax costs for any unrecognized deferred tax liabilities associated with its indefinite reinvestment assertion as of March 31, 2018, because the actual tax liability, if any, would be dependent on complex analysis and calculations considering various tax laws, exchange rates, circumstances existing when a repatriation, sale, or liquidation occurs, or other factors. If there are any changes to our indefinite reinvestment assertion as a result of finalizing our assessment of the new Tax Act, the Company will adjust its provisional estimates, record, and disclose any tax impacts in the appropriate period, pursuant to SAB 118.

The consolidated effective tax rate for the quarter ended March 31, 2018 was 13% as compared to 14% in the same quarter of the prior year. The effective tax rate for the quarter ended March 31, 2018 benefited from a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring as well as the reduction in the U.S. corporate tax rate effective at the beginning of 2018. These impacts were mitigated somewhat by an increased weighting of taxable income in higher tax rate jurisdictions versus the prior year. The effective tax rate for the quarter ended April 1, 2017 benefited from a deferred tax benefit of $38 million resulting from intercompany transfers of intellectual property.

As of March 31, 2018, the Company classified $10 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 $6 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 quarter ended March 31, 2018; $50 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
(millions)
December 30, 2017
$
60

Tax positions related to current year:
 
Additions
2

Reductions

Tax positions related to prior years:
 
Additions
1

Reductions

Settlements

Lapse in statute of limitations

March 31, 2018
$
63


The accrual balance for tax-related interest was approximately $24 million at March 31, 2018.
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 and nonderivative financial instruments 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 and nonderivative hedging instruments 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.

24


Total notional amounts of the Company’s derivative instruments as of March 31, 2018 and December 30, 2017 were as follows:
(millions)
March 31,
2018
December 30,
2017
Foreign currency exchange contracts
$
1,277

$
2,172

Cross-currency contracts
736


Interest rate contracts
1,710

2,250

Commodity contracts
550

544

Total
$
4,273

$
4,966

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 March 31, 2018 and December 30, 2017, 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, cross-currency 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 March 31, 2018 or December 30, 2017.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of March 31, 2018 and December 30, 2017:
Derivatives designated as hedging instruments
 
March 31, 2018
 
December 30, 2017
(millions)
Level 1
Level 2
Total
 
Level 1
Level 2
Total
Liabilities:
 
 

 
 
 

Cross-currency contracts:
 
 
 
 
 
 
 
   Other Liabilities
 
$
(8
)
$
(8
)
 
 
 
 
Interest rate contracts:
 
 

 
 
 

Other liabilities (a)

(32
)
(32
)
 

(54
)
(54
)
Total liabilities
$

$
(40
)
$
(40
)

$

$
(54
)
$
(54
)
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.4 billion and $2.3 billion as of March 31, 2018 and December 30, 2017, respectively.

25


Derivatives not designated as hedging instruments
 
March 31, 2018
 
December 30, 2017
(millions)
Level 1
Level 2
Total
 
Level 1
Level 2
Total
Assets:
 
 
 
 
 
 
 
Foreign currency exchange contracts:
 
 
 
 
 
 
 
Other prepaid assets
$

$
9

$
9

 
$

$
10

$
10

Commodity contracts:
 
 
 
 
 
 
 
Other prepaid assets
5


5

 
6


6

Total assets
$
5

$
9

$
14


$
6

$
10

$
16

Liabilities:
 
 
 
 
 
 
 
Foreign currency exchange contracts:
 
 
 
 
 
 
 
Other current liabilities
$

$
(6
)
$
(6
)
 
$

$
(14
)
$
(14
)
Commodity contracts:
 
 
 
 
 
 
 
Other current liabilities
(7
)

(7
)
 
$
(7
)
$

$
(7
)
Total liabilities
$
(7
)
$
(6
)
$
(13
)

$
(7
)
$
(14
)
$
(21
)
The Company has designated 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 $2.8 billion and $2.7 billion as of March 31, 2018 and December 30, 2017, respectively.

The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of March 31, 2018 and December 30, 2017.
(millions)
 
Line Item in the Consolidated Balance Sheet in which the hedged item is included
 
Carrying amount of the hedged liabilities
 
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
 
 
 
 
March 31,
2018
December 30,
2017
 
March 31,
2018
December 30,
2017
Interest rate contracts
 
Current maturities of long-term debt
 
$
401

$
402

 
$
1

$
2

Interest rate contracts
 
Long-term debt
 
$
3,406

$
3,481

 
$
(53
)
$
(22
)
(a) The current maturities of hedged long-term debt includes $1 million and $2 million of hedging adjustment on discontinued hedging relationships as of March 31, 2018 and December 30, 2017, respectively. The hedged long-term debt includes $(20) million and $32 million of hedging adjustment on discontinued hedging relationships as of March 31, 2018 and December 30, 2017, respectively.

26


The Company has elected to not 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 March 31, 2018 and December 30, 2017 would be adjusted as detailed in the following table:
As of March 31, 2018:
 
 
 
  
  
Gross Amounts Not Offset in the
Consolidated Balance Sheet
  
  
Amounts
Presented in
the
Consolidated
Balance Sheet
Financial
Instruments
Cash Collateral
Received/
Posted
Net
Amount
Total asset derivatives
$
14

$
(12
)
$

$
2

Total liability derivatives
$
(53
)
$
12

$
30

$
(11
)

As of December 30, 2017:
 
 
 
 
  
  
Gross Amounts Not Offset in the
Consolidated Balance Sheet
  
  
Amounts
Presented in the
Consolidated
Balance Sheet
Financial
Instruments
Cash Collateral
Received/
Posted
Net
Amount
Total asset derivatives
$
16

$
(15
)
$

$
1

Total liability derivatives
$
(75
)
$
15

$
37

$
(23
)

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended March 31, 2018 and April 1, 2017 was as follows:

Derivatives and non-derivatives in net investment hedging relationships
(millions)
Gain (loss)
recognized in
AOCI
 
Gain (loss) excluded from assessment of hedge effectiveness
Location of gain (loss) in income of excluded component
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
 
Foreign currency denominated long-term debt
$
(73
)
 
$
(25
)
 
$

 
$

 
Cross-currency contracts
(8
)
 

 
3

 

Other income (expense), net
Total
$
(81
)
 
$
(25
)
 
$
3

 
$

 
Derivatives not designated as hedging instruments
(millions)
Location of gain
(loss) recognized
in income
Gain (loss)
recognized in
income
 
 
March 31,
2018
 
April 1,
2017
Foreign currency exchange contracts
COGS
$
3

 
$
(9
)
Foreign currency exchange contracts
Other income (expense), net
(4
)
 
(5
)
Foreign currency exchange contracts
SG&A
1

 

Commodity contracts
COGS
5

 
(13
)
Commodity contracts
SG&A

 
1

Total
 
$
5


$
(26
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


27


The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended March 31, 2018 and April 1, 2017:
 
 
 
 
March 31, 2018
 
April 1, 2017
(millions)
 
Interest Expense
 
COGS
Interest Expense
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded
 
$
69

 
$
2,088

$
61

 
Gain (loss) on fair value hedging relationships:
 
 
 
 
 
 
Interest contracts:
 
 
 
 
 
 
Hedged items
 
32

 

9

 
Derivatives designated as hedging instruments
 
(28
)
 

(4
)
 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
Interest contracts:
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 
(2
)
 

(2
)
 
Foreign exchange contracts:
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 

 
1


During the next 12 months, the Company expects $7 million of net deferred losses reported in AOCI at March 31, 2018 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 March 31, 2018 was $39 million. If the credit-risk-related contingent features were triggered as of March 31, 2018, the Company would be required to post additional collateral of $23 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 as of March 31, 2018 triggered by credit-risk-related contingent features.
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 $8.1 billion and $7.9 billion, respectively, as of March 31, 2018.
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 March 31, 2018, 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

28


counterparty that are subject to enforceable netting agreements. As of March 31, 2018, the Company posted $16 million related to reciprocal collateralization agreements. As of March 31, 2018 the Company posted $14 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 21% of consolidated trade receivables at March 31, 2018.
Note 12 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 ten 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. Snacks operating segment includes cookies, crackers, cereal bars, savory snacks and fruit-flavored snacks.
U.S. Morning Foods includes primarily cereal and toaster pastries.
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, Canada, and RXBAR 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. Certain immaterial reclassifications have been made to the prior year amounts to conform with current year presentation.

29


 
Quarter ended
(millions)
March 31,
2018
April 1,
2017
Net sales
 
 
U.S. Snacks
$
762

$
795

U.S. Morning Foods
691

708

U.S. Specialty
398

393

North America Other
479

392

Europe
587

513

Latin America
232

220

Asia Pacific
252

227

Consolidated
$
3,401

$
3,248

Operating profit
 
 
U.S. Snacks
$
102

$
(36
)
U.S. Morning Foods
150

157

U.S. Specialty
80

96

North America Other
67

49

Europe
74

66

Latin America
22

33

Asia Pacific
27

22

Total Reportable Segments
522

387

Corporate
(12
)
(107
)
Consolidated