UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)



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

For the quarterly period ended ~~September~~June 30, ~~2017~~2018



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

For the transition period from to

Commission file number 1-4171

KELLOGG COMPANY



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

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

Registrant’s telephone number: 269-961-2000

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

Yes x No ¨

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

Yes x No ¨

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



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

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

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

Yes ¨ No x

Common Stock outstanding as of ~~October~~July 28, ~~2017~~2018 — ~~345,472,588~~346,672,653 shares

KELLOGG COMPANY

INDEX



		Page
	PART I — Financial Information
	Item 1:
	Financial Statements
	Consolidated Balance Sheet — ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016~~30, 2017	3
	Consolidated Statement of Income — quarter and year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016~~2017	4
	Consolidated Statement of Comprehensive Income – quarter and year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016~~2017	5
	Consolidated Statement of Equity — year ended December ~~31, 2016~~30, 2017 and year-to-date period ended ~~September~~June 30, ~~2017~~2018	6
	Consolidated Statement of Cash Flows — year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016~~2017	7
	Notes to Consolidated Financial Statements	8
	Item 2:
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3336
	Item 3:
	Quantitative and Qualitative Disclosures about Market Risk	5857
	Item 4:
	Controls and Procedures	5857
	PART II — Other Information
	Item 1:
	Legal Proceedings	5958
	Item 1A:
	Risk Factors	5958
	Item 2:
	Unregistered Sales of Equity Securities and Use of Proceeds	5958
	Item 6:
	Exhibits	6058
	Signatures	6159
	Exhibit Index	6260

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET

(millions, except per share data)


	September 30, 2017 (unaudited)			December 31, 2016 *			June 30, 2018 (unaudited)			December 30, 2017
Current assets
Cash and cash equivalents	$	267		$	280		$	257		$	281
Accounts receivable, net	1,512			1,231			1,530			1,389
Inventories:
Raw materials and supplies	327			315
Finished goods and materials in process	868			923
Other prepaid assets	198			191
Inventories							1,291			1,217
Other current assets							189			149
Total current assets	3,172			2,940			3,267			3,036
Property, net of accumulated depreciation of $5,636 and $5,280	3,629			3,569
Property, net							3,638			3,716
Goodwill							6,072			5,504
Other intangibles, net							3,391			2,639
Investments in unconsolidated entities	432			438			421			429
Goodwill	5,135			5,166
Other intangibles, net of accumulated amortization of $62 and $54	2,442			2,369
Other assets	831			629			1,112			1,027
Total assets	$	15,641		$	15,111		$	17,901		$	16,351
Current liabilities
Current maturities of long-term debt	$	410		$	631		$	7		$	409
Notes payable	572			438			324			370
Accounts payable	2,140			2,014			2,306			2,269
Accrued advertising and promotion	552			436
Accrued income taxes	38			47
Accrued salaries and wages	277			318
Other current liabilities	658			590			1,329			1,474
Total current liabilities	4,647			4,474			3,966			4,522
Long-term debt	7,216			6,698			8,737			7,836
Deferred income taxes	411			525			714			355
Pension liability	933			1,024			532			839
Other liabilities	491			464			548			605
Commitments and contingencies
Equity
Common stock, $.25 par value	105			105			105			105
Capital in excess of par value	851			806			866			878
Retained earnings	6,862			6,571			7,743			7,069
Treasury stock, at cost	(4,425		)	(3,997		)	(4,375		)	(4,417		)
Accumulated other comprehensive income (loss)	(1,466		)	(1,575		)	(1,501		)	(1,457		)
Total Kellogg Company equity	1,927			1,910			2,838			2,178
Noncontrolling interests	16			16			566			16
Total equity	1,943			1,926			3,404			2,194
Total liabilities and equity	$	15,641		$	15,111		$	17,901		$	16,351

* Condensed from audited financial statements.

~~Refer to~~See accompanying 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)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016		June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Net sales	$	3,273		$	3,254		$	9,714		$	9,917	$	3,360	$	3,175	$	6,761	$	6,423
Cost of goods sold	2,041			1,990			6,013			6,138		2,151		1,950		4,300		4,038
Selling, general and administrative expense	768			854			2,424			2,482		735		840		1,477		1,720
Operating profit	464			410			1,277			1,297		474		385		984		665
Interest expense	64			58			188			343		72		63		141		124
Other income (expense), net	(2		)	3			(5		)	7		69		63		139		151
Income before income taxes	398			355			1,084			961		471		385		982		692
Income taxes	104			62			248			215		70		102		137		145
Earnings (loss) from unconsolidated entities	3			(1		)	5			1		198		—		198		2
Net Income	$	297		$	292		$	841		$	747
Net income												599		283		1,043		549
Net income (loss) attributable to noncontrolling interests												3		—		3		—
Net income attributable to Kellogg Company												$	596	$	283	$	1,040	$	549
Per share amounts:
Basic earnings	$	0.86		$	0.83		$	2.41		$	2.13	$	1.72	$	0.81	$	3.00	$	1.57
Diluted earnings	$	0.85		$	0.82		$	2.39		$	2.11	$	1.71	$	0.80	$	2.99	$	1.56
Dividends	$	0.54		$	0.52		$	1.58		$	1.52	$	0.54	$	0.52	$	1.08	$	1.04
Average shares outstanding:
Basic	345			350			348			350		347		349		346		350
Diluted	348			354			351			354		348		352		348		353
Actual shares outstanding at period end							345			351						346		346

~~Refer to~~See accompanying Notes to Consolidated Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(millions)


																			Quarter ended June 30, 2018									Year-to-date period ended June 30, 2018
(Results are unaudited)																			Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income																									$	599								$	1,043
Other comprehensive income (loss):
Foreign currency translation adjustments																			$	(54	)	$	(46	)	(100		)	$	(24	)	$	(27	)	(51		)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges																			3			(1		)	2			3			(1		)	2
Reclassification to net income																			2			(1		)	1			4			(1		)	3
Postretirement and postemployment benefits:
Reclassification to net income:
Net experience loss																			(1		)	—			(1		)	(2		)	—			(2		)
Other comprehensive income (loss)																			$	(50	)	$	(48	)	$	(98	)	$	(19	)	$	(29	)	$	(48	)
Comprehensive income																									$	501								$	995
Net Income (loss) attributable to noncontrolling interests																									3									3
Other comprehensive income (loss) attributable to noncontrolling interests																									(4		)							(4		)
Comprehensive income attributable to Kellogg Company																									$	502								$	996

	Quarter ended September 30, 2017									Year-to-date period ended September 30, 2017									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			Pre-tax amount			Tax (expense) benefit			After-tax amount			Pre-tax amount			Tax (expense) benefit			After-tax amount
Net income							$	297								$	841								$	283								$	549
Other comprehensive income (loss):
Foreign currency translation adjustments	(6		)	33			27			4			99			103			$	(66	)	$	57		(9		)	$	10		$	66		76
Cash flow hedges:
Reclassification to net income	3			(1		)	2			7			(2		)	5			2			—			2			4			(1		)	3
Postretirement and postemployment benefits:
Reclassification to net income:
Net experience loss	—			—			—			1			—			1			—			—			—			1			—			1
Other comprehensive income (loss)	$	(3	)	$	32		$	29		$	12		$	97		$	109		$	(64	)	$	57		$	(7	)	$	15		$	65		$	80
Comprehensive income							$	326								$	950								$	276								$	629

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

~~Refer to~~See accompanying 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 2, 2016	420	$	105	$	745		$	6,597		70		$	(3,943	)	$	(1,376	)	$	2,128		$	10	$	2,138
Common stock repurchases										6		(426		)				(426		)			(426		)
Net income							694											694			1		695
Acquisition of noncontrolling interest																		—			5		5
Dividends							(716		)									(716		)			(716		)
Other comprehensive loss															(199		)	(199		)	—		(199		)
Stock compensation				63														63					63
Stock options exercised and other				(2		)	(4		)	(7	)	372						366					366
Balance, December 31, 2016	420	$	105	$	806		$	6,571		69		$	(3,997	)	$	(1,575	)	$	1,910		$	16	$	1,926		420	$	105	$	806		$	6,552		69		$	(3,997	)	$	(1,575	)	$	1,891		$	16		$	1,907
Common stock repurchases										7		(516		)				(516		)			(516		)										7		(516		)				(516		)				(516		)
Net income							841											841					841									1,254											1,254			—			1,254
Dividends							(550		)									(550		)			(550		)							(736		)									(736		)				(736		)
Other comprehensive income															109			109			—		109																	118			118			—			118
Stock compensation				53														53					53						66														66						66
Stock options exercised and other				(8		)	—			(1	)	88						80					80			1			6			(1		)	(1	)	96						101						101
Balance, September 30, 2017	420	$	105	$	851		$	6,862		75		$	(4,425	)	$	(1,466	)	$	1,927		$	16	$	1,943
Balance, December 30, 2017																										421	$	105	$	878		$	7,069		75		$	(4,417	)	$	(1,457	)	$	2,178		$	16		$	2,194
Common stock repurchases																																			1		(50		)				(50		)				(50		)
Net income																																1,040											1,040			3			1,043
Acquisition of noncontrolling interest, net																																											—			552			552
Dividends																																(374		)									(374		)	(1		)	(375		)
Other comprehensive income																																								(44		)	(44		)	(4		)	(48		)
Stock compensation																													30														30						30
Stock options exercised and other																													(42		)	8			(2	)	92						58						58
Balance, June 30, 2018																										421	$	105	$	866		$	7,743		74		$	(4,375	)	$	(1,501	)	$	2,838		$	566		$	3,404

~~Refer to notes~~See accompanying 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)	September 30, 2017			October 1, 2016			June 30, 2018			July 1, 2017
Operating activities
Net income	$	841		$	747		$	1,043		$	549
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization	366			357			234			240
Postretirement benefit plan expense (benefit)	(191		)	(53		)	(86		)	(96		)
Deferred income taxes	(20		)	(26		)	69			(66		)
Stock compensation	53			45			30			36
Gain on unconsolidated entities, net							(200		)	—
Other	32			(3		)	(67		)	36
Postretirement benefit plan contributions	(33		)	(29		)	(274		)	(28		)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables	(223		)	(208		)	(83		)	(716		)
Inventories	78			25			(38		)	63
Accounts payable	135			139			64			70
Accrued income taxes	(10		)	10
Accrued interest expense	43			53
Accrued and prepaid advertising and promotion	83			66
Accrued salaries and wages	(50		)	(45		)
All other current assets and liabilities, net	17			(57		)
All other current assets and liabilities							(245		)	4
Net cash provided by (used in) operating activities	1,121			1,021			447			92
Investing activities
Additions to properties	(374		)	(376		)	(270		)	(268		)
Collections of deferred purchase price on securitized trade receivables							—			568
Acquisitions, net of cash acquired	4			(21		)	(28		)	4
Investments in unconsolidated entities, net proceeds	14			27
Investments in unconsolidated entities							(388		)	—
Acquisition of cost method investments							(4		)	—
Other	(7		)	(11		)	29			(4		)
Net cash provided by (used in) investing activities	(363		)	(381		)	(661		)	300
Financing activities
Net issuances (reductions) of notes payable	134			(749		)	(76		)	287
Issuances of long-term debt	656			2,061			993			655
Reductions of long-term debt	(626		)	(1,230		)	(401		)	(626		)
Net issuances of common stock	87			356			70			65
Common stock repurchases	(516		)	(426		)	(50		)	(390		)
Cash dividends	(550		)	(533		)	(374		)	(363		)
Net cash provided by (used in) financing activities	(815		)	(521		)	162			(372		)
Effect of exchange rate changes on cash and cash equivalents	44			(24		)	28			34
Increase (decrease) in cash and cash equivalents	(13		)	95			(24		)	54
Cash and cash equivalents at beginning of period	280			251			281			280
Cash and cash equivalents at end of period	$	267		$	346		$	257		$	334

Supplemental cash flow disclosures
Interest paid	$	149		$	294		$	151		$	138
Income taxes paid	$	279		$	225		$	76		$	205

Supplemental cash flow disclosures of non-cash investing activities:
Beneficial interests obtained in exchange for securitized trade receivables							$	—		$	566
Additions to properties included in accounts payable	$	85		$	87		$	77		$	82

~~Refer to~~See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

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

The condensed balance sheet information at December ~~31, 2016~~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 ~~September~~June 30, ~~2017~~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 ~~September~~June 30, ~~2017, $798~~2018, $834 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold ~~$582~~$572 million of those payment obligations to participating financial institutions. As of December ~~31, 2016, $677~~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 ~~$507~~$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 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

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

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

~~Income Taxes.~~ In October 2016, the FASB, as part of their simplification initiative, issued an Accounting Standard Update (ASU) to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current Generally Accepted Accounting Principles (GAAP) prohibit recognition of current and deferred income taxes for intra-entity asset transfers until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendments in the ASU eliminate the exception, such that entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the period of adoption. The Company early adopted the ASU in the first quarter of 2017. As a result of intercompany transfers of intellectual property, the Company recorded reductions totaling $39 million to income tax expense in the year-to-date period ended September 30, 2017. Upon adoption, there was no cumulative effect adjustment to retained earnings.

~~Accounting standards to be adopted in future periods~~

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

to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company ~~is currently assessing~~adopted the ASU in the first quarter of 2018. The impact ~~and timing~~ of adoption ~~of this ASU.~~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 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~~adopted 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~~adopted the ~~impact and timing~~ASU in the first quarter of ~~adoption of this ASU.~~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 ~~will adopt~~adopted the new ASU in the first quarter of 2018. If the Company adopted the ASU in the first quarter of 2017, cash flow from operations would have decreased $45 million and cash flow from investing activities would have increased $45 million for the year-to-date period ended September 30, 2017.

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

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



	Quarter ended July 1, 2017
Consolidated Statement of Income	Previously Reported			Revenue Recognition ASU			Pension ASU		Restated
Net sales	$	3,187		$	(12	)	$	—	$	3,175
Cost of goods sold	$	1,922		$	(17	)	$	45	$	1,950
Selling, general and administrative expense	$	812		$	4		$	24	$	840
Other income (expense), net	$	(6	)	$	—		$	69	$	63
Income taxes	$	102		$	—		$	—	$	102
Net income	$	282		$	1		$	—	$	283
Per share amounts:
Basic earnings	$	0.81		$	—		$	—	$	0.81
Diluted earnings	$	0.80		$	—		$	—	$	0.80



	Year-to-date period ended July 1, 2017
Consolidated Statement of Income	Previously Reported			Revenue Recognition ASU			Pension ASU		Restated
Net sales	$	6,441		$	(18	)	$	—	$	6,423
Cost of goods sold	$	3,972		$	(33	)	$	99	$	4,038
Selling, general and administrative expense	$	1,656		$	9		$	55	$	1,720
Other income (expense), net	$	(3	)	$	—		$	154	$	151
Income taxes	$	144		$	1		$	—	$	145
Net income	$	544		$	5		$	—	$	549
Per share amounts:
Basic earnings	$	1.56		$	0.01		$	—	$	1.57
Diluted earnings	$	1.54		$	0.02		$	—	$	1.56



	Year-to-date period ended July 1, 2017
Consolidated Statement of Cash Flows	Previously Reported			Revenue Recognition ASU			Cash Flow ASU			Restated
Net income	$	544		$	5		$	—		$	549
Deferred income taxes	$	(67	)	$	1		$	—		$	(66	)
Other	$	30		$	—		$	6		$	36
Trade receivables	$	(148	)	$	—		$	(568	)	$	(716	)
All other current assets and liabilities, net	$	10		$	(6	)	$	—		$	4
Net cash provided by (used in) operating activities	$	654		$	—		$	(562	)	$	92
Collections of deferred purchase price on securitized trade receivables	$	—		$	—		$	568		$	568
Investment in unconsolidated entities, net proceeds	$	6		$	—		$	(6	)	$	—
Net cash provided by (used in) investing activities	$	(262	)	$	—		$	562		$	300

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 when to adopt the ASU ~~was originally~~and the impact of adoption.

Leases. In February 2016, the FASB issued ~~it was~~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 criteriaas 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, 2016, and early adoption was not permitted. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The updated standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Entities will be permitted to adopt the new revenue standard early, but not before the original effective date. Entities will have the option to apply the final standard retrospectively or use a modified retrospective method, recognizing the cumulative effect of the ASU in retained earnings at the date of initial application. An entity will not restate prior periods if it uses the modified retrospective method, but will be required to disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the ASU as compared to the guidance in effect prior to the change, as well as reasons for significant changes. Based upon the Company's preliminary assessment, the impact of2018. Early adoption is ~~not expected to be material, and is limited to timing and classification differences as well as disaggregated revenue disclosures.~~permitted. The Company will adopt the ~~updated standard~~ASU in the first quarter of ~~2018, using a modified retrospective transition method.~~2019, and is currently evaluating the impact that implementing this ASU will have on its financial statements.

Note 2 Sale of accounts receivable

InDuring 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 ~~entered into a~~has two Receivable Sales ~~Agreement~~Agreements (Monetization Programs) and previously had a separate U.S. accounts receivable securitization program ~~(the "securitization program")~~(Securitization Program), both described below, which ~~primarily enable the Company to extend payment terms for participating customers in exchange for elimination of the discount the Company offered for early payment. The agreements~~ are intended to directly offset the impact ~~that extended customer payment terms~~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. ~~See further discussion in~~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 impact on working capital of the Extended Terms Program is effectively offset by the Monetization and Securitization Programs~~Liquidity and capital resources~~ ~~section of MD&A.~~.

~~In March 2016,~~The Company has no retained interest in the receivables sold, however the Company ~~entered into~~does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of June 30, 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 ~~Receivable Sales Agreement~~discrete group of customers, to sell, on a revolving basis, certain trade accounts receivable ~~balances~~invoices to a third party financial ~~institution.~~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 ~~Receivable Sales Agreement provides~~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 ~~$800~~$1,033 million (increased from ~~$700~~$988 million as of ~~July 1, 2017). During~~March 31, 2018, reflecting the ~~year-to-date periods ended September 30, 2017 and October 1, 2016 approximately $1.7 billion and $1.0 billion, respectively,~~execution of ~~accounts receivable have been sold via this arrangement.~~an amendment to the second monetization program on June 26, 2018). Accounts receivable sold of ~~$629~~$936 million and ~~$562~~$601 million remained outstanding under ~~this arrangement~~these arrangements as of ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016,~~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 $3$6 million and $8$12 million for the quarter and year-to-date ~~period~~periods ended ~~September~~June 30, ~~2017,~~2018, respectively and was $1$3 million and $3$5 million for the quarter and year-to-date ~~period~~periods ended ~~October~~July 1, ~~2016,~~2017, respectively. The recorded loss is included in Other income and expense.

InSecuritization Program

Between July 2016 and December 2017, the Company ~~entered into the securitization program~~had a Securitization Program with a third party financial institution. Under the program, the Company ~~receives~~received cash consideration of up to $600 million and a deferred purchase price asset for the remainder of the purchase price. Transfers under ~~this agreement are~~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 utilizes~~Securitization Program utilized Kellogg Funding Company (Kellogg Funding), a wholly-owned subsidiary of the Company. Kellogg Funding's sole business ~~consists~~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. ~~This program expires~~The Securitization Program was structured to expire in July 2018, but ~~can be renewed~~was terminated at the end of 2017. In March 2018 the Company substantially replaced the securitization program with ~~consent from~~ the ~~parties to the~~second monetization program. Kellogg Funding had no creditors and held no assets at June 30, 2018.

During the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively, approximately $2.0 billion and $341 million of accounts receivable were sold via the accounts receivable securitization program. As of ~~September~~December 30, 2017, approximately ~~$480~~$433 million of accounts receivable sold to Kellogg Funding under the ~~securitization program~~Securitization Program remained outstanding, for which the Company received net cash proceeds of approximately ~~$433~~$412 million and a deferred purchase price asset of approximately $47 million. As of December 31, 2016, approximately $292 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company received net cash proceeds of approximately $255 million and a deferred purchase price asset of approximately $37$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 ~~prepaid~~current assets on the Consolidated Balance Sheet. ~~The proceeds from these sales~~Upon final settlement of ~~receivables are included~~the program in ~~cash from operating activities in~~March 2018, the ~~Consolidated Statement~~outstanding deferred purchase price asset of ~~Cash Flows.~~ $21 million was exchanged for previously sold trade accounts receivable.

The recorded net loss on sale of receivables ~~was $1 million and $4 million~~ for the ~~quarter and~~ year-to-date ~~periods~~period ended ~~September 30,~~July 1, 2017 ~~respectively and was not material for the 2016 periods. The recorded loss~~ is included in Other income and ~~expense.~~expense and is not material.

~~The Company has no retained interests in the receivables sold under the~~Other programs above. The Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of September 30, 2017 and December 31, 2016 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.

Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. ~~During the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively, $145 million and $33 million of accounts receivable have been sold via these programs.~~ Accounts receivable sold of ~~$45~~$26 million and ~~$124~~$86 million remained outstanding under these programs as of ~~September~~June 30, 2018 and December 30, 2017, ~~and December 31, 2016,~~ respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on the sale of these receivables is included in Other income and expense and is not material.

Note 3 ~~Goodwill~~Acquisitions, West Africa investments, goodwill and other intangible assets

~~Parati~~Multipro acquisition

~~In December 2016,~~On May 2, 2018, the Company (i) acquired ~~Ritmo Investimentos, controlling shareholder~~an incremental 1% ownership interest in Multipro, a leading distributor of ~~Parati S/A, Afical Ltda~~a variety of food products in Nigeria and ~~Padua Ltda ("Parati Group")~~Ghana, and (ii) exercised its call option (Purchase Option) to acquire a 50% interest in Tolaram Africa Foods, PTE LTD (TAF), a ~~leading Brazilian~~holding company with a 49% equity interest in an affiliated food ~~group~~manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer. The aggregate cash consideration paid was approximately $419 million and was funded through cash on hand and short-term borrowings, which was refinanced with long-term borrowings in May 2018. As part of the consideration for ~~approximately BRL 1.38 billion ($381 million) or $379 million, net~~the acquisition, an escrow established in connection with the original Multipro investment in 2015, which represented a significant portion of ~~cash and cash equivalents.~~the amount paid for the Company’s initial investment, was released by the Company. The ~~purchase price was~~amount paid to exercise the Purchase Option is subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the exercise date compared to targeted amounts.

As a result of the Company’s incremental ownership interest in Multipro and concurrent changes to the shareholders' agreement, the Company now has a 51% controlling interest in and began consolidating Multipro. Accordingly, the acquisition was accounted for as a business combination and the assets and liabilities of Multipro were included in the June 30, 2018 Consolidated Balance Sheet and the results of its operations have been included in the Consolidated Statement of Income subsequent to the acquisition date. The aggregate of the

consideration paid and the fair value of previously held equity interest totaled $626 million, or $617 million net of cash acquired. The Multipro investment was previously accounted for under the equity method of accounting and the Company recorded our share of equity income or loss from Multipro within Earnings (loss) from unconsolidated entities. In connection with the business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of $245 million, which is included within Earnings (loss) from unconsolidated entities.

The assets and liabilities are included in the Consolidated Balance Sheet as of June 30, 2018 within the Asia-Pacific reporting segment. The acquired assets and assumed liabilities include the following:



(millions)	May 2, 2018
Current assets	$	118
Property	41
Goodwill	616
Intangible assets subject to amortization, primarily customer relationships	425
Intangible assets not subject to amortization, primarily distribution rights	373
Deferred tax liability	(256		)
Other liabilities	(148		)
Noncontrolling interest	(552		)
	$	617

The amounts in the above table represent the preliminary allocation of purchase price and are subject to revision when valuations are finalized for intangible assets, which are expected in 2018. The goodwill from the acquisition is not expected to be deductible for income tax purposes.

Multipro contributed net revenues of $129 million and net earnings of $2 million since the acquisition, including transaction fees and integration costs. The unaudited pro forma historical net sales, as if Multipro had been acquired at the beginning of 2017 are estimated as follows:



	Quarter ended				Year-to-date period ended
(millions)	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Net sales	$	3,433	$	3,326	$	7,043	$	6,739

The impact of the business combination as if Multipro had been acquired at the beginning of 2017, on the unaudited pro forma historical net income and net income attributable to Kellogg Company, exclusive of the non-cash $245 million gain on the disposition of the equity interest, was immaterial.

Investment in TAF

The investment in TAF is accounted for under the equity method of accounting with the Company’s share of equity income or loss being recognized within Earnings (loss) from unconsolidated entities. The $458 million aggregate of the consideration paid upon exercise and the historical cost value of the Put Option was compared to the estimated fair value of the Company’s ownership percentage of TAF and the Company recognized a one-time, non-cash loss of $45 million within Earnings (loss) from unconsolidated entities, which represents an other than temporary excess of cost over fair value of the investment. The difference between the carrying amount of TAF and the underlying equity in net assets is primarily attributable to brand and customer list intangible assets, a portion of which is being amortized over future periods, and goodwill.

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 ~~July 1, 2017~~March 31, 2018 and resulted in a purchase price reduction of ~~BRL 14 million ($4 million).~~$1 million. The acquisition was accounted for under the purchase price method and was financed with ~~cash on hand and~~ short-term borrowings.

~~In our Latin America reportable segment, for the quarter ended September 30, 2017 the acquisition added $48 million in net sales and $3 million of operating profit.~~ For the year-to-date period ended ~~September~~June 30, ~~2017~~2018, the acquisition added ~~$141 million in~~ net sales in the Company's North America Other reporting segment totaling $110 million and ~~$15~~net earnings totaling $6 million, ~~of operating profit.~~respectively.

The assets and liabilities ~~of the Parati Group~~ are included in the Consolidated Balance Sheet as of ~~September~~June 30, ~~2017~~2018 within the ~~Latin~~North America Other reporting segment. The acquired assets and assumed liabilities include the following:

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

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

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

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



(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 final allocation of purchase price as of ~~September~~June 30, ~~2017 and represent the finalization of the appraisals for~~2018, which resulted in a $2 million increase in amortizable intangible assets ~~and~~with a corresponding reduction of goodwill during the ~~Company's evaluation~~first quarter of pre-acquisition contingencies. The purchase price allocation remains subject to the Company’s finalization of the merger and the resulting income tax effects, which is expected to occur in November 2017. The goodwill from this acquisition is expected to be deductible for income tax purposes.2018.

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 and distribution agreements, are presented in the following tables:

Carrying amount of goodwill


(millions)	U.S. Morning Foods		U.S. Snacks		U.S. Specialty		North America Other		Europe		Latin America			Asia Pacific		Consoli- dated			U.S. Snacks		U.S. Morning Foods		U.S. Specialty Channels		North America Other			Europe			Latin America			Asia Pacific			Consoli- dated
December 31, 2016	$	131	$	3,568	$	82	$	457	$	376	$	328		$	224	$	5,166
December 30, 2017																			$	3,568	$	131	$	82	$	836		$	414		$	244		$	229		$	5,504
Additions																			—		—		—		—			—			—			616			616
Purchase price allocation adjustment	—		—		—		—		—		(79		)	—		(79		)	—		—		—		(1		)	—			—			—			(1		)
Purchase price adjustment	—		—		—		—		—		(4		)	—		(4		)	—		—		—		(1		)	—			—			—			(1		)
Currency translation adjustment	—		—		—		4		35		9			4		52			—		—		—		(2		)	(12		)	(25		)	(7		)	(46		)
September 30, 2017	$	131	$	3,568	$	82	$	461	$	411	$	254		$	228	$	5,135
June 30, 2018																			$	3,568	$	131	$	82	$	832		$	402		$	219		$	838		$	6,072

Intangible assets subject to amortization


Gross carrying amount
(millions)	U.S. Morning Foods		U.S. Snacks			U.S. Specialty		North America Other		Europe			Latin America			Asia Pacific			Consoli- dated			U.S. Snacks			U.S. Morning Foods		U.S. Specialty Channels		North America Other			Europe			Latin America			Asia Pacific			Consoli- dated
December 31, 2016	$	8	$	42		$	—	$	5	$	40		$	36		$	10		$	141
December 30, 2017																						$	42		$	8	$	—	$	22		$	45		$	74		$	10		$	201
Additions																						—			—		—		—			—			—			425			425
Purchase price allocation adjustment	—		—			—		—		—			39			—			39			—			—		—		2			—			—			—			2
Currency translation adjustment	—		—			—		—		3			2			—			5			—			—		—		—			(1		)	(10		)	(3		)	(14		)
September 30, 2017	$	8	$	42		$	—	$	5	$	43		$	77		$	10		$	185
June 30, 2018																						$	42		$	8	$	—	$	24		$	44		$	64		$	432		$	614

Accumulated Amortization
December 31, 2016	$	8	$	19		$	—	$	4	$	14		$	6		$	3		$	54
December 30, 2017																						$	22		$	8	$	—	$	5		$	18		$	10		$	4		$	67
Amortization	—		2			—		—		2			3			1			8			2			—		—		1			1			2			3			9
September 30, 2017	$	8	$	21		$	—	$	4	$	16		$	9		$	4		$	62
Currency translation adjustment																						—			—		—		—			—			(1		)	—			(1		)
June 30, 2018																						$	24		$	8	$	—	$	6		$	19		$	11		$	7		$	75

Intangible assets subject to amortization, net	Intangible assets subject to amortization, net																					Intangible assets subject to amortization, net
December 31, 2016	$	—	$	23		$	—	$	1	$	26		$	30		$	7		$	87
December 30, 2017																						$	20		$	—	$	—	$	17		$	27		$	64		$	6		$	134
Additions																						—			—		—		—			—			—			425			425
Purchase price allocation adjustment	—		—			—		—		—			39			—			39			—			—		—		2			—			—			—			2
Amortization																						(2		)	—		—		(1		)	(1		)	(2		)	(3		)	(9		)
Currency translation adjustment	—		—			—		—		3			2			—			5			—			—		—		—			(1		)	(9		)	(3		)	(13		)
Amortization	—		(2		)	—		—		(2		)	(3		)	(1		)	(8		)
September 30, 2017	$	—	$	21		$	—	$	1	$	27		$	68		$	6		$	123
June 30, 2018																						$	18		$	—	$	—	$	18		$	25		$	53		$	425		$	539

For intangible assets in the preceding table, amortization was $8$9 million and $5$4 million for the year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, respectively. The currently estimated aggregate annual amortization expense for full-year ~~2017~~2018 is approximately ~~$11~~$23 million.

Intangible assets not subject to amortization

(millions)
U.S.
Morning
Foods
U.S.
Snacks
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 31, 2016 $ —
$ 1,625
$ —
$ 176
$ 383
$ 98
$ —
$ 2,282
Purchase price allocation adjustment —
—
—
—
—
(11 ) —
(11 )
Currency translation adjustment —
—
—
—
45
3
—
48
September 30, 2017 $ —
$ 1,625
$ —
$ 176
$ 428
$ 90
$ —
$ 2,319



(millions)	U.S. Snacks		U.S. Morning Foods		U.S. Specialty Channels		North America Other		Europe			Latin America			Asia Pacific			Consoli- dated
December 30, 2017	$	1,625	$	—	$	—	$	360	$	434		$	86		$	—		$	2,505
Additions	—		—		—		—		—			—			373			373
Currency translation adjustment	—		—		—		—		(10		)	(13		)	(3		)	(26		)
June 30, 2018	$	1,625	$	—	$	—	$	360	$	424		$	73		$	370		$	2,852

~~Note 4 Investments in unconsolidated entities~~

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

Note 54 Restructuring and cost reduction activities

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

Total Projects

During the quarter ended ~~September~~June 30, ~~2017,~~2018, the Company recorded total net charges of $1$5 million across all restructuring and cost reduction activities. The charges were comprised of a$(4) million net ~~$9 million credit~~gain recorded in cost of goods sold (COGS) and a ~~net $10~~$9 million expense recorded in selling, general and administrative (SG&A) expense. During the year-to-date period ended ~~September~~June 30, ~~2017,~~2018, the Company recorded total charges of ~~$239~~$25 million across all restructuring and cost reduction activities. The charges were comprised of ~~$26~~$9 million recorded in ~~cost of goods sold (COGS)~~COGS and ~~$213~~$16 million recorded in ~~selling, general and administrative (SG&A)~~SG&A expense.

During the quarter ended ~~October~~July 1, ~~2016,~~2017, the Company recorded total charges of ~~$40~~$96 million across all restructuring and cost reduction activities. The charges ~~consist~~were comprised of ~~$12~~$24 million recorded in COGS, ~~and $28~~$75 million recorded in SG&A ~~expense.~~expense and $(3) million net gain recorded in other (income) expense, net (OIE). During the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, the Company recorded total charges of ~~$164~~$238 million across all restructuring and cost reduction activities. The charges ~~consist~~were comprised of ~~$66~~$37 million recorded in COGS, ~~and $98~~$200 million recorded in SG&A ~~expense.~~expense and $1 million recorded in OIE.

Project K

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

In addition to the original program’s focus on strengthening existing businesses in core markets, increasing growth in developing and emerging markets, and driving an increased level of value-added innovation, the extended program will also focus on implementing a more efficient go-to-market model for certain businesses and creating a more efficient organizational design in several markets.

Since inception, Project K has ~~provided significant benefits~~reduced the Company’s cost structure, and is expected to ~~continue to~~ provide ~~a number of~~enduring benefits, ~~in the future,~~ including an optimized supply chain infrastructure, ~~the implementation of~~an efficient global business services model, a ~~new~~ global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market ~~strategies.~~models. These benefits are intended to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation.

The Company currently anticipates that ~~Project K~~the program will result in total pre-tax charges, once all phases are approved and implemented, on the lower end of a range 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 ~~16%), U.S. Snacks (approximately 35%~~17%), U.S. Specialty Channels (approximately 1%), North America Other (approximately 13%), Europe (approximately ~~23%~~22%), Latin America (approximately 2%), Asia-Pacific (approximately 5%6%), and Corporate (approximately 5%).

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

Since the inception of Project K, the Company has recognized charges of ~~$1,355~~$1,402 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, ~~$716~~$803 million recorded in COGS, ~~and $633~~$730 million recorded in SG&A, ~~expense.~~and ($137 million) recorded in OIE.

~~Other Projects~~

In 2015 the Company implemented a zero-based budgeting (ZBB) program in its North America business that has delivered ongoing annual savings. During 2016, ZBB was expanded to include the international segments of the business. In support of the ZBB initiative, the Company incurred pre-tax charges of approximately $1 million and $21 million during the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively. Total charges of $38 million have been recognized since the inception of the ZBB program.

The tables below provide the details for charges ~~across all restructuring and cost reduction activities~~ incurred during the ~~quarter~~quarters and year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016~~2017 and program costs to date for programs currently active as of ~~September~~June 30, ~~2017.~~2018.


	Quarter ended					Year-to-date period ended					Program costs to date			Quarter ended						Year-to-date period ended					Program costs to date
(millions)	September 30, 2017			October 1, 2016		September 30, 2017			October 1, 2016		September 30, 2017			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017		June 30, 2018
Employee related costs	$	31		$	6	$	166		$	26	$	523		$	1		$	28		$	5		$	135	$	539
Pension curtailment (gain) loss, net	(134		)	—		(133		)	—		(122		)	—			(3		)	—			1		(137		)
Asset related costs	38			5		68			32		260			(14		)	20			(10		)	30		259
Asset impairment	—			—		—			16		155			—			—			—			—		155
Other costs	66			29		138			90		577			18			51			30			72		586
Total	$	1		$	40	$	239		$	164	$	1,393		$	5		$	96		$	25		$	238	$	1,402

	Quarter ended					Year-to-date period ended					Program costs to date			Quarter ended						Year-to-date period ended					Program costs to date
(millions)	September 30, 2017			October 1, 2016		September 30, 2017			October 1, 2016		September 30, 2017			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017		June 30, 2018
U.S. Snacks														$	3		$	79		9			$	199	$	512
U.S. Morning Foods	$	14		$	4	$	16		$	13	$	257		10			1			12			2		263
U.S. Snacks	106			8		305			62		507
U.S. Specialty	—			1		1			4		20
U.S. Specialty Channels														—			1			—			1		21
North America Other	4			7		13			20		141			(1		)	2			1			9		141
Europe	13			6		21			34		320			(13		)	2			(6		)	8		324
Latin America	2			2		6			6		30			2			3			4			4		31
Asia Pacific	1			2		5			6		86			3			3			3			4		90
Corporate	(139		)	10		(128		)	19		32			1			5			2			11		20
Total	$	1		$	40	$	239		$	164	$	1,393		$	5		$	96		$	25		$	238	$	1,402

~~For the quarters ended September 30, 2017 and October 1, 2016 employee~~Employee related costs consist primarily of severance and ~~other termination~~ related ~~benefits, pension~~benefits. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project ~~initiatives, asset~~initiatives. Asset related costs consist primarily of accelerated ~~depreciation~~depreciation. During the quarter ended June 30, 2018, a gain was recognized related to the sale of a manufacturing facility in Europe that was previously impacted as part of Project K. Asset impairments were recorded for fixed assets that were determined to be impaired and ~~other~~were written down to their estimated fair value. Other costs consist ~~primarily~~ of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.

At ~~September~~June 30, ~~2017~~2018 total ~~exit cost~~project reserves were ~~$194~~$76 million, related to severance payments and other costs of which a substantial portion will be paid ~~out~~ in ~~2017~~2018 and ~~2018.~~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, 2016 $ 102
$ —
$ —
$ —
$ 29
$ 131
2017 restructuring charges 166
(133 ) —
68
138
239
Cash payments (146 ) —
—
(31 ) (98 ) (275 )
Non-cash charges and other 3
133
—
(37 ) —
99
Liability as of September 30, 2017 $ 125
$ —
$ —
$ —
$ 69
$ 194



	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	5			—		—		(10		)	30			25
Cash payments	(43		)	—		—		—			(76		)	(119		)
Non-cash charges and other	—			—		—		10			—			10
Liability as of June 30, 2018	$	59		$	—	$	—	$	—		$	17		$	76

Note 65 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 9 million and 6 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended June 30, 2018, respectively. There were 5 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended ~~September 30, 2017. There were~~ ~~3 million~~ ~~anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended October~~July 1, ~~2016,~~2017, respectively.

Quarters ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016:~~2017:



(millions, except per share data)	Net income		Average shares outstanding	Earnings per share			Net income		Average shares outstanding	Earnings per share
2018
Basic							$	596	347	$	1.72
Dilutive potential common shares									1	(0.01		)
Diluted							$	596	348	$	1.71
2017
Basic	$	297	345	$	0.86		$	283	349	$	0.81
Dilutive potential common shares			3	(0.01		)			3	(0.01		)
Diluted	$	297	348	$	0.85		$	283	352	$	0.80
2016
Basic	$	292	350	$	0.83
Dilutive potential common shares			4	(0.01		)
Diluted	$	292	354	$	0.82

Year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016:~~2017:



(millions, except per share data)	Net income		Average shares outstanding	Earnings per share			Net income		Average shares outstanding	Earnings per share
2018
Basic							$	1,040	346	$	3.00
Dilutive potential common shares									2	(0.01		)
Diluted							$	1,040	348	$	2.99
2017
Basic	$	841	348	$	2.41		$	549	350	$	1.57
Dilutive potential common shares			3	(0.02		)			3	(0.01		)
Diluted	$	841	351	$	2.39		$	549	353	$	1.56
2016
Basic	$	747	350	$	2.13
Dilutive potential common shares			4	(0.02		)
Diluted	$	747	354	$	2.11

In December ~~2015,~~2017, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock beginning in ~~2016~~January 2018 through December ~~2017.~~2019. As of ~~September~~June 30, ~~2017, $558 million~~2018, $1.45 billion remains available under the authorization.

During the year-to-date period ended ~~September~~June 30, ~~2017,~~2018, the Company repurchased ~~approximately 7~~less than 1 million shares of common stock for a total of ~~$516~~$50 million. During the year-to-date period ended ~~October~~July 1, ~~2016,~~2017, the Company repurchased 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.

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.~~

plans, net of related tax effects.

Reclassifications out of AOCI for the quarter and year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, consisted of the following:


(millions)
Details about AOCI components	Amount reclassified from AOCI						Line item impacted within Income Statement	Amount reclassified from AOCI						Line item impacted within Income Statement
	Quarter ended September 30, 2017			Year-to-date period ended September 30, 2017				Quarter ended June 30, 2018			Year-to-date period ended June 30, 2018
(Gains) losses on cash flow hedges:
Foreign currency exchange contracts	$	—		$	(1	)	COGS	$	—		$	—		COGS
Interest rate contracts	3			8			Interest expense	2			4			Interest expense
	$	3		$	7		Total before tax	$	2		$	4		Total before tax
	(1		)	(2		)	Tax expense (benefit)	(1		)	(1		)	Tax expense (benefit)
	$	2		$	5		Net of tax	$	1		$	3		Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss	$	—		$	1		See Note 9 for further details	$	(1	)	$	(2	)	OIE
	$	—		$	1		Total before tax	$	(1	)	$	(2	)	Total before tax
	—			—			Tax expense (benefit)	—			—			Tax expense (benefit)
	$	—		$	1		Net of tax	$	(1	)	$	(2	)	Net of tax
Total reclassifications	$	2		$	6		Net of tax	$	—		$	1		Net of tax

(millions)
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement

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

(Gains) losses on cash flow hedges:
Foreign currency exchange contracts $ (4 ) $ (11 ) COGS
Foreign currency exchange contracts (1 ) (1 ) SGA
Interest rate contracts 2
10
Interest expense
Commodity contracts 3
10
COGS
$ —
$ 8
Total before tax
(1 ) (4 ) Tax expense (benefit)
$ (1 ) $ 4
Net of tax
Amortization of postretirement and postemployment benefits:
Net experience loss $ 1
$ 3
See Note 9 for further details
Prior service cost 1
3
See Note 9 for further details
$ 2
$ 6
Total before tax
(1 ) (1 ) Tax expense (benefit)
$ 1
$ 5
Net of tax
Total reclassifications $ —
$ 9
Net of tax




(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	—		—			SGA
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 8 for further details
Prior service cost	—		—			See Note 8 for further details
	$	—	$	1		Total before tax
	—		—			Tax expense (benefit)
	$	—	$	1		Net of tax
Total reclassifications	$	2	$	4		Net of tax

Accumulated other comprehensive income (loss), net of tax, as of ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016~~30, 2017 consisted of the following:


(millions)	September 30, 2017			December 31, 2016			June 30, 2018			December 30, 2017
Foreign currency translation adjustments	$	(1,402	)	$	(1,505	)	$	(1,473	)	$	(1,426	)
Cash flow hedges — unrealized net gain (loss)	(62		)	(67		)	(56		)	(61		)
Postretirement and postemployment benefits:
Net experience loss	(13		)	(14		)	32			34
Prior service cost	11			11			(4		)	(4		)
Total accumulated other comprehensive income (loss)	$	(1,466	)	$	(1,575	)	$	(1,501	)	$	(1,457	)

Note 76 Debt

The following table presents the components of notes payable at ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016:~~30, 2017:


	September 30, 2017				December 31, 2016				June 30, 2018				December 30, 2017
(millions)	Principal amount		Effective interest rate (a)		Principal amount		Effective interest rate (a)		Principal amount		Effective interest rate		Principal amount		Effective interest rate (a)
U.S. commercial paper	$	285	1.29	%	$	80	0.61	%	$	197	2.26	%	$	196	1.76	%
Europe commercial paper	201		(0.26	)%	306		(0.18	)%	—		—	%	96		(0.32	)%
Bank borrowings	86				52				127				78
Total	$	572			$	438			$	324			$	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.

In May 2018, the Company issued $600 million of ten-year 4.30% Senior Notes due 2028 and $400 million of three-year 3.25% Senior Notes due 2021, resulting in aggregate net proceeds after debt discount of $994 million. The proceeds from these Notes were used for general corporate purposes, including the repayment of the Company's $400 million, seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of ownership interests in TAF and

Multipro. 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.

In May 2017, the Company issued €600 million (approximately ~~$709~~$685 million USD at ~~September 30,~~July 1, 2017, which reflects the discount and translation adjustments) of five-year 0.80% Euro Notes due 2022, resulting in aggregate net proceeds after debt discount of $656 million. The proceeds from these Notes were used for general corporate purposes, including, together with cash on hand and additional commercial paper borrowings, repayment of the Company's $400 million, five-year 1.75% U.S. Dollar Notes due 2017 at maturity. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision. The Notes were designated as a net investment hedge of the Company's investment in its Europe subsidiary when issued.

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

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

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

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

The Company has entered into interest rate swaps with notional amounts totaling ~~$2.2~~$1.5 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 ~~September~~June 30, ~~2017~~2018 were as follows: (a) ~~seven-year 3.25% U.S. Dollar Notes due 2018 – 3.08%; (b)~~ ten-year 4.15% U.S. Dollar Notes due 2019 – ~~3.51%~~3.50%; ~~(c)~~(b) ten-year 4.00% U.S. Dollar Notes due 2020 – ~~3.41%~~3.39%; ~~(d)~~(c) ten-year 3.125% U.S. Dollar Notes due 2022 – ~~2.58%~~3.87%; ~~(e)~~(d) ten-year 2.75% U.S. Dollar Notes due 2023 – ~~2.72%~~4.00%; ~~(f)~~(e) seven-year 2.65% U.S. Dollar Notes due 2023 – ~~2.36%~~3.42%; ~~(g)~~(f) eight-year 1.00% Euro Notes due 2024 – 0.72%; ~~(h)~~(g) ten-year 1.25% Euro Notes due 2025 - ~~1.33%~~1.30% and ~~(i)~~(h) ten-year 3.25% U.S. Notes due 2026 – ~~3.64%~~4.06%.

Note 87 Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s ~~2016~~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				Year-to-date period ended				Quarter ended				Year-to-date period ended
(millions)	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016		June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Pre-tax compensation expense	$	18	$	16	$	57	$	49	$	16	$	21	$	33	$	39
Related income tax benefit	$	7	$	6	$	21	$	18	$	4	$	8	$	8	$	14

As of ~~September~~June 30, ~~2017,~~2018, total stock-based compensation cost related to non-vested awards not yet recognized was ~~$101~~$112 million and the weighted-average period over which this amount is expected to be recognized was 2 years.

Stock options

During the year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~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 ~~2016~~2017 Annual Report on Form 10-K.

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

Employee and director stock options Shares (millions)
Weighted-
average
exercise price
Weighted-
average
remaining
contractual term (yrs.)
Aggregate
intrinsic
value (millions)

Outstanding, beginning of period 15
$ 62

Granted 2
73

Exercised (1 ) 57

Forfeitures and expirations (1 ) 70

Outstanding, end of period 15
$ 64
6.8 $ 37
Exercisable, end of period 10
$ 60
5.8 $ 37

Year-to-date period ended ~~October 1, 2016:~~June 30, 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 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



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	14		$	64
Granted	3		70
Exercised	(1	)	57
Forfeitures and expirations	(1	)	70
Outstanding, end of period	15		$	65	6.6	$	92
Exercisable, end of period	11		$	63	5.7	$	91

Year-to-date period ended 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

The weighted-average grant date fair value of options granted was ~~$10.14~~$10.00 per share and ~~$9.44~~$10.14 per share for the year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~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 year-to-date period ended September 30, 2017: 18 % 6.6 2.26 % 2.80 %
Grants within the year-to-date period ended October 1, 2016: 17 % 6.9 1.60 % 2.60 %



	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 June 30, 2018:	18	%	6.6	2.82	%	3.00	%
Grants within the year-to-date period ended July 1, 2017:	18	%	6.6	2.26	%	2.80	%

The total intrinsic value of options exercised was ~~$21~~$13 million and ~~$140~~$17 million for the year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, respectively.

Performance shares

In the first quarter of ~~2017,~~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 00% and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include ~~currency-neutral comparable operating margin~~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 ~~currency-neutral comparable operating margin expansion.~~adjusted net sales growth achievement. Compensation cost related to ~~currency-neutral comparable operating margin~~adjusted net sales growth performance is revised for changes in the expected outcome. The ~~2017~~2018 target grant currently corresponds to approximately ~~186,000~~188,000 shares, with a grant-date fair value of ~~$67~~$72 per share.

Based on the market price of the Company’s common stock at ~~September~~June 30, ~~2017,~~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)	September 30, 2017		June 30, 2018
2015 Award	$	20
2016 Award	$	22	$	18
2017 Award	$	23	$	16
2018 Award			$	26

The ~~2014~~2015 performance share award, payable in stock, was settled at ~~35%~~75% of target in February ~~2017~~2018 for a total dollar equivalent of $5$8 million.

Other stock-based awards

During the year-to-date period ended ~~September~~June 30, ~~2017,~~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 ~~2016~~2017 Annual Report on Form 10-K.

Year-to-date period ended ~~September~~June 30, ~~2017:~~2018:


Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value
Employee restricted stock units					Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	1,166		$	63	1,673		$	65
Granted	666		67		697		63
Vested	(76	)	57		(416	)	59
Forfeited	(125	)	65		(151	)	63
Non-vested, end of period	1,631		$	65	1,803		$	66

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

Note 98 Employee benefits

The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s ~~2016~~2017 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

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

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

Pension


	Quarter ended						Year-to-date period ended						Quarter ended						Year-to-date period ended
(millions)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Service cost	$	22		$	25		$	72		$	74		$	22		$	25		$	44		$	50
Interest cost	40			43			123			131			41			42			83			83
Expected return on plan assets	(97		)	(87		)	(277		)	(266		)	(90		)	(90		)	(182		)	(180		)
Amortization of unrecognized prior service cost	3			3			7			10			2			2			4			4
Recognized net (gain) loss	83			28			84			28			(2		)	(2		)	(11		)	1
Net periodic benefit cost	51			12			9			(23		)	(27		)	(23		)	(62		)	(42		)
Curtailment (gain) loss	(134		)	—			(136		)	—			—			(3		)	—			(2		)
Total pension (income) expense	$	(83	)	$	12		$	(127	)	$	(23	)	$	(27	)	$	(26	)	$	(62	)	$	(44	)

Other nonpension postretirement


	Quarter ended						Year-to-date period ended						Quarter ended						Year-to-date period ended
(millions)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Service cost	$	5		$	5		$	14		$	15		$	4		$	4		$	9		$	9
Interest cost	10			10			28			29			9			9			18			18
Expected return on plan assets	(24		)	(22		)	(73		)	(67		)	(23		)	(25		)	(47		)	(49		)
Amortization of unrecognized prior service (gain)	(3		)	(2		)	(7		)	(7		)	(2		)	(2		)	(4		)	(4		)
Recognized net (gain) loss	—			—			(29		)	—			—			—			—			(29		)
Net periodic benefit cost	(12		)	(9		)	(67		)	(30		)	(12		)	(14		)	(24		)	(55		)
Curtailment loss	—			—			3			—			—			—			—			3
Total postretirement benefit (income) expense	$	(12	)	$	(9	)	$	(64	)	$	(30	)	$	(12	)	$	(14	)	$	(24	)	$	(52	)

Postemployment


	Quarter ended				Year-to-date period ended				Quarter ended					Year-to-date period ended
(millions)	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016		June 30, 2018			July 1, 2017		June 30, 2018			July 1, 2017
Service cost	$	1	$	1	$	4	$	5	$	1		$	2	$	2		$	3
Interest cost	—		1		2		3		—			1		—			2
Recognized net loss	—		1		1		3
Recognized net (gain) loss									(1		)	—		(2		)	1
Total postemployment benefit expense	$	1	$	3	$	7	$	11	$	—		$	3	$	—		$	6

During the ~~third~~year-to-date period ended June 30, 2018, the Company recognized a gain of $11 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 second quarter of 2017, the Company recognized a curtailment gain of $3 million within a pension plan ~~curtailment gains totaling $134 million~~ in conjunction with Project K restructuring ~~activity which resulted from the amendment of certain defined benefit pension plans in the U.S. and Canada and workforce reductions.~~activity. The Company remeasured the benefit obligation for the impacted pension ~~plans~~plan resulting in a mark-to-market ~~loss~~gain of ~~$83~~$2 million. The ~~loss~~gain was due primarily to ~~changes in discount rates, partially offset by~~ plan asset returns in excess of the expected rate of return.

~~On a year-to-date basis,~~During the first quarter of 2017, the Company recognized ~~pension plan~~ curtailment ~~gains totaling $136~~losses of $1 million and ~~a curtailment loss of~~ $3 million within apension and nonpension postretirement plan, respectively, in conjunction with Project K restructuring activity. ~~The curtailment gains and losses resulted from the amendment of certain defined benefit pension plans in the U.S. and Canada and global workforce reductions.~~ 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 ~~$84~~$3 million on a pension ~~plans~~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.

Company contributions to employee benefit plans are summarized as follows:

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



(millions)	Pension		Nonpension postretirement		Total
Quarter ended:
June 30, 2018	$	251	$	4	$	255
July 1, 2017	$	2	$	2	$	4
Year-to-date period ended:
June 30, 2018	$	266	$	8	$	274
July 1, 2017	$	23	$	5	$	28
Full year:
Fiscal year 2018 (projected)	$	274	$	13	$	287
Fiscal year 2017 (actual)	$	31	$	13	$	44

During the second quarter of 2018, the Company made discretionary contributions to certain U.S. pension plans totaling $250 million. Plan funding strategies may be modified in response to ~~management’s~~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 109 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 second 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 June 30, 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 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 June 30, 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 ~~September~~June 30, ~~2017~~2018 was ~~26%~~15% as compared to 26% in the same quarter of the prior ~~year’s rate of 18%.~~year. The effective tax rate for the second quarter ~~ended October 1, 2016~~ benefited from ~~excess~~the reduction of the U.S. corporate tax ~~benefits from share-based compensation~~rate as well as a tax benefit of $31 million attributable to discretionary pension contributions made in the second quarter of 2018 totaling ~~$16 million.~~$250 million, which are designated as 2017 tax year contributions.

The consolidated effective tax ~~rates~~rate for the year-to-date periods ended ~~September~~June 30, 2018 and July 1, 2017 was 14% and ~~October 1, 2016 were 23% and 22%~~21%, respectively. For the year-to-date period ended September 30, 2017, the effective tax rate benefited from a deferred tax benefit of $39 million resulting from intercompany transfers 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 year-to-date period ended ~~October 1, 2016~~June 30, 2018 benefited from ~~excess~~a discretionary pension contribution during the second quarter of 2018, a $44 million discrete tax ~~benefits from share-based compensation totaling $34 million~~benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring in the first quarter of 2018, as well as the ~~completion~~reduction in the U.S. corporate tax rate effective at the beginning of ~~certain~~2018. These impacts were mitigated somewhat by an increased weighting of taxable income in higher tax ~~examinations.~~rate jurisdictions versus the prior year. The effective tax rate for the year-to-date period ended July 1, 2017 benefited from a deferred tax benefit of $38 million resulting from intercompany transfers of intellectual property.

As of ~~September~~June 30, ~~2017,~~2018, the Company classified $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 $5$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~~year-to-date period ended ~~September~~June 30, ~~2017; $37~~2018; $45 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

							(millions)
December 31, 2016	$	63
December 30, 2017				$	60
Tax positions related to current year:
Additions	4			3
Reductions	—			—
Tax positions related to prior years:
Additions	3			2
Reductions	(8		)	(6		)
Settlements	(4		)	(2		)
Lapse in statute of limitations	(2		)	—
September 30, 2017	$	56
June 30, 2018				$	57

The accrual balance for tax-related interest was approximately ~~$20~~$25 million at ~~September~~June 30, ~~2017.~~2018.

Note 1110 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.

Total notional amounts of the Company’s derivative instruments as of ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016~~30, 2017 were as follows:


(millions)	September 30, 2017		December 31, 2016		June 30, 2018		December 30, 2017
Foreign currency exchange contracts	$	2,079	$	1,396	$	1,518	$	2,172
Cross-currency contracts					696		—
Interest rate contracts	2,232		2,185		1,468		2,250
Commodity contracts	294		437		348		544
Total	$	4,605	$	4,018	$	4,030	$	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 ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016,~~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 ~~September~~June 30, ~~2017~~2018 or December ~~31, 2016.~~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 ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016:~~30, 2017:

Derivatives designated as hedging instruments


	September 30, 2017								December 31, 2016								June 30, 2018								December 30, 2017
(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	$	—	$	—		$	—		$	—	$	2		$	2
Cross-currency contracts
Other current assets																	$	—	$	27		$	27		$	—	$	—		$	—
Interest rate contracts:
Other assets (a)	—		—			—			—		1			1			—		4			4			—		—			—
Total assets	$	—	$	—		$	—		$	—	$	3		$	3		$	—	$	31		$	31		$	—	$	—		$	—
Liabilities:
Interest rate contracts:
Other liabilities (a)	—		(43		)	(43		)	—		(65		)	(65		)	—		(29		)	(29		)	—		(54		)	(54		)
Total liabilities	$	—	$	(43	)	$	(43	)	$	—	$	(65	)	$	(65	)	$	—	$	(29	)	$	(29	)	$	—	$	(54	)	$	(54	)

(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was ~~$2.2~~$1.5 billion and $2.3 billion as of ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016,~~30, 2017, respectively.

Derivatives not designated as hedging instruments


	September 30, 2017									December 31, 2016									June 30, 2018									December 30, 2017
(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	$	—		$	10		$	10		$	—		$	25		$	25
Other current assets																			$	—		$	26		$	26		$	—		$	10		$	10
Commodity contracts:
Other prepaid assets	4			—			4			13			—			13
Other current assets																			3			—			3			6			—			6
Total assets	$	4		$	10		$	14		$	13		$	25		$	38		$	3		$	26		$	29		$	6		$	10		$	16
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—		$	(23	)	$	(23	)	$	—		$	(11	)	$	(11	)	$	—		$	(14	)	$	(14	)	$	—		$	(14	)	$	(14	)
Commodity contracts:
Other current liabilities	(5		)	—			(5		)	$	(7	)	$	—		$	(7	)	(10		)	—			(10		)	$	(7	)	$	—		$	(7	)
Total liabilities	$	(5	)	$	(23	)	$	(28	)	$	(7	)	$	(11	)	$	(18	)	$	(10	)	$	(14	)	$	(24	)	$	(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 $2.7 billion ~~and $1.8 billion~~ as of ~~September~~June 30, 2018 and December 30, 2017.

The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of June 30, 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)
		June 30, 2018		December 30, 2017		June 30, 2018			December 30, 2017
Interest rate contracts	Current maturities of long-term debt	$	—	$	402	$	—		$	2
Interest rate contracts	Long-term debt	$	3,357	$	3,481	$	(45	)	$	(22	)

(a) The current maturities of hedged long-term debt includes $2 million of hedging adjustment on discontinued hedging relationships as of December 30, 2017. The hedged long-term debt includes $(19) million and $32 million of hedging adjustment on discontinued hedging relationships as of June 30, 2018 and December 30, 2017, ~~and December 31, 2016,~~ respectively.

The Company has elected to 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 ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016~~30, 2017 would be adjusted as detailed in the following table:


As of September 30, 2017:
As of June 30, 2018:
				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	$	14		$	(14	)	$	—	$	—		$	60		$	(28	)	$	—	$	32
Total liability derivatives	$	(71	)	$	14		$	16	$	(41	)	$	(53	)	$	28		$	25	$	—


As of December 31, 2016:
As of December 30, 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	$	41		$	(24	)	$	—	$	17		$	16		$	(15	)	$	—	$	1
Total liability derivatives	$	(83	)	$	24		$	48	$	(11	)	$	(75	)	$	15		$	37	$	(23	)

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016~~2017 was as follows:

~~Derivatives in fair value hedging relationships~~

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

$ 6


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

~~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)
September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016
Foreign currency exchange contracts $ —
$ 1
COGS $ —
$ 4
Other income (expense), net $ —
$ (1 )
Foreign currency exchange contracts —
1
SGA
expense
—
1
Other income (expense), net —
—
Interest rate contracts —
1
Interest
expense
(3 ) (2 ) N/A —
—
Commodity contracts —
—
COGS —
(3 ) Other income (expense), net —
—
Total $ —

$ 3
$ (3 )
$ —

$ —

$ (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
September 30,
2017 October 1,
2016
Foreign currency denominated long-term debt $ (90 ) $ (19 )



(millions)	Gain (loss) recognized in AOCI					Gain (loss) excluded from assessment of hedge effectiveness				Location of gain (loss) in income of excluded component
	June 30, 2018		July 1, 2017			June 30, 2018		July 1, 2017
Foreign currency denominated long-term debt	$	146	$	(157	)	$	—	$	—
Cross-currency contracts	35		—			$	3	—		Other income (expense), net
Total	$	181	$	(157	)	$	3	$	—

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
		September 30, 2017			October 1, 2016				June 30, 2018			July 1, 2017
Foreign currency exchange contracts	COGS	$	—		$	3		COGS	$	4		$	(4	)
Foreign currency exchange contracts	Other income (expense), net	(3		)	(1		)	Other income (expense), net	—			(3		)
Foreign currency exchange contracts	SG&A	(1		)	—			SG&A	—			(1		)
Commodity contracts	COGS	(13		)	(14		)	COGS	(8		)	10
Commodity contracts	SG&A	(16		)	—
Total		$	(33	)	$	(12	)		$	(4	)	$	2

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016~~2017 was as follows:

~~Derivatives in fair value hedging relationships~~

(millions)
Location of gain (loss)
recognized in income
Gain (loss)
recognized in
income (a)
September 30,
2017 October 1,
2016
Interest rate contracts Interest expense $ 14
$ 15

~~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)
September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016
Foreign currency exchange contracts $ —
$ 10
COGS $ 1
$ 11
Other income (expense), net $ —
$ (2 )
Foreign currency exchange contracts —
1
SGA expense —
1
Other income (expense), net —
—
Interest rate contracts 1
(68 ) Interest expense (8 ) (10 ) N/A —
—
Commodity contracts —
—
COGS —
(10 ) Other income (expense), net —
—
Total $ 1

$ (57 ) $ (7 )
$ (8 )
$ —

$ (2 )


~~(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					Gain (loss) excluded from assessment of hedge effectiveness				Location of gain (loss) in income of excluded component
	September 30, 2017			October 1, 2016			June 30, 2018		July 1, 2017			June 30, 2018		July 1, 2017
Foreign currency denominated long-term debt	$	(272	)	$	(31	)	$	73	$	(182	)	$	—	$	—
Foreign currency exchange contracts	—			(23		)
Cross-currency contracts							27		—			6		—		Other income (expense), net
Total	$	(272	)	$	(54	)	$	100	$	(182	)	$	6	$	—

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
		September 30, 2017			October 1, 2016				June 30, 2018			July 1, 2017
Foreign currency exchange contracts	COGS	$	(13	)	$	(7	)	COGS	$	7		$	(13	)
Foreign currency exchange contracts	Other income (expense), net	(11		)	9			Other income (expense), net	(4		)	(8		)
Foreign currency exchange contracts	SGA	(2		)	—			SGA	1			(1		)
Commodity contracts	COGS	(16		)	(4		)	COGS	(3		)	(3		)
Commodity contracts	SGA	(15		)	2			SGA	—			1
Total		$	(57	)	$	—			$	1		$	(24	)

The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended June 30, 2018 and July 1, 2017:



		June 30, 2018			July 1, 2017
(millions)		Interest Expense			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		$	72		$	63
	Gain (loss) on fair value hedging relationships:
	Interest contracts:
	Hedged items	(7		)	(3		)
	Derivatives designated as hedging instruments	7			8

	Gain (loss) on cash flow hedging relationships:
	Interest contracts:
	Amount of gain (loss) reclassified from AOCI into income	(2		)	(3		)
	Foreign exchange contracts:
	Amount of gain (loss) reclassified from AOCI into income	—			—

The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended June 30, 2018 and July 1, 2017:



		June 30, 2018			July 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		$	141		$	4,038	$	124
	Gain (loss) on fair value hedging relationships:
	Interest contracts:
	Hedged items	25			—		6
	Derivatives designated as hedging instruments	(21		)	—		4

	Gain (loss) on cash flow hedging relationships:
	Interest contracts:
	Amount of gain (loss) reclassified from AOCI into income	(4		)	—		(5		)
	Foreign exchange contracts:
	Amount of gain (loss) reclassified from AOCI into income	—			1		—

During the next 12 months, the Company expects $8$7 million of net deferred losses reported in AOCI at ~~September~~June 30, ~~2017~~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 ~~September~~June 30, ~~2017~~2018 was ~~$55~~$15 million. If the credit-risk-related contingent features were triggered as of ~~September~~June 30, ~~2017,~~2018, the Company would be required to post additional collateral of ~~$48~~$10 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 ~~September~~June 30, ~~2017~~2018 triggered by credit-risk-related contingent features.

~~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 ended September 30, 2017, there were no long-lived asset impairment related to Project K.~~

During the year-to-date period ended October 1, 2016, long-lived assets of $26 million related to a manufacturing facility in the Company's U.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.

~~The following table presents level 3 assets that were measured at fair value on the consolidated Balance Sheet on a nonrecurring basis as of October 1, 2016:~~

(millions) Fair Value Total Loss
Description:
Long-lived assets $ 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 ~~$7,575 million~~$8.9 billion and ~~$7,216 million,~~$8.7 billion, respectively, as of ~~September~~June 30, ~~2017.~~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 ~~September~~June 30, ~~2017,~~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 counterparty that are subject to enforceable netting agreements. As of ~~September~~June 30, ~~2017,~~2018, the Company posted $7$5 million related to reciprocal collateralization agreements. As of ~~September~~June 30, ~~2017~~2018 the Company posted $9$17 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 ~~28%~~22% of consolidated trade receivables at ~~September~~June 30, ~~2017.~~2018.

Note 1211 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, veggie foods and ~~veggie foods.~~noodles. 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~~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. ~~Morning Foods~~Snacks 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. Morning Foods includes primarily cereal and toaster pastries.

U.S. Specialty Channels 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 ~~Canada~~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;~~countries, the Middle east and Northern Africa; 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.


	Quarter ended					Year-to-date period ended						Quarter ended						Year-to-date period ended
(millions)	September 30, 2017		October 1, 2016			September 30, 2017			October 1, 2016			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net sales
U.S. Snacks												$	745		$	815		$	1,507		$	1,610
U.S. Morning Foods	$	710	$	733		$	2,108		$	2,227		643			664			1,334			1,372
U.S. Snacks	760		796			2,344			2,431
U.S. Specialty	290		284			961			931
U.S. Specialty Channels												277			275			675			668
North America Other	420		402			1,204			1,222			462			390			941			782
Europe	599		594			1,677			1,821			621			567			1,208			1,080
Latin America	240		197			696			593			239			232			471			452
Asia Pacific	254		248			724			692			373			232			625			459
Consolidated	$	3,273	$	3,254		$	9,714		$	9,917		$	3,360		$	3,175		$	6,761		$	6,423
Operating profit
U.S. Snacks												$	111		$	29		$	213		$	(7	)
U.S. Morning Foods	$	141	$	144		$	477		$	457		138			170			288			327
U.S. Snacks	14		78			(8		)	230
U.S. Specialty	76		68			242			214
U.S. Specialty Channels												60			70			140			166
North America Other	65		43			173			135			76			59			143			108
Europe	72		78			214			216			97			77			171			143
Latin America ~~(a)~~	23		27			82			70			20			26			42			59
Asia Pacific	25		21			66			50			28			18			55			40
Total Reportable Segments	416		459			1,246			1,372			530			449			1,052			836
Corporate ~~(b)~~	48		(49		)	31			(75		)	(56		)	(64		)	(68		)	(171		)
Consolidated	$	464	$	410		$	1,277		$	1,297		$	474		$	385		$	984		$	665

Supplemental product information is provided below for net sales to external customers:


~~(a)~~	Includes non-cash losses totaling $13 million associated with the remeasurement of the financial statements of the Company's Venezuela subsidiary during the year-to-date period ended October 1, 2016, respectively.

~~(b)~~

Includes mark-to-market adjustments for pension and postretirement plans, commodity and foreign currency contracts totaling ($104) million and ($31) million for the quarters ended September 30, 2017 and October 1, 2016, respectively. Includes mark-to-market adjustments for pension and postretirement plans, commodity and foreign currency contracts totaling ($118) million and ($35) million for the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively. See further discussion in ~~Note 9 Employee benefits~~.



	Quarter ended				Year-to-date period ended
(millions)	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Snacks	$	1,684	$	1,635	$	3,458	$	3,351
Cereal	1,304		1,305		2,655		2,603
Frozen and other	372		235		648		469
Consolidated	$	3,360	$	3,175	$	6,761	$	6,423

Note ~~13 Subsequent Event~~12 Supplemental Financial Statement Data



Consolidated Balance Sheet
(millions)	June 30, 2018 (unaudited)			December 30, 2017
Trade receivables	$	1,339		$	1,250
Allowance for doubtful accounts	(10		)	(10		)
Refundable income taxes	18			23
Other receivables	183			126
Accounts receivable, net	$	1,530		$	1,389
Raw materials and supplies	$	337		$	333
Finished goods and materials in process	954			884
Inventories	$	1,291		$	1,217
Property	$	9,063		$	9,366
Accumulated depreciation	(5,425		)	(5,650		)
Property, net	$	3,638		$	3,716
Pension	$	290		$	252
Deferred income taxes	242			246
Other	580			529
Other assets	$	1,112		$	1,027
Accrued income taxes	$	32		$	30
Accrued salaries and wages	225			311
Accrued advertising and promotion	570			582
Other	502			551
Other current liabilities	$	1,329		$	1,474
Income taxes payable	$	182		$	192
Nonpension postretirement benefits	39			40
Other	327			373
Other liabilities	$	548		$	605

On October 27, 2017, the Company completed its acquisition of Chicago Bar Co., LLC, the manufacturer of RXBAR, for approximately $600 million, funded through short-term borrowings. The purchase price is 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. The major classes of assets and liabilities of Chicago Bar Co., LLC are expected to be net working capital, intangible assets (primarily, customer lists and brands), and goodwill.

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~~These foods include snacks, such as cookies, ~~and~~ crackers, ~~and a leading producer of~~ savory snacks, ~~and frozen foods. Additional product offerings include~~ toaster pastries, cereal bars and bites, fruit-flavored ~~snacks~~snacks; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie ~~foods.~~ foods, and noodles.

Kellogg products are manufactured and marketed globally.

~~Corporate responsibility and 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~~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. We report results of operations in the following reportable segments: U.S. Snacks: U.S. Morning Foods; U.S. ~~Snacks; U.S. Specialty;~~Specialty Channels; North America Other; Europe; Latin America; and Asia Pacific. The reportable segments are discussed in greater detail in Note 1211 within Notes to Consolidated Financial Statements.

~~Operating margin expansion through 2018~~Restatement of 2017 financial statements

~~In 2016 we announced a plan~~Financial statements for 2017 were restated to ~~increase our currency-neutral comparable operating margin by 350 basis points from 2015 through 2018. There are four elements to this margin expansion plan:~~

Productivity and savings - In addition to annual productivity savings to offset inflation, we have expanded our Project K restructuring program, and we have expanded our zero-based budgeting initiativereflect changes in ~~the U.S. and our international regions. These initiatives are expected to result in higher annual savings.~~

~~Price and Mix - We have established a more formal Revenue Growth Management discipline around the world, to help us ensure our products and pack-sizes are priced correctly, and~~accounting standards that ~~we are generating a 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.~~

During this time period, we will be working to stabilize net sales, with an aim to returning to growth. Accordingly, our margin expansion target incorporates continued investment in food and 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 and currency neutral comparable earnings per share in 2017 and 2018.

~~We are currently on pace to deliver the 350 basis point improvement.~~

In March 2017, the 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 2015 currency-neutral comparable operating margin, the basis for our 350 basis point improvement, by approximately 175-185 basis points. The adoption is anticipated to impact only the Corporate segment, and is not expected to impact our ability to achieve 350 basis points of currency-neutral comparable operation margin expansion from this new base by the end of 2018. See the ~~Accounting standards to be~~were adopted ~~in future periods~~ ~~section of the MD&A for additional information regarding the impact of this ASU.~~

~~Guidance on operating profit margin expansion and net sales growth outlook is provided~~ on a ~~non-GAAP, currency-neutral comparable~~retrospective 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. 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.as well as product transfer between reportable segments.

Non-GAAP 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~~currency-neutral and organic net sales, ~~comparable gross margin, comparable SG&A, comparable~~adjusted and currency-neutral adjusted operating profit, ~~comparable operating profit margin, comparable effective tax rate, comparable net income, comparable~~adjusted and currency-neutral adjusted 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~~Currency-neutral net ~~sales:~~sales and organic net sales: We adjust the GAAP financial ~~measures~~measure to exclude the ~~pre-tax effect~~impact of foreign currency, resulting in currency-neutral sales. In addition, we exclude the impact of acquisitions, dispositions, related integration costs, shipping day differences, and ~~divestitures.~~foreign currency, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing ~~this~~these non-GAAP net sales ~~measure,~~measures, 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~~these non-GAAP ~~measure~~measures to evaluate the effectiveness of initiatives behind net sales growth, ~~price~~pricing realization, and the impact of mix on our business results. ~~This~~These non-GAAP ~~measure is~~measures are 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 SG&A, comparable SG&A%, comparable~~Adjusted: operating profit, ~~comparable operating profit margin, comparable~~ net income, 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 (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, and other costs ~~associated with the early redemption of debt outstanding, and impacts of the prior-year Venezuela remeasurement and deconsolidation.~~impacting comparability resulting in adjusted. 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, to assess performance of newly acquired businesses, 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~~Currency-neutral adjusted: gross profit, gross margin, SG&A, SG&A%, operating profit, operating profit margin, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. 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, to assess performance of newly acquired businesses, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.

Adjusted effective income tax rate: We adjust the GAAP financial ~~measure~~measures to exclude ~~tax~~the effect of Project K and cost reduction activities, ~~divestitures, integration costs,~~ mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency ~~contracts, costs associated with the early redemption of debt outstanding, and costs associated with prior-year Venezuela remeasurement.~~contracts. 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~~adjusted effective income 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~~

In February 2017, the Company announced an expansion and an extension to its previously-announced global efficiency and effectiveness program ("Project K"). 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. The Company expects that these savings may be used to drive future growth in the business. We recorded pre-tax charges related to this program of $1 million and $238 million for the quarter and year-to-date periods ended September 30, 2017, respectively. We also recorded pre-tax charges of $36 million and $143 million for the quarter and year-to-date periods ended October 1, 2016, respectively.

In 2015 we initiated the implementation of a Zero-Based Budgeting (ZBB) program in our North America business. During 2016 ZBB was expanded to include international segments of the business. In support of the ZBB initiative, we incurred pre-tax charges of $1 million for the year-to-date period ended September 30, 2017. We also incurred

~~pre-tax charges of $4 million and $21 million for the quarter and year-to-date periods ended October 1, 2016, respectively.~~

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

~~Acquisitions~~

In December 2016, the Company acquired Ritmo Investimentos, controlling shareholder of Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading Brazilian food group. In our Latin America reportable segment, for the quarter ended September 30, 2017 the acquisition added $48 million in net sales and $3 million of operating profit (before integration costs) that impacted the comparability of our reported results. For the year-to-date period ended September 30, 2017 the acquisition added $141 million in net sales and $15 million of operating profit (before integration costs) that impacted the comparability of our reported 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. We recorded ~~total~~a pre-tax mark-to-market ~~charges~~benefit of ~~$104~~$5 million and ~~$31 million for quarters ended September 30, 2017 and October 1, 2016, respectively, and $118 million and $35~~$44 million for the quarter and year-to-date periods ended ~~September~~June 30, ~~2017 and October 1, 2016,~~2018, respectively. Included within the aforementioned ~~charges are~~was a pre-tax mark-to-market ~~charges~~benefit for pension plans of ~~$76~~$2 million and ~~$28 million for quarters ended September 30, 2017 and October 1, 2016, respectively, and $73 million and $62~~$27 million for the quarter and year-to-date periods ended ~~September~~June 30, 2018, respectively. We also recorded a pre-tax mark-to-market benefit of $6 million and a pre-tax mark-to-market charge of $15 million for the quarter and year-to-date periods ended July 1, 2017, respectively. Included within the aforementioned was a pre-tax mark-to-market benefit for pension plans of $2 million and ~~October~~$3 million for the quarter and year-to-date periods ended July 1, ~~2016,~~2017, respectively.

~~Other costs impacting comparability~~Project K and cost reduction activities

~~During~~Project K continued generating savings used to invest in key strategic areas of focus for the business. We recorded pre-tax charges related to this program of $5 million and $25 million for the quarter and year-to-date periods ended April 2, 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031. In connection with the debt redemption, we incurred $153 million of interest expense, consisting primarily of a premium on the tender offer andJune 30, 2018, respectively. We also ~~including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees~~recorded pre-tax charges related to this program of $95 million and $237 million for the ~~tender offer.~~quarter and year-to-date periods ended July 1, 2017, respectively.

~~Venezuela~~

~~There was a material change in~~See the ~~business environment, including a worsening of our access to key raw materials subject to restrictions,~~Restructuring 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.cost reduction activities section for more information.

AsAcquisitions

In October of ~~December 31, 2016, we deconsolidated and changed to~~2017, the ~~cost method~~Company acquired Chicago Bar Company LLC, manufacturer of ~~accounting~~RXBAR, a high protein snack bar made of simple ingredients. In our North America Other reportable segment, for ~~our Venezuelan subsidiary. For~~ the quarter and year-to-date periods ended ~~October 1, 2016~~June 30, 2018, the ~~deconsolidation reduced~~acquisition added $59 million and $110 million, respectively, in net sales by $7 million and operating profit by $3 million which impacted the comparability of our reported results. For the year-to-date period ended October 1, 2016 the deconsolidation reduced net sales by $23 million and operating profit by $8 million whichthat impacted the comparability of our reported results.

In ~~2016 certain non-monetary assets related~~May of 2018, the Company acquired an incremental 1% ownership interest in Multipro, which along with concurrent changes to ~~our Venezuelan subsidiary continued to be remeasured at historical exchange rates. As these assets were utilized by our Venezuelan subsidiary during 2016 they were recognized~~the shareholders' agreement, resulted in the ~~income statement at historical exchange rates~~Company now having a 51% controlling interest in and began consolidating Multipro, a leading distributor of a variety of food products in Nigeria and Ghana. In our Asia Pacific reportable segment, for the quarter and year-to-date periods ended June 30, 2018, the acquisition added $129 million in net sales that impacted the comparability of our reported results.

Gain on unconsolidated entities, net

In connection with the Multipro business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of $245 million. Additionally, the Company exercised its call option to acquire a 50% interest in Tolaram Africa Foods, PTE LTD, a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company have a 24.5% interest in the affiliated food manufacturer. In conjunction with the exercise, the Company recognized a one-time, non-cash loss of $45 million, which represents an ~~unfavorable impact. As a result~~other than temporary excess of cost over fair value of the ~~utilization of the remaining non-monetary assets, we experienced an unfavorable operating profit impact of $13 million for year-to-date period ended October 1, 2016, primarily impacting COGS.~~investment. These amounts were recorded within Earnings (loss) from unconsolidated entities.

Foreign currency translation

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.

Financial results

For the quarter ended ~~September~~June 30, ~~2017,~~2018, our reported net sales improved by ~~0.6%~~5.9% due primarily to the ~~Parati acquisition in Brazil as well as favorable foreign currency translation. This principally reflects on~~inclusion of RXBAR and Multipro results. These impacts were partially offset by the previously announced list-price adjustments and other impacts in U.S. Snacks related to its transition from ~~DSD.~~DSD as well as unfavorable foreign currency. Currency-neutral ~~comparable~~ net sales ~~were down 1.4%~~increased 6.3% after eliminating the impact of ~~acquisitions,~~ foreign ~~currency, and~~currency. Organic net sales decreased 0.4% from the prior year ~~Venezuela results.~~after also excluding the impact of acquisitions.

~~Reported~~Second quarter reported operating profit and operating profit margin increased versus the year-ago quarter, driven by productivity savings and higher net sales, as well as by significantly lower restructuring charges and favorable mark-to-market impacts year-on-year. Currency-neutral adjusted operating profit increased, ~~13.1%, as a result of~~owing to the higher sales growth and strong productivity savings ~~from~~related to the Project K restructuring ~~which includes this year's~~program. These savings, driven primarily by last summer's exit and elimination of overhead from its U.S. Snacks segment's Direct Store Delivery ~~sales~~system, more than offset a substantial year-on-year increase in advertising and delivery system. Reported operating profit also benefited from lower year-over-year restructuring and integration expense, and the impact of acquisitions and foreign currency. This was partially offset by the impact of mark-to-market accounting for pension plans, commodities, prior year Venezuela operations, and foreign currency contracts. Currency-neutral comparable operating profit increased by 17.5% excluding the impact of mark-to-market, restructuring, integration costs, acquisitions, prior year Venezuela operations, and foreign currency.

Reported operating margin for the quarter was favorable 160 basis points due primarily to COGS and SG&A savings realized from Project K and ZBB initiatives, lower restructuring costs, and acquisitions, partially offset by the year-over-year impact of market-to-market. Currency-neutral comparable operating margin was favorable 280 basis points after excluding the impact of restructuring, mark-to-market, and acquisitions.promotion investment, as well as various cost pressures, including a significant rise in freight costs.

Reported diluted EPS of ~~$.85~~$1.71 for the quarter was up ~~almost 4%~~114% compared to the prior year of ~~$.82. Higher operating profit as~~$.80 due to a ~~result of productivity savings from Project K~~one-time non-cash gain related to our transaction in West Africa, lower restructuring ~~more than offset~~charges, a ~~higher~~lower effective tax ~~rate.~~rate, and favorable mark-to-market adjustments year-on-year. Currency-neutral ~~comparable~~adjusted diluted EPS of ~~$1.05~~$1.12 increased by 9%15.5% compared to prior year of ~~$.96, due to higher profit margins driven by productivity initiatives.~~$.97, after excluding the impact of mark-to-market and restructuring.

Reconciliation of certain non-GAAP Financial Measures

Quarter ended Year-to-date period ended
Consolidated results
(dollars in millions, except per share data)
September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016
Reported net income $ 297
$ 292
$ 841
$ 747
Mark-to-market (pre-tax) (104 ) (31 ) (118 ) (35 )
Project K and cost reduction activities (pre-tax) (1 ) (40 ) (239 ) (164 )
Other costs impacting comparability (pre-tax) —
—
—
(153 )
Integration and transaction costs (pre-tax) (1 ) (2 ) (2 ) (3 )
Venezuela operations impact (pre-tax) —
3
—
8
Venezuela remeasurement (pre-tax) —
—
—
(11 )
Income tax benefit applicable to adjustments, net* 36
23
117
106
Comparable net income $ 367
$ 339
$ 1,083
$ 999
Foreign currency impact 4
(10 )
Currency-neutral comparable net income $ 363

$ 1,093

Reported diluted EPS $ 0.85
$ 0.82
$ 2.39
$ 2.11
Mark-to-market (pre-tax) (0.30 ) (0.09 ) (0.34 ) (0.10 )
Project K and cost reduction activities (pre-tax) —
(0.11 ) (0.68 ) (0.46 )
Other costs impacting comparability (pre-tax) —
—
—
(0.43 )
Integration and transaction costs (pre-tax) —
(0.01 ) —
(0.01 )
Venezuela operations impact (pre-tax) —
—
—
0.01
Venezuela remeasurement (pre-tax) —
—
—
(0.03 )
Income tax benefit applicable to adjustments, net* 0.10
0.07
0.33
0.31
Comparable diluted EPS $ 1.05
$ 0.96
$ 3.08
$ 2.82
Foreign currency impact —
(0.03 )
Currency-neutral comparable diluted EPS $ 1.05

$ 3.11

Currency-neutral comparable diluted EPS growth 9.4 % 15.1 % 10.3 % 7.4 %



	Quarter ended						Year-to-date period ended
Consolidated results (dollars in millions, except per share data)	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Reported net income	$	596		$	283		$	1,040		$	549
Mark-to-market (pre-tax)	5			6			44			(15		)
Project K and cost reduction activities (pre-tax)	(5		)	(95		)	(25		)	(237		)
Income tax impact applicable to adjustments, net*	—			31			(3		)	81
Gain from unconsolidated entities, net	200			—			200			—
Adjusted net income	$	396		$	341		$	824		$	720
Foreign currency impact	4						17
Currency-neutral adjusted net income	$	392		$	341		$	807		$	720
Reported diluted EPS	$	1.71		$	0.80		$	2.99		$	1.56
Mark-to-market (pre-tax)	0.01			0.02			0.13			(0.04		)
Project K and cost reduction activities (pre-tax)	(0.01		)	(0.27		)	(0.07		)	(0.67		)
Income tax impact applicable to adjustments, net*	—			0.08			(0.01		)	0.23
Gain from unconsolidated entities, net	0.57			—			0.57			—
Adjusted diluted EPS	$	1.14		$	0.97		$	2.37		$	2.04
Foreign currency impact	0.02						0.05
Currency-neutral adjusted diluted EPS	$	1.12		$	0.97		$	2.32		$	2.04
Currency-neutral adjusted diluted EPS growth	15.5		%				13.7		%

* 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 ~~2017~~2018 versus ~~2016:~~2017:

Quarter ended September 30, 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 $ 710
$ 760
$ 290
$ 420
$ 599
$ 240
$ 254
$ —
$ 3,273
Acquisitions —
—
—
—
4
48
—
—
52
Comparable net sales $ 710
$ 760
$ 290
$ 420
$ 595
$ 192
$ 254
$ —
$ 3,221
Foreign currency impact —
—
—
7
7
6
1
—
21
Currency-neutral comparable net sales $ 710
$ 760
$ 290
$ 413
$ 588
$ 186
$ 253
$ —
$ 3,200
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
Venezuela operations impact —
—
—
—
—
7
—
—
7
Comparable net sales $ 733
$ 796
$ 284
$ 402
$ 594
$ 190
$ 248
$ —
$ 3,247
% change - 2017 vs. 2016:
Reported growth (3.0 )% (4.5 )% 1.9 % 4.4 % 0.8 % 21.5 % 2.9 % — % 0.6 %
Acquisitions — % — % — % — % 0.7 % 24.4 % — % — % 1.6 %
Venezuela operations impact — % — % — % — % — % (4.0 )% — % — % (0.2 )%
Comparable growth (3.0 )% (4.5 )% 1.9 % 4.4 % 0.1 % 1.1 % 2.9 % — % (0.8 )%
Foreign currency impact — % — % — % 1.5 % 1.2 % 3.2 % 0.9 % — % 0.6 %
Currency-neutral comparable growth (3.0 )% (4.5 )% 1.9 % 2.9 % (1.1 )% (2.1 )% 2.0 % — % (1.4 )%



Quarter ended June 30, 2018
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	745		$	643		$	277		$	462		$	621		$	239		$	373		$	—		$	3,360
Foreign currency impact on total business (inc)/dec	—			—			—			3			20			(13		)	(23		)	—			(13		)
Currency-neutral net sales	$	745		$	643		$	277		$	459		$	601		$	252		$	396		$	—		$	3,373
Acquisitions	—			—			—			59			—			—			129			—			188
Foreign currency impact on acquisitions (inc)/dec	—			—			—			—			—			—			23			—			23
Organic net sales	$	745		$	643		$	277		$	400		$	601		$	252		$	244		$	—		$	3,162

Quarter ended July 1, 2017
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	815		$	664		$	275		$	390		$	567		$	232		$	232		$	—		$	3,175

% change - 2018 vs. 2017:
Reported growth	(8.6		)%	(3.2		)%	1.1		%	18.4		%	9.5		%	3.5		%	60.8		%	—		%	5.9		%
Foreign currency impact on total business (inc)/dec	—		%	—		%	—		%	0.9		%	3.6		%	(5.7		)%	(10.1		)%	—		%	(0.4		)%
Currency-neutral growth	(8.6		)%	(3.2		)%	1.1		%	17.5		%	5.9		%	9.2		%	70.9		%	—		%	6.3		%
Acquisitions	—		%	—		%	—		%	14.8		%	—		%	—		%	55.9		%	—		%	5.9		%
Foreign currency impact on acquisitions (inc)/dec	—		%	—		%	—		%	—		%	—		%	—		%	10.0		%	—		%	0.8		%
Organic growth	(8.6		)%	(3.2		)%	1.1		%	2.7		%	5.9		%	9.2		%	5.0		%	—		%	(0.4		)%

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

Quarter ended September 30, 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 $ 141
$ 14
$ 76
$ 65
$ 72
$ 23
$ 25
$ 48
$ 464
Mark-to-market —
—
—
—
—
—
—
(104 ) (104 )
Project K and cost reduction activities (14 ) (106 ) —
(4 ) (13 ) (2 ) (1 ) 139
(1 )
Integration and transaction costs —
—
—
—
—
(1 ) —
—
(1 )
Acquisitions —
—
—
—
(1 ) 3
—
—
2
Comparable operating profit $ 155
$ 120
$ 76
$ 69
$ 86
$ 23
$ 26
$ 13
$ 568
Foreign currency impact —
—
—
2
3
—
—
(1 ) 4
Currency-neutral comparable operating profit $ 155
$ 120
$ 76
$ 67
$ 83
$ 23
$ 26
$ 14
$ 564
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 operating profit $ 144
$ 78
$ 68
$ 43
$ 78
$ 27
$ 21
$ (49 ) $ 410
Mark-to-market —
—
—
—
—
—
—
(31 ) (31 )
Project K and cost reduction activities (4 ) (8 ) (1 ) (7 ) (6 ) (2 ) (2 ) (10 ) (40 )
Integration and transaction costs —
—
—
—
(1 ) 1
—
(2 ) (2 )
Venezuela operations impact —
—
—
—
—
3
—
—
3
Comparable operating profit $ 148
$ 86
$ 69
$ 50
$ 85
$ 25
$ 23
$ (6 ) $ 480
% change - 2017 vs. 2016:
Reported growth (2.6 )% (82.5 )% 12.2 % 52.8 % (9.2 )% (13.2 )% 18.7 % 197.0 % 13.1 %
Mark-to-market — % — % — % — % — % — % — % (721.7 )% (15.6 )%
Project K and cost reduction activities (6.8 )% (121.3 )% 0.7 % 12.7 % (9.3 )% (1.7 )% 7.0 % 647.7 % 10.3 %
Integration and transaction costs — % — % — % 0.2 % 1.3 % (3.5 )% 0.8 % (28.0 )% 0.4 %
Acquisitions — % — % — % — % (0.3 )% 8.7 % — % — % 0.4 %
Venezuela operations impact — % — % — % — % — % (9.8 )% — % (1.4 )% (0.7 )%
Comparable growth 4.2 % 38.8 % 11.5 % 39.9 % (0.9 )% (6.9 )% 10.9 % 300.4 % 18.3 %
Foreign currency impact — % — % — % 2.0 % 2.0 % 2.3 % 0.2 % 4.4 % 0.8 %
Currency-neutral comparable growth 4.2 % 38.8 % 11.5 % 37.9 % (2.9 )% (9.2 )% 10.7 % 296.0 % 17.5 %



Quarter ended June 30, 2018
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	111		$	138		$	60		$	76		$	97		$	20		$	28		$	(56	)	$	474
Mark-to-market	—			—			—			—			—			—			—			3			3
Project K and cost reduction activities	(3		)	(10		)	—			1			13			(2		)	(3		)	(1		)	(5		)
Adjusted operating profit	$	114		$	148		$	60		$	75		$	84		$	22		$	31		$	(58	)	$	476
Foreign currency impact	—			—			—			1			3			(1		)	(1		)	—			2
Currency-neutral adjusted operating profit	$	114		$	148		$	60		$	74		$	81		$	23		$	32		$	(58	)	$	474

Quarter ended July 1, 2017
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	29		$	170		$	70		$	59		$	77		$	26		$	18		$	(64	)	$	385
Mark-to-market	—			—			—			—			—			—			—			5			5
Project K and cost reduction activities	(79		)	(1		)	(1		)	(2		)	(2		)	(3		)	(3		)	(7		)	(98		)
Adjusted operating profit	$	108		$	171		$	71		$	61		$	79		$	29		$	21		$	(62	)	$	478

% change - 2018 vs. 2017:
Reported growth	294.3		%	(18.5		)%	(15.3		)%	28.3		%	25.4		%	(20.4		)%	54.1		%	12.8		%	23.5		%
Mark-to-market	—		%	—		%	—		%	—		%	—		%	—		%	—		%	(2.3		)%	(0.9		)%
Project K and cost reduction activities	287.9		%	(4.9		)%	0.7		%	5.7		%	18.6		%	0.1		%	7.7		%	9.4		%	24.7		%
Adjusted growth	6.4		%	(13.6		)%	(16.0		)%	22.6		%	6.8		%	(20.5		)%	46.4		%	5.7		%	(0.3		)%
Foreign currency impact	—		%	—		%	—		%	0.4		%	3.8		%	(1.1		)%	(6.1		)%	0.3		%	0.4		%
Currency-neutral adjusted growth	6.4		%	(13.6		)%	(16.0		)%	22.2		%	3.0		%	(19.4		)%	52.5		%	5.4		%	(0.7		)%

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

U.S. ~~Morning Foods~~

This segment consists of cereal, toaster pastries, and health and wellness bars. As reported and Currency-neutral comparable net sales declined 3.0% as a result of decreased volume partially offset by favorable pricing/mix.

~~In our cereal business, kid-oriented brands performed well during the quarter as~~ ~~Froot Loops~~ ~~and~~ ~~Frosted Flakes~~ ~~continued to gain share behind effective media and innovation. Adult-oriented brands declined, reflecting a category trend and our lack of sufficient food news and brand activity.~~

~~Toaster pastries grew share during the quarter despite lower consumption in the category.~~

~~As reported operating profit decreased 2.6% due to higher restructuring charges and lower net sales. Currency-neutral comparable operating profit increased 4.2% after excluding restructuring charges.~~

~~U.S.~~ Snacks

This segment consists of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks.

As reported and Currency-neutral ~~comparable~~ net sales were ~~4.5%~~8.6% lower versus the comparable quarter due primarily to price/mix as a result of the year on year impact of list-price adjustments and ~~lower volume. During~~rationalization of stock-keeping units related to the DSD exit during the second half of 2017. These impacts were partially offset by improved performance by key brands.

All of our ex-DSD categories experienced year over year gains in velocity during the second quarter, as we now have a stronger set of SKUs on the shelf which are being supported with brand-building.

The Big 3 crackers brands (Cheez-it, Club and Townhouse) collectively grew consumption and share during the second quarter of 2018. Pringles, which was never in DSD, grew both consumption and share during the second quarter lead by our core flavors and immediate-consumption pack-formats.

Wholesome snacks growth was lead by Rice Krispies Treats, which grew consumption and share during the quarter, ~~the Company discontinued shipping through its DSD distribution system. Accordingly, all sales are now made at a list-price that is reduced~~driven by a cost-to-serve for various DSD services no longer provided by the Company. As reported net sales were also affected by a pull-back in merchandising to facilitate customer transitions early in the quarter,innovation and ~~the impact of eliminating smaller, less productive SKUs.~~

Crackers, Cookies, and Wholesome Snacks declined in consumption in the third quarter due to the reduction of promotion activity related to our efforts to smoothly transition out of DSD. Savory snacks consumption was pulled down, in part, on the elimination of a promotion-sized can but Core Four flavors grew during the quarter.advertising.

As reported operating profit ~~declined 82.5%~~increased significantly due to ~~increased~~lower Project K restructuring charges and overhead reductions in ~~the current year associated~~conjunction with our DSD ~~transition.~~transition partially offset by a significant increase in brand investment. Currency-neutral ~~comparable~~adjusted operating profit increased ~~38.8%~~6.4% after excluding the impact of restructuring ~~charges; this was driven by DSD-related overhead reductions~~charges.

U.S. Morning Foods

This segment consists of cereal and toaster pastries. As reported and Currency-neutral net sales declined 3.2% as a result of decreased volume on lower cereal consumption, partially offset by ~~increased brand investment.~~favorable pricing/mix.

During the quarter, our share in the cereal category stabilized, with our Core 6 cereal brands collectively resuming share growth. Special K grew consumption and share during the second quarter as a result of communication around its inner-strength positioning. Raisin Bran grew consumption and share during the quarter, aided by the launch of Raisin Bran Crunch with Bananas, and supported by advertising highlighting Raisin Bran's health attributes. The quarter was negatively impacted by a recall on co-manufactured Honey Smacks.

As reported operating profit decreased 18.5% due to higher restructuring charges, higher commercial investment, and lower net sales. Currency-neutral adjusted operating profit decreased 13.6% after excluding restructuring charges.

U.S. Specialty Channels

This segment is comprised of sales of most of our brands through channels such as foodservice, convenience stores, vending, and others. As reported and Currency-neutral ~~comparable~~ net sales improved ~~1.9% as a~~1.1%, primarily the result of higher ~~volume and improved pricing/mix.~~volume.

~~Shipments grew~~The Vending, Girl Scouts, and Convenience channels posted strong growth. Foodservice experienced a modest decline, particularly in ~~the quarter led by both our Convenience~~K-12 schools and ~~Foodservice channels, with the latter additionally benefiting from hurricane-related orders.~~military.

As Reported operating profit ~~increased 12.2%~~decreased 15.3% due to ~~the higher net sales and savings from Project K and ZBB initiatives.~~a revised allocation of costs between U.S. operating segments. Currency-neutral ~~comparable~~adjusted operating profit ~~increased 11.5%~~decreased 16.0% after excluding the impact of restructuring charges.

North America Other

This segment is composed of our U.S. Frozen Foods, Kashi Company, Canada, and ~~Canada~~RXBAR businesses.

As reported net sales increased ~~4.4%~~18.4% due to the RXBAR acquisition, higher volume, favorable pricing/mix, and favorable foreign currency. Currency-neutral ~~comparable~~ net sales increased ~~2.9%~~17.5% after excluding the impact of foreign currency. Organic net sales increased 2.7% from the prior year after also excluding RXBAR results, led by growth momentum in U.S. Frozen Foods.

RXBAR consumption and share grew as we continued to expand distribution of core bars.

~~The~~ U.S. Frozen ~~business~~Foods reported increased ~~shipments~~net sales on higher volume and favorable price/mix. Eggo^®andMorningstar Farmsboth grew share and consumption during the quarter, benefiting from ~~the removal of artificial ingredients~~renovated food and ~~the success of Disney-shaped waffles, as well as the exit of~~packaging, new innovations, and a ~~competitor. Our frozen veggie business, under the~~ focus on core offerings.~~Morningstar Farms~~^®~~and~~ ~~Gardenburger~~^®~~brands, returned to consumption and share~~

In Canada, we posted sales growth during the quarter ~~reflecting focused marketing support on~~and we gained share in most of our ~~core burger offerings during the summer grilling season.~~

Canada reported increased shipments during the quarter on higher volume, positive price/mix, and favorable foreign currency. We generated continued improvement in consumption with broad-based share gains in both cereal and snacks. The business is past the elasticity impact of currency-driven pricing actions taken in the second quarter of 2016, and is showing consistent improvement as we invest in brand building and innovation.

Kashi Company posted lower net sales in the quarter due to the decision to eliminate less profitable SKUs in certain channels, but its sales performance did continue to improve sequentially from previous quarters. Our cereal business grew share, led by ~~Bear Naked, which is now the largest granola brand in the U.S. Additionally, our renovated snacks offerings are stabilizing share more quickly than anticipated, with share flat during the quarter.~~categories.

As Reported operating profit increased ~~52.8%~~28.3% due to lower restructuring charges, Project K ~~and ZBB~~ savings and favorable foreign currency. Currency-neutral ~~comparable~~adjusted operating profit increased ~~37.9%~~22.2% after excluding the impact of restructuring charges and foreign currency.

Europe

As Reported net sales increased ~~0.8%~~9.5% due to favorable foreign currency ~~pricing/mix,~~ and ~~acquisitions,~~higher volume partially offset by ~~lower volume.~~unfavorable pricing/mix. Currency-neutral ~~comparable~~ net sales ~~declined 1.1%~~increased 5.9% after excluding the impact of foreign ~~currency and acquisitions.~~currency.

Growth was led by Pringles ~~returned~~, which lapped year-ago promotional disruptions in some markets. Pringlescontinued to ~~growth during~~grow across the ~~quarter, following temporary declines in~~region, well beyond the ~~first half of 2017, when prolonged customer negotiations resulted in reduced promotional activity.~~markets that experienced last year's disruption.

Cereal currency-neutral net sales declined due to softness in ~~adult-oriented brands in continental~~Continental Europe, most notably France and ~~economic softness in our Mediterranean, Middle East, and Africa sub-region.~~Benelux. The U.K. cereal business grew ~~consumption and~~ share during the quarter, continuing its improving trend with growth in several brands.

Emerging markets were also a driver of Europe's growth in both cereal and snacks, led by Egypt, Russia, and the Middle East.

As reported operating profit ~~decreased 9.2%~~increased 25.4%, despite a double-digit increase in brand investment, due primarily to ~~higher~~sales growth, lower restructuring charges ~~partially mitigated by incremental Project K savings~~ and favorable foreign currency. Currency-neutral ~~comparable~~adjusted operating profit ~~declined 2.9%~~increased 3.0% after excluding the impact of restructuring charges ~~acquisitions~~ and foreign currency.

Latin America

As reported net sales improved ~~21.5%~~3.5% due to increased volume ~~as a result of the Parati acquisition and favorable pricing/mix. This was~~ partially offset by ~~lower volume in the base business~~unfavorable pricing/mix and ~~the unfavorable impact of~~ foreign currency. Currency-neutral ~~comparable~~ net sales ~~declined 2.1%~~increased 9.2% after excluding the impact of ~~acquisitions, prior year Venezuela results, and~~ foreign currency.

~~This decline~~Mexico posted its ninth straight quarter of organic net sales growth, growing consumption and share in cereal, while snacks growth was ~~due solely~~led by Pringles.

Parati continued to ~~the~~grow consumption and share in cookies and crackers in Brazil.

We continued to see good recovery in our Caribbean/Central America ~~sub-region, where economic softness was exacerbated by shipment disruptions due to hurricanes Maria and Irma.~~

We did post growth in each of the other sub-regions within Latin America. Our Mexico business continued to perform well, despite disruptions related to two major earthquakes. Mercosur posted particularly strong growth in ~~Pringles, despite a challenging environment.~~

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

As reported operating profit decreased ~~13.2%,~~20.4% due primarily ~~due~~to a substantial increase in advertising and promotion investment as well as costs related to the ~~impact of prior year Venezuela results partially mitigated by efficiencies from productivity initiatives and the impact of the Parati acquisition.~~Brazilian trucking strike. Currency-neutral ~~comparable~~adjusted operating profit decreased ~~9.2%~~19.4% after excluding the impact of foreign currency translation and restructuring ~~costs, acquisitions, prior year Venezuela remeasurement and foreign currency.~~charges.

Asia Pacific

As reported net sales improved ~~2.9%~~61% due to higher volume from the consolidation of Multipro results and favorable ~~foreign currency~~price/mix partially offset by unfavorable ~~price/mix.~~foreign currency. Currency-neutral ~~comparable~~ net sales increased ~~2.0%~~71%, after excluding the impact of foreign currency. Organic net sales increased 5.0% after also excluding the impact of Multipro.

~~Good~~Our Pringles business posted strong growth for the quarter in Asia Pacific. We continue to expand product offerings in certain markets while launching new pack-formats in others, extending the brand's distribution reach.

Emerging markets cereal grew during the quarter, with double-digit growth in ~~cereal was broad-based across the region, led by Asia's expansion in granola, e-commerce, and the re-acceleration of growth in~~ India.

Australia, our largest market in the region, posted ~~consumption and share gains during the quarter, continuing its stabilization trend.~~

~~Our Pringles business posted growth~~higher net sales for the quarter, ~~across the region.~~driven by consumption growth in cereal.

As reported operating profit increased ~~18.7%~~54% due to the consolidation of Multipro results, higher organic net sales, ~~lower restructuring charges,~~and productivity and brand-building efficiencies ~~related to ZBB.~~as a result of Project K and ZBB initiatives. Currency-neutral ~~comparable~~adjusted operating profit improved ~~10.7%~~53% after excluding the impact of restructuring and foreign currency.

Outside of reported results, our joint ventures in West Africa and China continued to perform well. Our venture in West Africa posted double-digit growth for the quarter driven by strong noodles volume. The China JV is benefiting from granola cereal and rapid expansion of e-commerce sales.

Corporate

As reported operating profit increased ~~$97~~$8 million due primarily to ~~pension curtailment gains related to Project K~~lower restructuring ~~partially offset by higher mark-to-market costs.~~charges. Currency-neutral ~~comparable~~adjusted operating profit improved ~~$20~~$4 million ~~due to lower pension and postretirement benefit costs~~ after excluding the impact of mark-to-market, restructuring charges,and foreign currency.

~~The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods ended September 30, 2017 versus October 1, 2016:~~

Year-to-date period ended September 30, 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 $ 2,108
$ 2,344
$ 961
$ 1,204
$ 1,677
$ 696
$ 724
$ —
$ 9,714
Acquisitions —
—
—
1
11
141
—
—
153
Comparable net sales $ 2,108
$ 2,344
$ 961
$ 1,203
$ 1,666
$ 555
$ 724
$ —
$ 9,561
Foreign currency impact —
—
—
6
(55 ) (1 ) 16
—
(34 )
Currency-neutral comparable net sales $ 2,108
$ 2,344
$ 961
$ 1,197
$ 1,721
$ 556
$ 708
$ —
$ 9,595
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
Venezuela operations impact —
—
—
—
—
23
—
—
23
Comparable net sales $ 2,227
$ 2,431
$ 931
$ 1,222
$ 1,821
$ 570
$ 692
$ —
$ 9,894
% change - 2017 vs. 2016:
Reported growth (5.3 )% (3.6 )% 3.2 % (1.5 )% (7.9 )% 17.3 % 4.7 % — % (2.0 )%
Acquisitions — % — % — % 0.1 % 0.6 % 23.7 % — % — % 1.6 %
Venezuela operations impact — % — % — % — % — % (3.8 )% — % — % (0.2 )%
Comparable growth (5.3 )% (3.6 )% 3.2 % (1.6 )% (8.5 )% (2.6 )% 4.7 % — % (3.4 )%
Foreign currency impact — % — % — % 0.4 % (3.0 )% (0.2 )% 2.4 % — % (0.4 )%
Currency-neutral comparable growth (5.3 )% (3.6 )% 3.2 % (2.0 )% (5.5 )% (2.4 )% 2.3 % — % (3.0 )%



Year-to-date period ended June 30, 2018
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	1,507		$	1,334		$	675		$	941		$	1,208		$	471		$	625		$	—		$	6,761
Foreign currency impact on total business (inc)/dec	—			—			—			8			82			(9		)	(12		)	—			69
Currency-neutral net sales	$	1,507		$	1,334		$	675		$	933		$	1,126		$	480		$	637		$	—		$	6,692
Acquisitions	—			—			—			110			—			—			129			—			239
Foreign currency impact on acquisitions (inc)/dec	—			—			—			—			—			—			23			—			23
Organic net sales	$	1,507		$	1,334		$	675		$	823		$	1,126		$	480		$	485		$	—		$	6,430

Year-to-date period ended July 1, 2017
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported net sales	$	1,610		$	1,372		$	668		$	782		$	1,080		$	452		$	459		$	—		$	6,423

% change - 2018 vs. 2017:
Reported growth	(6.4		)%	(2.8		)%	1.2		%	20.2		%	11.8		%	4.4		%	36.2		%	—		%	5.3		%
Foreign currency impact on total business (inc)/dec	—		%	—		%	—		%	1.0		%	7.6		%	(2.0		)%	(2.7		)%	—		%	1.1		%
Currency-neutral growth	(6.4		)%	(2.8		)%	1.2		%	19.2		%	4.2		%	6.4		%	38.9		%	—		%	4.2		%
Acquisitions	—		%	—		%	—		%	14.0		%	—		%	—		%	28.2		%	—		%	3.7		%
Foreign currency impact on acquisitions (inc)/dec	—		%	—		%	—		%	—		%	—		%	—		%	5.1		%	—		%	0.4		%
Organic growth	(6.4		)%	(2.8		)%	1.2		%	5.2		%	4.2		%	6.4		%	5.6		%	—		%	0.1		%

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 September 30, 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 $ 477
$ (8 ) $ 242
$ 173
$ 214
$ 82
$ 66
$ 31
$ 1,277
Mark-to-market —
—
—
—
—
—
—
(118 ) (118 )
Project K and cost reduction activities (16 ) (305 ) (1 ) (13 ) (21 ) (6 ) (5 ) 128
(239 )
Integration and transaction costs —
—
—
—
—
(2 ) —
—
(2 )
Acquisitions —
—
—
(2 ) (1 ) 15
—
—
12
Comparable operating profit $ 493
$ 297
$ 243
$ 188
$ 236
$ 75
$ 71
$ 21
$ 1,624
Foreign currency impact —
—
—
1
(8 ) (3 ) 2
(3 ) (11 )
Currency-neutral comparable operating profit $ 493
$ 297
$ 243
$ 187
$ 244
$ 78
$ 69
$ 24
$ 1,635
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 )
integration and transaction costs —
—
—
—
(2 ) 1
—
(2 ) (3 )
Venezuela operations impact —
—
—
—
—
8
—
—
8
Venezuela remeasurement —
—
—
—
—
(13 ) —
—
(13 )
Comparable operating profit $ 470
$ 292
$ 218
$ 155
$ 252
$ 80
$ 56
$ (19 ) $ 1,504
% change - 2017 vs. 2016:
Reported growth 4.3 % (103.7 )% 13.2 % 28.8 % (1.2 )% 17.6 % 32.7 % 141.1 % (1.6 )%
Mark-to-market — % — % — % — % — % — % — % (335.9 )% (6.3 )%
Project K and cost reduction activities (0.6 )% (105.3 )% 1.6 % 8.2 % 5.0 % 0.7 % 5.8 % 270.8 % (4.5 )%
Integration and transaction costs — % — % — % 0.1 % 0.7 % (3.0 )% 1.0 % (8.3 )% 0.1 %
Acquisitions — % — % — % (1.2 )% (0.3 )% 19.2 % — % — % 0.8 %
Venezuela operations impact — % — % — % — % — % (13.0 )% — % (1.6 )% (0.6 )%
Venezuela remeasurement — % — % — % — % — % 18.4 % — % — % 0.9 %
Comparable growth 4.9 % 1.6 % 11.6 % 21.7 % (6.6 )% (4.7 )% 25.9 % 216.1 % 8.0 %
Foreign currency impact — % — % — % 0.5 % (3.3 )% (2.8 )% 3.4 % (15.9 )% (0.7 )%
Currency-neutral comparable growth 4.9 % 1.6 % 11.6 % 21.2 % (3.3 )% (1.9 )% 22.5 % 232.0 % 8.7 %



Year-to-date period ended June 30, 2018
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	213		$	288		$	140		$	143		$	171		$	42		$	55		$	(68	)	$	984
Mark-to-market	—			—			—			—			—			—			—			33			33
Project K and cost reduction activities	(9		)	(12		)	—			(1		)	6			(4		)	(3		)	(2		)	(25		)
Adjusted operating profit	$	222		$	300		$	140		$	144		$	165		$	46		$	58		$	(99	)	$	976
Foreign currency impact	—			—			—			1			11			—			—			1			13
Currency-neutral adjusted operating profit	$	222		$	300		$	140		$	143		$	154		$	46		$	58		$	(100	)	$	963

Year-to-date period ended July 1, 2017
(millions)	U.S. Snacks			U.S. Morning Foods			U.S. Specialty Channels			North America Other			Europe			Latin America			Asia Pacific			Corporate			Kellogg Consolidated
Reported operating profit	$	(7	)	$	327		$	166		$	108		$	143		$	59		$	40		$	(171	)	$	665
Mark-to-market	—			—			—			—			—			—			—			(42		)	(42		)
Project K and cost reduction activities	(199		)	(2		)	(1		)	(9		)	(8		)	(4		)	(4		)	(9		)	(236		)
Adjusted operating profit	$	192		$	329		$	167		$	117		$	151		$	63		$	44		$	(120	)	$	943

% change - 2018 vs. 2017:
Reported growth	2,883.9		%	(11.9		)%	(15.8		)%	32.1		%	19.1		%	(27.6		)%	38.6		%	60.1		%	48.1		%
Mark-to-market	—		%	—		%	—		%	—		%	—		%	—		%	—		%	38.7		%	13.5		%
Project K and cost reduction activities	2,867.6		%	(3.0		)%	0.3		%	9.6		%	10.0		%	(1.6		)%	5.0		%	4.6		%	31.1		%
Adjusted growth	16.3		%	(8.9		)%	(16.1		)%	22.5		%	9.1		%	(26.0		)%	33.6		%	16.8		%	3.5		%
Foreign currency impact	—		%	—		%	—		%	0.7		%	7.0		%	0.7		%	(0.5		)%	1.2		%	1.4		%
Currency-neutral adjusted growth	16.3		%	(8.9		)%	(16.1		)%	21.8		%	2.1		%	(26.7		)%	34.1		%	15.6		%	2.1		%

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

U.S. ~~Morning Foods~~

This segment consists of cereal, toaster pastries, and health and wellness bars. As reported and currency-neutral comparable net sales declined 5.3% as a result of decreased volume partially offset by favorable pricing/mix.

Cereal consumption declined due to our adult-oriented brands, for which we have not supported with enough food news and brand activity to reverse a category-wide trend. Our kid-oriented brands have continued to perform well. ~~Frosted Flakes~~ ~~grew consumption and share during the year-to-date period behind effective media and innovation, including new Cinnamon~~ ~~Frosted Flakes~~. ~~Froot Loops~~ ~~also grew consumption and share during the year-to-date period reflecting effective innovation and brand-building.~~

~~Toaster pastries grew share during year-to-date period, despite lower consumption in the category.~~

As Reported operating profit increased 4.3% due to productivity initiatives partially offset by lower net sales and higher restructuring charges. Currency-neutral comparable operating profit increased 4.9% after eliminating the impact of restructuring charges.

~~U.S.~~ Snacks

This segment consists of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks.

As reported and Currency-neutral ~~comparable~~ net sales ~~declined 3.6%~~were 6.4% lower versus the comparable year-to-date period due primarily ~~due~~ to ~~impacts~~price/mix as a result of the year on year impact of list-price adjustments and rationalization of stock-keeping units related to ~~our conversion from~~the DSD ~~to warehouse distribution; specifically, reduced merchandising~~exit during the ~~transition, reduction~~second half of ~~SKUs, and a list-price adjustment.~~2017. These impacts were partially offset by offset by improved performance by key brands.

~~Crackers, Cookies, and Wholesome Snacks declined~~All of our ex-DSD categories experienced year over year gains in ~~consumption in~~velocity during the ~~third quarter due to the reduction~~first half, as we now have a stronger set of ~~promotion activity related to our efforts to smoothly transition out of DSD. Savory snacks consumption was pulled down, in part,~~SKUs on the ~~elimination~~shelf which are being supported with brand-building.

The Big 3 crackers brands (Cheez-it, Club and Townhouse) collectively returned to consumption and share growth during the first half of 2018. Pringles, which was never in DSD, grew both consumption and share during the first half of 2018 as a ~~promotion-sized can.~~result of our successful flavor-stacking campaign, involving both media and in-store activation, as well as immediate-consumption pack-formats.

Wholesome snacks growth was lead by Rice Krispies Treats, which grew consumption and share during the first half of 2018, driven by innovation and advertising.

As reported operating profit ~~declined 103.7%~~increased significantly due to ~~increased~~lower Project K restructuring charges and overhead reductions in ~~the current year associated~~conjunction with our DSD ~~transition.~~transition partially offset by a significant increase in brand investment. Currency-neutral ~~comparable~~adjusted operating profit increased ~~1.6%~~16.3% after excluding the impact of restructuring ~~charges; this was driven by DSD-related overhead reductions~~charges.

U.S. Morning Foods

This segment consists of cereal and toaster pastries. As reported and Currency-neutral net sales declined 2.8% as a result of decreased volume on lower cereal consumption, partially offset by ~~increased~~favorable pricing/mix.

A focus on food news and brand ~~investment.~~communication in the adult-oriented Health & Wellness segment helped moderate our declines from 2017. Our share in the cereal category stabilized during the second quarter, with our Core 6 cereal brands collectively resuming share growth. Special K grew consumption and share during the first half of the year as a result of communication around its inner-strength positioning. The second quarter was negatively impacted by a recall on co-manufactured Honey Smacks.

As reported operating profit decreased 11.9% due to higher restructuring charges and lower net sales. Currency-neutral adjusted operating profit decreased 8.9% after excluding restructuring charges.

U.S. Specialty Channels

This segment is comprised of sales of most of our brands through channels such as foodservice, convenience stores, vending, and others. As reported and Currency-neutral ~~comparable~~ net sales improved ~~3.2%~~1.2% as a result of higher volume and improved pricing/~~mix aided by innovation~~mix.

The Vending, Convenience, and ~~expansion in core and emerging growth~~Girls Scouts channels ~~and the third quarter benefit~~posted strong growth. Foodservice posted a modest decline, against a strong first half of ~~hurricane-related shipments.~~2017.

As ~~reported~~Reported operating profit ~~increased 13.2%~~decreased 15.8% due to ~~the higher net sales, savings from Project K and ZBB initiatives, and lower restructuring charges.~~a revised allocation of costs between U.S. operating segments. Currency-neutral ~~comparable~~adjusted operating profit ~~increased 11.6%~~decreased 16.1% after excluding the impact of restructuring charges.

North America Other

This segment is composed of our U.S. Frozen Foods, Kashi Company, Canada, and ~~Canada~~RXBAR businesses.

As reported net sales ~~declined 1.5%~~increased 20.2% due to ~~decreased~~the RXBAR acquisition, higher volume, favorable pricing/mix, and favorable foreign ~~currency partially offset by acquisitions.~~currency. Currency-neutral ~~comparable~~ net sales ~~declined 2.0%~~increased 19.2% after excluding the impact of ~~acquisitions~~foreign currency. Organic net sales increased 5.2% from the prior year after also excluding RXBAR results, led by growth momentum in U.S. Frozen Foods.

RXBAR consumption and ~~foreign currency.~~share grew as we continued to expand distribution of core bars.

In U.S. Frozen Foods reported increased net sales on higher volume and favorable price/mix. Eggo^®andMorningstar Farmsboth grew share and consumption during the ~~year-to-date period,~~first half of the year, benefiting from ~~the removal of artificial ingredients~~renovated food and ~~the success of Disney-shaped waffles, as well as the exit of~~packaging, new innovations, and a ~~competitor. Our frozen veggie business, under the~~ ~~Morningstar Farms~~^®~~and~~ ~~Gardenburger~~^®~~brands, returned to growth in the second and third quarters reflecting focused marketing support~~focus on ~~our~~ core ~~burger offerings during the summer grilling season.~~offerings.

In Canada, ~~consumption and~~we posted sales growth during the first half of 2018 on higher volume as we gained share ~~performance continued to improve~~ in ~~both cereal and in snacks.~~most of our categories.

Kashi Company shipments were impacted by the exit of non-core or less profitable SKUs, promotions, or categories. Our cereal business grew share during the year-to-date period. We also saw improved trends for the wholesome snacks business, as recent innovations and media are starting to take hold.

As Reported operating profit increased ~~28.8%~~32.1% due to lower restructuring charges, ~~and by~~ Project K savings and ~~ZBB savings.~~favorable foreign currency. Currency-neutral ~~comparable~~adjusted operating profit increased ~~21.2%~~21.8% after excluding the impact of restructuring charges and foreign currency.

Europe

As Reported net sales declined 7.9% due to lower volume partially offset by the favorable impact of foreign currency, pricing/mix and acquisitions. Currency-neutral comparable net sales declined 5.5% after excluding the impact of foreign currency and 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 first and second quarter merchandising programs. Promotional activity resumed in the third quarter and the brand returned to year-over-year growth.

~~Cereal consumption has declined due to sluggish categories across the region and particular softness in the adult-oriented brands across the category, notably our~~ ~~Special K. In the U.K., our largest market in the region, consumption and share turned positive in the third quarter, continuing an improving trend that began early this year.~~

As reported operating profit decreased 1.2% due to lower sales offset somewhat by lower restructuring charges, incremental Project K savings, and favorable foreign currency. Currency-neutral comparable operating profit declined 3.3% after excluding the impact of restructuring charges, prior year integration costs, acquisitions and foreign currency.

~~Latin America~~

~~Reported net sales improved 17.3% due to~~ increased volume as a result of the Parati acquisition and the impact of favorable pricing/mix. This was partially offset by lower volume in the base business and the unfavorable impact of foreign currency. Currency-neutral comparable net sales declined 2.4% after excluding the impact of acquisitions, prior year Venezuela results, and foreign currency.

This decline was due solely to the Caribbean/Central America sub-region, where distributor transitions and economic softness were exacerbated during the third quarter by shipment disruptions due to hurricanes Maria and Irma.

We did post growth in each of the other sub-regions within Latin America. Our Mexico business continued to perform well with consumption increasing year-on-year. Mercosur posted particularly strong growth in ~~Pringles, despite a challenging environment, and continued its expansion in Argentina and Chile.~~

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

As Reported operating profit increased 17.6%, primarily due to the impact of the Parati acquisition. Currency-neutral comparable operating profit decreased 1.9% after excluding the impact of restructuring costs, acquisitions, prior year Venezuela remeasurement and foreign currency.

~~Asia Pacific~~

~~Reported net sales improved 4.7%~~11.8% due to favorable foreign currency and higher volume partially offset by unfavorable pricing/~~mix as well as a slight increase in volume.~~mix. Currency-neutral ~~comparable~~ net sales increased ~~2.3%,~~4.2% after excluding the impact of foreign currency.

Growth ~~in cereal~~ was led by ~~India and Korea. Australia, our largest market~~Pringles, which lapped year-ago promotional disruptions in some markets. Pringlescontinued to grow across the region, ~~gained~~well beyond the markets that experienced last year's disruption.

Cereal currency-neutral net sales declined modestly due to softness in Northern Europe, but trends continue to improve. The U.K. cereal business grew consumption and share during the ~~period, reflecting continued stabilization.~~first half, continuing its improving trend with growth in several brands.

~~Our Pringles business posted~~Emerging markets were also a driver of Europe's growth ~~for the period across the region.~~in both cereal and snacks, led by Egypt and Russia.

As reported operating profit increased ~~32.7%~~19.1% due primarily to ~~higher net~~ sales growth and productivity saving which more than offset a significant increase in Brand Building. The first half also benefited from lower restructuring charges and ~~brand-building efficiencies.~~favorable foreign currency. Currency-neutral ~~comparable~~adjusted operating profit ~~improved 22.5%~~increased 2.1% after excluding the impact of restructuring ~~prior year integration costs~~charges and foreign currency.

~~Outside~~Latin America

As reported net sales improved 4.4% due to increased volume, favorable pricing/mix and favorable foreign currency. Currency-neutral net sales increased 6.4% after excluding the impact of foreign currency.

Mexico posted net sales growth during the year-to-date period, growing consumption and share in cereal, while snacks growth was led by Pringles. Mercosur posted double-digit growth driven by cereal, Pringles, and Parati. Parati continued to grow consumption and share in cookies and crackers in Brazil, and we continue to leverage its presence and expertise in high-frequency stores.

As reported operating profit decreased 27.6%, primarily due to a double-digit increase in Brand Building investment, the expected negative impact of transactional currency exchange on cost of goods sold in the first quarter , and costs related to a Brazilian trucking strike in the second quarter. The positive impact of foreign currency translation was mostly offset by the higher restructuring charges. Currency-neutral adjusted operating profit decreased 26.7%, after excluding the impact of restructuring charges and foreign currency.

Asia Pacific

As reported net sales improved 36% due to the consolidation of Multipro results and favorable foreign currency partially offset by unfavorable price/mix. Currency-neutral net sales increased 39%, after excluding the impact of foreign currency. Organic net sales increased 5.6% after also excluding the impact of Multipro.

Cereal and wholesome snacks businesses experienced growth across Asia and Africa, including double-digit growth in India, as well as growth in South East Asia and Korea. To achieve this growth, we are executing our emerging market cereal category development model: leveraging the Kellogg master brand, launching affordable and locally relevant innovation, offering the right price/pack combination across retail channels, and expanding the quantity and quality of our distribution.

Our Pringles business posted high single-digit growth for the first half in Asia Pacific. We continue to expand product offerings in certain markets while launching new pack-formats in others, extending the brand's distribution reach.

Australia, our largest market in the region, posted share gains during the first half, continuing its stabilization trend.

As reported operating profit increased 39% due to higher net sales, which include two months of Multipro results, ~~our joint ventures~~lower restructuring charges, and productivity and brand-building efficiencies as a result of Project K and ZBB initiatives, partially offset by a double-digit increase in ~~West Africa~~brand building. Currency-neutral adjusted operating profit improved 34% after excluding the impact of restructuring and ~~China continued to perform extremely well. Growth was driven by strong noodles volume in West Africa and e-commerce sales in China.~~foreign currency.

Corporate

As ~~Reported~~reported operating profit ~~improved $106~~increased $103 million due primarily to ~~pension curtailments gains in conjunction with Project K~~the favorable impact of year on year mark-to-market costs, and lower restructuring ~~mitigated somewhat by higher mark-to-market~~ costs. Currency-neutral ~~comparable~~adjusted operating profit improved ~~$43~~$20 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 ~~2017~~2018 versus ~~2016~~2017 is as follows:


Quarter	2017		2016		Change vs. prior year (pts.)		2018		2017		Change vs. prior year (pts.)
Reported gross margin (a)	37.7	%	38.9	%	(1.2	)	36.0	%	38.5	%	(2.5	)
Mark-to-market (COGS)	(2.0	)	(0.1	)	(1.9	)	—	%	0.1	%	(0.1	)
Project K and cost reduction activities (COGS)	0.2		(0.4	)	0.6		0.2	%	(0.7	)%	0.9
Acquisitions (COGS)	0.1		—		0.1
Comparable gross margin	39.4	%	39.4	%	—
Foreign currency impact	—				—		0.1	%	—	%	0.1
Currency-neutral comparable gross margin	39.4	%			—
Currency-neutral adjusted gross margin							35.7	%	39.1	%	(3.4	)
Reported SG&A%	(23.5	)%	(26.3	)%	2.8		(21.9	)%	(26.4	)%	4.5
Mark-to-market (SG&A)	(1.1	)	(0.8	)	(0.3	)	0.1	%	0.1	%	—
Project K and cost reduction activities (SG&A)	(0.3	)	(0.9	)	0.6		(0.4	)%	(2.5	)%	2.1
Acquisitions (SG&A)	(0.3	)	—		(0.3	)
Comparable SG&A%	(21.8	)%	(24.6	)%	2.8
Foreign currency impact	—				—		—	%	—	%	—
Currency-neutral comparable SG&A%	(21.8	)%			2.8
Currency-neutral adjusted SG&A%							(21.6	)%	(24.0	)%	2.4
Reported operating margin	14.2	%	12.6	%	1.6		14.1	%	12.1	%	2.0
Mark-to-market	(3.1	)	(0.9	)	(2.2	)	0.1	%	0.2	%	(0.1	)
Project K and cost reduction activities	(0.1	)	(1.3	)	1.2		(0.2	)%	(3.2	)%	3.0
Acquisitions	(0.2	)	—		(0.2	)
Comparable operating margin	17.6	%	14.8	%	2.8
Foreign currency impact	—				—		0.1	%	—	%	0.1
Currency-neutral comparable operating margin	17.6	%			2.8
Currency-neutral adjusted operating margin							14.1	%	15.1	%	(1.0	)

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 quarter was unfavorable ~~120~~250 basis points due primarily to ~~the impact of mark-to-market accounting for pension, commodities and foreign currency contracts, as well as~~ the impact of U.S. Snacks transition out of DSD distribution, ~~namely~~unfavorable mix, the consolidation of Multipro results, a substantial year-over-year increase in freight costs, and unfavorable mark-to-market impacts. The U.S. Snacks transition out of DSD distribution reflects the elimination of the list price ~~adjustment~~premium, as DSD services are no longer provided, and ~~increased resources~~the inclusion of logistics costs in COGS in a warehouse ~~logistics due~~distribution model. Logistics costs were expensed to SG&A in the DSD ~~transition. This was partially offset~~model. These impacts were mitigated somewhat by ~~the impact of productivity and cost-savings under the Project K restructuring program,~~ lower restructuring charges and ~~acquisitions.~~the impact of foreign currency. Currency-neutral ~~comparable~~adjusted gross margin was ~~flat~~unfavorable 340 basis points compared to the ~~third~~second quarter of ~~2016~~2017 after eliminating the impact of mark-to-market, restructuring, and ~~acquisitions.~~foreign currency.

Reported SG&A% for the quarter was favorable ~~280~~450 basis points due primarily to overhead savings realized from Project K and ~~ZBB,~~ lower Project K restructuring ~~charges, and acquisitions. These impacts were partially mitigated by higher year-over-year mark-to-market~~ charges. Currency-neutral ~~comparable~~adjusted SG&A% was favorable ~~280~~240 basis points after excluding the impact of ~~restructuring, mark-to-market, and acquisitions.~~restructuring.

Reported operating margin for the quarter was favorable ~~160~~200 basis points due ~~primarily~~ to ~~COGS and SG&A~~significantly lower restructuring charges as well as productivity savings ~~realized~~ from Project K restructuring, which includes this year's exit from its U.S. Snacks segment's Direct Store Delivery sales and ~~ZBB initiatives, lower restructuring charges,~~delivery system. These savings more than offset a substantial year-over-year increase in advertising and ~~acquisitions partially mitigated by the impact of mark-to-market accounting for pension, commodities and foreign currency contracts.~~promotion investment. Currency-neutral ~~comparable~~adjusted operating margin was ~~favorable 280~~unfavorable 100 basis points after excluding the ~~year-over-year~~ impact of mark-to-market, restructuring, ~~mark-to-market,~~ and ~~acquisitions.~~foreign currency.

Year-to-date 2017 2016
Change vs. prior
year (pts.)
Reported gross margin (a) 38.1 % 38.1 % —
Mark-to-market (COGS) (0.9 ) (0.1 ) (0.8 )
Project K and cost reduction activities (COGS) (0.3 ) (0.7 ) 0.4
Acquisitions (COGS) 0.1
—
0.1
Venezuela remeasurement (COGS) —
(0.1 ) 0.1
Comparable gross margin 39.2 % 39.0 % 0.2
Foreign currency impact —
—
Currency-neutral comparable gross margin 39.2 % 0.2
Reported SG&A% (25.0 )% (25.0 )% —
Mark-to-market (SG&A) (0.4 ) (0.2 ) (0.2 )
Project K and cost reduction activities (SG&A) (2.1 ) (1.0 ) (1.1 )
Acquisitions (SG&A) (0.3 ) —
(0.3 )
Venezuela operations impact (SG&A) —
0.1
(0.1 )
Venezuela remeasurement (SG&A) —
(0.1 ) 0.1
Comparable SG&A% (22.2 )% (23.8 )% 1.6
Foreign currency impact —
—
Currency-neutral comparable SG&A% (22.2 )% 1.6
Reported operating margin 13.1 % 13.1 % —
Mark-to-market (1.3 ) (0.3 ) (1.0 )
Project K and cost reduction activities (2.4 ) (1.7 ) (0.7 )
Acquisitions (0.2 ) —
(0.2 )
Venezuela operations impact —
0.1
(0.1 )
Venezuela remeasurement —
(0.2 ) 0.2
Comparable operating margin 17.0 % 15.2 % 1.8
Foreign currency impact —
—
Currency-neutral comparable operating margin 17.0 % 1.8



Year-to-date	2018		2017		Change vs. prior year (pts.)
Reported gross margin (a)	36.4	%	37.1	%	(0.7	)
Mark-to-market (COGS)	0.5	%	(0.6	)%	1.1
Project K and cost reduction activities (COGS)	(0.2	)%	(0.6	)%	0.4
Foreign currency impact	0.1	%	—	%	0.1
Currency-neutral adjusted gross margin	36.0	%	38.3	%	(2.3	)
Reported SG&A%	(21.8	)%	(26.7	)%	4.9
Mark-to-market (SG&A)	—	%	—	%	—
Project K and cost reduction activities (SG&A)	(0.1	)%	(3.1	)%	3.0
Foreign currency impact	(0.1	)%	—	%	(0.1	)
Currency-neutral adjusted SG&A%	(21.6	)%	(23.6	)%	2.0
Reported operating margin	14.6	%	10.4	%	4.2
Mark-to-market	0.5	%	(0.6	)%	1.1
Project K and cost reduction activities	(0.3	)%	(3.7	)%	3.4
Foreign currency impact	—	%	—	%	—
Currency-neutral adjusted operating margin	14.4	%	14.7	%	(0.3	)

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 flat versus the comparable prior year period. The impact of productivity and cost-savings under Project K, favorable net input costs, lower restructuring costs, and Venezuela remeasurement were partially offset byunfavorable 70 basis points due primarily to the impact of U.S. Snacks transition out of DSD distribution, ~~namely~~unfavorable mix, the impact of consolidating the Multipro business, and a substantial year-over-year increase in freight costs. The former reflects the elimination of the list price ~~adjustment~~premium, as DSD services are no longer provided, and ~~increased resources~~the inclusion of logistics costs in COGS in a warehouse ~~logistics due~~distribution model. Logistics costs were expensed to SG&A in the DSD model. These impacts were partially mitigated by the favorable year-over-year impacts of mark-to-market, restructuring, and foreign currency. Currency-neutral adjusted gross margin was unfavorable 230 basis points compared to the ~~DSD transition, impact~~first half of ~~acquisitions, mark-to-market accounting for pension plans, commodities and foreign currency contracts. Currency-neutral comparable gross margin improved 20 basis points~~2017 after eliminating the impact of mark-to-market, restructuring, ~~acquisitions,~~ and ~~Venezuela remeasurement.~~foreign currency.

Reported SG&A% for the year-to-date period was ~~flat versus the comparable prior year period. Overhead~~favorable 490 basis points due primarily to overhead savings realized from Project K and ~~ZBB, the impact to brand-building investment from ZBB efficiencies, and acquisitions were mitigated by increased~~lower Project K restructuring ~~and mark-to-market costs.~~charges, more than offsetting a double-digit increase in Brand Building. Currency-neutral ~~comparable~~adjusted SG&A% was favorable ~~160~~200 basis points after excluding the impact of restructuring ~~mark-to-market,~~ and ~~acquisitions.~~foreign currency.

Reported operating margin for the year-to-date period was ~~flat compared~~favorable 420 basis points due to ~~the prior year. The~~significantly lower restructuring charges, favorable market-to-market impact, ~~to COGS and SG&A expense realized~~as well as productivity savings from Project K restructuring, which includes this year's exit from its U.S. Snacks segment's Direct Store Delivery sales and ~~ZBB initiatives, acquisitions~~delivery system. These savings more than offset a substantial year-over-year increase in advertising and ~~Venezuela remeasurement were partially mitigated by higher market-to-market and restructuring charges.~~promotion investment. Currency-neutral ~~comparable~~adjusted operating margin was ~~favorable 180~~unfavorable 30 basis points after excluding the ~~year-over-year~~ impact of ~~restructuring,~~ mark-to-market ~~acquisitions,~~ and ~~Venezuela remeasurement.~~restructuring.

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

Quarter ended Year-to-date period ended
(dollars in millions) September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016
Reported gross profit (a) $ 1,232
$ 1,264
$ 3,701
$ 3,779
Mark-to-market (COGS) (69 ) (3 ) (90 ) (12 )
Project K and cost reduction activities (COGS) 9
(12 ) (26 ) (66 )
Integration and transaction costs (COGS) —
—
—
(1 )
Acquisitions (COGS) 22
—
65
—
Venezuela operations impact (COGS) —
2
—
9
Venezuela remeasurement (COGS) —
—
—
(12 )
Comparable gross profit $ 1,270
$ 1,277
$ 3,752
$ 3,861
Foreign currency impact 10
(10 )
Currency-neutral comparable gross profit $ 1,260

$ 3,762

Reported SG&A $ 768
$ 854
$ 2,424
$ 2,482
Mark-to-market (SG&A) 35
28
28
23
Project K and cost reduction activities (SG&A) 10
28
213
98
Integration and transaction costs (SG&A) 1
2
2
2
Acquisitions (SG&A) 20
—
53
—
Venezuela operations impact (SGA) —
(1 ) —
1
Venezuela remeasurement (SG&A) —
—
—
1
Comparable SG&A $ 702
$ 797
$ 2,128
$ 2,357
Foreign currency impact 6

1

Currency-neutral comparable SG&A $ 696

$ 2,127

Reported operating profit $ 464
$ 410
$ 1,277
$ 1,297
Mark-to-market (104 ) (31 ) (118 ) (35 )
Project K and cost reduction activities (1 ) (40 ) (239 ) (164 )
Integration and transaction costs (1 ) (2 ) (2 ) (3 )
Acquisitions 2
—
12
—
Venezuela operations impact —
3
—
8
Venezuela remeasurement —
—
—
(13 )
Comparable operating profit $ 568
$ 480
$ 1,624
$ 1,504
Foreign currency impact 4
(11 )
Currency-neutral comparable operating profit $ 564

$ 1,635



	Quarter ended						Year-to-date period ended
(millions)	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Reported gross profit (a)	$	1,209		$	1,225		$	2,461		$	2,385
Mark-to-market (COGS)	2			6			32			(39		)
Project K and cost reduction activities (COGS)	4			(23		)	(9		)	(36		)
Foreign currency impact	—			—			29			—
Currency-neutral adjusted gross profit	$	1,203		$	1,242		$	2,409		$	2,460
Reported SG&A	$	735		$	840		$	1,477		$	1,720
Mark-to-market (SG&A)	(1		)	1			(1		)	3
Project K and cost reduction activities (SG&A)	9			75			16			200
Foreign currency impact	(2		)	—			16			—
Currency-neutral adjusted SG&A	$	729		$	764		$	1,446		$	1,517
Reported operating profit	$	474		$	385		$	984		$	665
Mark-to-market	3			5			33			(42		)
Project K and cost reduction activities	(5		)	(98		)	(25		)	(236		)
Foreign currency impact	2			—			13			—
Currency-neutral adjusted operating profit	$	474		$	478		$	963		$	943

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.

Restructuring and cost reduction activities

We view our restructuring and cost reduction activities as part of our 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.

Project K

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

Since inception, Project K has ~~provided significant benefits~~reduced the Company’s cost structure, and is expected to ~~continue to~~ provide ~~a number of~~enduring benefits, ~~in the future,~~ including an optimized supply chain infrastructure, ~~the implementation of~~an efficient global business services model, a ~~new~~ global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market models. These benefits are intended to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation.

We currently anticipate that Project K will result in total pre-tax charges, once all phases are approved and implemented, on the lower end of a range of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be approximately $1.1 billion. Cash expenditures of approximately ~~$725~~$950 million have been incurred through the end of fiscal year ~~2016.~~2017. Total cash expenditures, as defined, are expected to be approximately ~~$250~~$175 million for ~~2017 and the balance thereafter.~~2018. Total charges for Project K in ~~2017~~2018 are expected to be approximately ~~$325~~$90 to ~~$375~~$110 million.

We expect annual cost savings generated from Project K will be on the higher end of a range of approximately $600 to $700 million in 2019. The savings will be realized primarily in selling, general and administrative expense with additional benefit realized in gross profit as cost of goods 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 reflects our go-to-market initiatives that will impact both selling, general and administrative expense and gross profit. We have realized approximately ~~$300~~$480 million of annual savings through the end of ~~2016.~~2017. Cost savings have been 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.

We funded much of the initial cash requirements for Project K through ~~our supplier financing initiative.~~improved working capital. We are now able to fund much of the cash costs for the project through cash on hand 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~~adjusted income tax rate that will be disclosed on a quarterly basis.

We will complete the implementation of Project K in 2018, with annual savings expected to increase through 2019. Project charges, after-tax cash costs and annual savings remain in line with expectations.

Refer to Note 54 within Notes to Consolidated Financial Statements for further information related to Project K and other restructuring activities.

~~Other Projects~~

In 2015 we 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. We expect cumulative savings from the ZBB program to be approximately $450 to $500 million by the end of 2018, realized largely in selling, general and administrative expense.

In support of the ZBB initiative, we incurred pre-tax charges of approximately $1 million and $21 million during the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively. Total charges of $38 million have been recognized since the inception of the ZBB program. We anticipate that ZBB will result in total cumulative pre-tax charges of approximately $40 million through 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, Russian ruble, Brazilian Real, and ~~Russian ruble.~~Nigerian Naira. 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 ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, interest expense was ~~$188~~$141 million and ~~$343~~$124 million, respectively. ~~Prior~~The increase from the comparable prior year period is due to higher interest ~~expense includes $153 million charge to redeem $475 million~~rates on floating rate debt as well as Senior Notes issued in November 2017 in conjunction with our acquisition of ~~7.45% U.S. Dollar Debentures due 2031. The charge consisted primarily~~the RXBAR business, and Senior Notes issued in May 2018 in conjunction with our purchase of ~~a premium on the tender offer~~additional equity interests in Tolaram Africa Foods, PTE LTD and ~~also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees.~~

~~For the full year 2017, we expect gross interest expense to be approximately $255 million. Full year interest expense for 2016 was $406 million, including $153 million related to the tender offer.~~Multipro.

Income taxes

Our reported effective tax rate for the quarters ended ~~September~~June 30, 2018 and July 1, 2017 was 15% and ~~October 1, 2016 was~~ 26% ~~and 18%~~, respectively. The effective tax rate for the second quarter benefited from the reduction of the U.S. corporate tax rate as well as a tax benefit of $31 million attributable to discretionary pension contributions made in the second quarter of 2018 totaling $250 million, which are designated as 2017 tax year contributions.

The reported effective tax rate for the year-to-date periods ended ~~September~~June 30, 2018 and July 1, 2017 was 14% and ~~October 1, 2016 was 23% and 22%~~21%, respectively.

For the ~~year-to-date period~~quarter ended ~~September~~June 30, ~~2017,~~2018, the effective tax rate benefited from a discretionary pension contribution during the second quarter of 2018, 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 year-to-date period ended July 1, 2017, benefited from a deferred tax benefit of ~~$39~~$38 million resulting from the intercompany transfer of intellectual property. The effective tax rate for the quarter and year-to-date periods ended October 1, 2016, benefited from excess tax benefits from share-based compensation and the completion of certain tax examinations. Refer to Note 10 within Notes to Consolidated Financial Statements for further information.

The ~~comparable~~adjusted effective income tax rate for the quarters ended ~~September~~June 30, 2018 and July 1, 2017 was 15% and ~~October 1, 2016 was~~ 28% ~~and 20%~~, respectively. The ~~comparable~~adjusted effective income tax rate for the year-to-date periods ended ~~September~~June 30, 2018 and July 1, 2017 ~~and October 1, 2016~~ was ~~25%~~14% and 24%, respectively. The decreases from the comparable prior year periods are due primarily to the reduction in the U.S. corporate tax rate.

For the full year ~~2017,~~2018, we currently expect the ~~comparable~~ effective income tax rate to be approximately ~~26-27%~~18-19%. 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 ~~comparable~~adjusted income taxes and effective tax rate for the quarter and year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016.~~2017.


	Quarter ended						Year-to-date period ended						Quarter ended						Year-to-date period ended
Consolidated results (dollars in millions)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Reported income taxes	$	104		$	62		$	248		$	215		$	70		$	102		$	137		$	145
Mark-to-market	(38		)	(13		)	(39		)	(11		)	1			3			8			(1		)
Project K and cost reduction activities	2			(11		)	(78		)	(43		)	(1		)	(34		)	(5		)	(80		)
Other costs impacting comparability	—			—			—			(54		)
Venezuela operations impact	—			1			—			2
Comparable income taxes	$	140		$	85		$	365		$	321
Adjusted income taxes													$	70		$	133		$	134		$	226
Reported effective income tax rate	26.3		%	17.5		%	22.9		%	22.3		%	15.0		%	26.4		%	14.0		%	20.9		%
Mark-to-market	(2.0		)%	(1.8		)%	(1.0		)%	(0.3		)%	—		%	0.1		%	0.2		%	0.2		%
Project K and cost reduction activities	0.5		%	(0.8		)%	(1.4		)%	(0.5		)%	(0.1		)%	(1.9		)%	(0.2		)%	(3.3		)%
Other costs impacting comparability	—		%	—		%	—		%	(1.4		)%
Venezuela operations impact	—		%	0.1		%	—		%	—		%
Venezuela remeasurement	—		%	—		%	—		%	0.2		%
Comparable effective income tax rate	27.8		%	20.0		%	25.3		%	24.3		%
Adjusted effective income tax rate													15.1		%	28.2		%	14.0		%	24.0		%



		~~2017 full year guidance~~
~~Reported effective income tax rate~~		*
~~Mark-to-market~~		*
~~Project K and cost reduction activities~~		(2	)%
~~Integration costs~~		*
~~Comparable effective income tax rate~~	~~Approx.~~	~~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.

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

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~~The impacts of the extended customer terms programs and the of monetization,and securitization programs are included in our calculation of core working capital and are largely offsetting. Core working capital was improved by the extension of supplier payment terms. These programs are all part of our ongoing working capital management.

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 ~~$1.5~~$0.7 billion and ~~$1.7~~$1.5 billion as of ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, 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)	September 30, 2017			October 1, 2016			June 30, 2018			July 1, 2017
Net cash provided by (used in):
Operating activities	$	1,121		$	1,021		$	447		$	92
Investing activities	(363		)	(381		)	(661		)	300
Financing activities	(815		)	(521		)	162			(372		)
Effect of exchange rates on cash and cash equivalents	44			(24		)	28			34
Net increase (decrease) in cash and cash equivalents	$	(13	)	$	95		$	(24	)	$	54

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 ~~September~~June 30, ~~2017,~~2018, totaled ~~$1,121~~$447 million, an increase of ~~$100~~$355 million over the same period in ~~2016. Pre-tax cash costs totaling $144~~2017, as restated, due primarily to the termination of our accounts receivable securitization program at the end of 2017. Collections of deferred purchase price on securitized trade receivables totaled $568 million in the ~~year-to-date period ended October 1, 2016 related to~~first half of 2017 versus zero in the ~~$475~~current period. The year-over-year impact of the accounts receivable securitization program was mitigated somewhat by discretionary pension contributions totaling $250 million ~~redemption of our 7.45% U.S. Dollar Debentures due 2031 and $59 million cash settlement of forward starting swaps were offset by an increase in tax cash payments~~ during the ~~year-to-date period ended September 30, 2017 as well as a lower~~second quarter of 2018. Exclusive of the impact of accounting changes and the discretionary pension contribution in 2018, year-over-year cash flow ~~impact from the supplier financing initiative.~~

~~After-tax Project K cash payments were $185 million and $112 million for the year-to-date periods ended September 30, 2017 and October 1, 2016, respectively.~~increased.

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), ~~was slightly below zero~~is approximately negative 6 days and ~~3 days~~negative one day for the 12 month periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, respectively. Compared with the 12 month period ended ~~October~~July 1, ~~2016,~~2017, the ~~2017~~2018 cash conversion cycle was positively impacted by an increase in the days of trade payables outstanding attributable to aextended supplier ~~financing initiative.~~payment terms.

Our pension and other postretirement benefit plan contributions amounted to ~~$33~~$274 million and ~~$29~~$28 million for the year-to-date periods ended ~~September~~June 30, ~~2017~~2018 and ~~October~~July 1, ~~2016,~~2017, respectively. For the full year ~~2017,~~2018, we currently expect that our contributions to pension and other postretirement plans will total approximately ~~$42~~$287 million. ~~Plan~~Actual 2018 contributions could be different from our current projections, as influenced by potential discretionary funding ~~strategies may be modified in response to~~of our ~~evaluation of tax deductibility, market conditions and~~benefit trusts versus other competing investment ~~alternatives.~~priorities.

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:


	Quarter ended							Year-to-date period ended
(millions)	September 30, 2017			October 1, 2016			Approximate 2017 full year guidance	June 30, 2018			July 1, 2017
Net cash provided by operating activities	$	1,121		$	1,021		$1,600-$1,700	$	447		$	92
Additions to properties	(374		)	(376		)	(500)	(270		)	(268		)
Cash flow	$	747		$	645		$1,100-$1,200	$	177		$	(176	)

Investing activities

Our net cash used in investing activities totaled ~~$363~~$661 million for the year-to-date period ended ~~September~~June 30, ~~2017~~2018 compared to ~~$381~~cash provided of $300 million in the same period of ~~2016.~~2017, as restated. The ~~slight~~ decrease from the prior year was primarily due to the acquisition of an ~~$18~~ownership interest in TAF for $381 million ~~acquisition~~during the second quarter of 2018, and the impact of collections of deferred purchase price on securitized trade receivables during the first ~~quarter~~half of ~~2016.~~2017. This program was terminated at the end of 2017.

Financing activities

Our net cash ~~used in~~provided by financing activities for the year-to-date period ended ~~September~~June 30, ~~2017~~2018 totaled ~~$815~~$162 million compared to ~~$521~~net cash used of $372 million induring the ~~same period~~first half of ~~2016.~~2017. The difference is primarily due to ~~lower~~an increase in proceeds from net debt issuance during the first half of 2018 versus the comparable prior year period.

~~common stock related primarily~~In May 2018, we issued $600 million of ten-year 4.30% Senior Notes due 2028 and $400 million of three-year 3.25% Senior Notes due 2021, resulting in aggregate net proceeds after debt discount of $994 million. The proceeds from these Notes were used for general corporate purposes, including the repayment of our $400 million,seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of our commercial paper borrowings used to ~~option exercises. Proceeds from issuance~~finance our acquisition of ~~common stock was $87~~ownership interests in TAF and Multipro.

In November 2017, we issued $600 million of ten-year 3.4% Senior Notes to pay down commercial paper issued in conjunction with the ~~current year-to-date period compared to $356 million in the prior year-to-date period.~~purchase of Chicago Bar Co., LLC, manufacturer of RXBAR.

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 December ~~2015,~~2017, the board of directors approved a new authorization to repurchase up to $1.5 billion in shares beginning in ~~2016~~2018 through December ~~2017.~~2019. Total purchases for the year-to-date period ended ~~September~~June 30, ~~2017,~~2018, were 71 million shares for ~~$516~~$50 million. 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.

We paid cash dividends of ~~$550~~$374 million in the year-to-date period ended ~~September~~June 30, ~~2017,~~2018, compared to ~~$533~~$363 million during the same period in ~~2016.~~2017. The increase in dividends paid reflects our third quarter ~~2016~~2017 increase in the quarterly dividend to ~~$.52~~$.54 per common share from the previous ~~$.50~~$.52 per common share. In ~~October 2017,~~July 2018, the board of directors declared a dividend of ~~$.54~~$.56 per common share, payable on ~~December 15, 2017~~September 17, 2018 to shareholders of record at the close of business on ~~December 1, 2017.~~September 4, 2018. The dividend is broadly in line with our current plan to maintain our long-term dividend pay-out of approximately 50% of ~~comparable~~adjusted net income.

~~In February 2014, we~~We entered into an unsecured ~~five year credit agreement expiring~~Five-Year Credit Agreement in ~~2019, which allows~~February 2014, allowing us to borrow, on a revolving credit basis, up to $2.0 ~~billion.~~billion and expiring in 2019. In January 2018, we entered into an unsecured Five-Year Credit Agreement to replace the existing agreement allowing us to borrow up to $1.5 billion, on a revolving basis.

In January ~~2017,~~2018, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to ~~$800 million~~$1.0 billion at any time ~~outstanding.~~outstanding, to replace the $800 million 364-day facility that expired in January 2018. The new credit ~~facility~~facilities 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.~~facilities.

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.

~~On October 27, 2017, we completed our acquisition of Chicago Bar Co., LLC, the manufacturer of RXBAR, for approximately $600 million, funded through short-term borrowings.~~

During ~~the first half of~~ 2016, we ~~executed~~initiated a ~~discrete customer~~ program toin which customers could extend ~~customer~~their payment terms in exchange for the elimination of ~~the discount we had offered for~~ early ~~payment.~~payment discounts (Extended Terms Program). In order to mitigate the net working capital impact of the ~~extended payment terms,~~Extended Terms Program for discrete customers, we entered into ~~an agreement~~agreements 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.institutions (Monetization Programs). Transfers under ~~this agreement~~the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from our Consolidated Balance Sheet. The ~~agreement provides~~Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either ~~party to the agreement;~~party; however the maximum funding from receivables that may be sold at any time is currently ~~$800~~$1,033 million (increased from $988 million as of March 31, 2018, reflecting the execution of an amendment to the second monetization program on June 26, 2018), 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 September 30, 2017, approximately $1.7 billion of accounts receivable have been sold via this arrangement.Monetization Programs. Accounts receivable sold of ~~$629~~$936 million and $601 million remained outstanding under this arrangement as of ~~September~~June 30, ~~2017.~~2018 and December 30, 2017, respectively.

~~In addition to the discrete customer program above,~~Previously, in July 2016 we established an accounts receivable securitization program for certain customers which allows for extended customer payment 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,~~Extended Terms Program for certain customers, we entered into ~~an agreement~~agreements with a financial ~~institution~~institutions (Securitization Program) 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~~was $600 ~~million, but may be increased as additional financial institutions are added to~~million. In December 2017, we terminated the ~~agreement. We currently estimate~~Securitization Program, such that no receivables were sold after December 28, 2017. In March 2018 we substantially replaced the ~~amount of these receivables held at any time by~~securitization program with a second monetization program. Terminating the ~~financial institution(s) will be up to approximately $1 billion. During the year-to-date period ended September 30, 2017, $2.0 billion of accounts receivable have been sold through this program.~~ Securitization Program had no impact on our Cash Flow.

As of ~~September~~December 30, 2017, approximately ~~$480~~$433 million of accounts receivable sold under the ~~securitization program~~Securitization Program remained outstanding, for which we received cash of approximately ~~$433~~$412 million and a deferred purchase price asset of approximately ~~$47~~$21 million.

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

~~Accounting standards~~Future outlook

The Company updated financial guidance for 2018 based on first half momentum, as well as a lower effective tax rate.

We expect currency-neutral net sales to be ~~adopted~~up 4-5% in ~~future periods~~

~~Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities~~2018, up from our previous guidance of 3-4%. ~~In August 2017,~~This reflects stronger-than-expected organic growth in 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.first half. The new guidance implies full-year organic net sales to be flat to down 1%, which still includes a negative impact of 1% from U.S. Snacks’ DSD transition, including its list-price adjustment and rationalization of SKUs. Acquisitions, namely RXBAR and Multipro, are still expected to account for 4-6 percentage points of growth.

We expect currency-neutral adjusted operating profit will be up 5-7% in 2018. While net sales outlook is ~~effective on January 1, 2019, with early adoption permitted. For cash flow hedges~~increased, the Company is holding its operating profit forecast to its existing ~~at the adoption date, the standard requires adoption on~~range to reflect a ~~modified retrospective basis with a cumulative-effect adjustment~~prudent view toward mix trends, cost pressures, and potential increases to brand investment. Less than half of this year-on-year growth remains related to the ~~Consolidated Balance Sheet as~~acquisitions of RXBAR and Multipro, while the rest of the ~~beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company~~growth is ~~currently assessing the impact and timing of adoption of this ASU.~~driven by our underlying business, even after a strong increase in Brand Building investment.

~~In March 2017, the FASB issued an ASU~~Finally, we expect currency-neutral adjusted EPS 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~~grow in the ~~same line item or items as other compensation costs arising~~range of 11-13% in 2018, from ~~services rendered~~previous guidance of 9-11%, driven by various incremental tax benefits, including the ~~pertinent employees during the period. The other components of net~~tax 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. 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 $157 million and $120 million, respectively, with an offsetting decrease to other income (expense), net (OIE) of $277 million in the year-to-date period ended September 30, 2017. For the year-to-date period ended October 1, 2016, the impact to our Corporate segment would have been an increase to COGS and SG&A of $107 million and $35 million, respectively, with an offsetting decrease to OIE of $142 million. Adoption will have no impact on net income or cash flow. The impactrelated to the ~~Consolidated Balance Sheet at September 30, 2017 and October 1, 2016 would have been insignificant.~~

~~On a comparable basis,~~second quarter discretionary pension contribution. Specifically, the impact would have been an increase to COGS and SG&A of $128 million and $71 million, respectively, with an offsetting decrease to OIE of $199 million in the year-to-date period ended September 30, 2017, and an increase to COGS and SG&A of $107 million and $63 million, respectively, with a decrease to OIE of $170 million in the year-to-date period ended October 1, 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 prospective basis. We are currently assessing the impact and timing of adoption of 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 will adopt the 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 $45 million and cash flow from investing activities would have increased $45 million for the year-to-date period ended September 30, 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 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.

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 ASU to have a material 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. 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, using a modified retrospective transition method, and the adoption is not expected to have a material impact on its financial statements.~~

~~Future outlook~~

We affirm our guidance for currency-neutral comparable net sales, operating profit and earnings per share, as well as 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 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 Company's currency-neutral comparable operating profit margin remains on pace to improve by 350 basis points 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 ($0.06) 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 $4.00-4.06.

~~Comparable-basis and currency-neutral comparable-basis earnings per share guidance by definition exclude up-front costs, principally related to the Project K program. These up-front costs are~~is now expected to be after-tax $(0.65)-(0.75) per share, or $(325)-(375) million pretax, down from previous guidance of $(0.80)-(0.90) per share after tax and $(400)-(450) million pretax. The EPS guidance also continues to exclude integration costs, related to the Company's acquisition18-19% in ~~Brazil, as well as previous acquisitions. These integration costs are now expected to come in toward the low end of our previous guidance range of $(0.01)-(0.03) per share after-tax.~~2018.

~~We also affirmed our guidance~~During the second quarter, we elected to make a discretionary pension contribution of $250 million designated for the 2017 tax year to deduct at the pre-Tax Reform corporate tax rate. To reflect this contribution, the Company now projects Net cash ~~flow. Specifically, cash from~~provided by operating activities ~~should be~~of approximately ~~$1.6-1.7~~$1.5 billion ~~which after~~in 2018, driven by higher net income, sustained working-capital improvement, and benefits from U.S. Tax Reform. Additionally, we are increasing planned capital expenditure ~~translates into cash flow of $1.1-1.2 billion.~~by slightly less than $50 million, to fund growth initiatives such as single-serve pack formats and emerging market capacity.

Reconciliation of Non-GAAP amounts - 2017 Full Year Guidance*
Net sales Operating profit EPS
Currency-Neutral Comparable Guidance (3.0%) 7.0% - 9.0% $4.03 - $4.09
Foreign currency impact (0.5%) (0.6%) ($.03)
Comparable Guidance (3.5%) 6.4% - 8.4% $4.00 - $4.06

Impact of certain items excluded from Non-GAAP guidance:
Project K and cost reduction activities (pre-tax) 1.9% - (1.5%) ($1.07) - ($.93)
Integration costs (pre-tax) 0.3% ($.02)
Acquisitions/dispositions (pre-tax) 1.4% 0.7% $.07
Income tax benefit applicable to adjustments, net** $.31 - $.27



Impact of certain items excluded from Non-GAAP guidance:	Net sales	Operating profit	EPS
Project K and cost reduction activities (pre-tax)		$90-110M	$0.27-$0.32
Income tax benefit applicable to adjustments, net**			$0.05 - $0.06
Currency-neutral adjusted guidance*	4-5%	5-7%	11-13%

* ~~2017~~2018 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP, ~~comparable and~~ currency-neutral ~~comparable~~adjusted 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)~~(billions)	Full Year ~~2017~~2018
Net cash provided by (used in) operating activities	$~~1,600 - $1,700~~1.5
Additions to properties	($~~500)~~.5)
Cash Flow	$~~1,100 - $1,200~~1.0

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 our implementation of a more formal revenue growth management discipline;

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 and transportation 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 1110 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 ~~2016~~2017 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 ~~September~~June 30, ~~2017.~~2018.

During ~~2017,~~2018, we entered into forward starting interest rate swaps with notional amounts totaling ~~€300~~$300 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate ~~Euro~~ debt to be used for general corporate purposes. These swaps were designated as cash flow hedges. The ~~Euro~~ forward starting interest rate swaps ~~were~~were settled upon issuance of fixed rate ~~Euro~~ debt. A resulting aggregate gain ~~of $1 million~~immaterial to the financial statements 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 76 within Notes to Consolidated Financial Statements for further information related to the fixed rate debt issuance.

During ~~the year-to-date period ended~~ ~~September 30, 2017~~,2018, we entered into cross currency swaps with notional amounts totaling approximately $696 million, as hedges against foreign currency volatility associated with our net investment in our wholly-owned foreign subsidiaries. These swaps were designated as net investment hedges. The cross currency swaps were still outstanding as of June 30, 2018, representing a settlement receivable of $29M.

We have interest rate swaps with notional amounts totaling ~~approximately €600~~$1.5 billion and $2.3 billion outstanding at June 30, 2018 and December 30, 2017, respectively, representing a net settlement obligation of $25 million ~~that~~and $54 million, respectively. The interest rate swaps are designated as fair value hedges of certain ~~Euro~~U.S. Dollar debt. ~~Additionally,~~During the year-to-date period ended June 30, 2018, we settled interest rate swaps with notional amounts totaling approximately ~~$700~~$869 million which were previously designated as fair value hedges of certain U.S. Dollar Notes. We recorded an aggregate loss of ~~$14~~$49 million related to the settled swaps 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 Statements.~~

We have interest rate swaps with notional amounts totaling $2.2 billion outstanding at September 30, 2017 and December 31, 2016, representing a settlement obligation of $43 million and $64 million, respectively. The interest rate swaps 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 interest expense by approximately ~~$26~~$21 million and ~~$17~~$27 million at ~~September~~June 30, ~~2017~~2018 and December ~~31, 2016,~~30, 2017, respectively.

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 ~~September~~June 30, ~~2017,~~2018, 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.

Kellogg’s Project K initiative which includes the reorganization and relocation of certain financial, information technology, and logistics and distribution processes; internal to the organization was initiated in 2014. This initiative is expected to continue through 2018 and will continue to impact the design of our control framework. During efforts associated with Project K, we have implemented additional controls to monitor and maintain appropriate internal controls over financial reporting. There were no other changes during the quarter ended ~~September~~June 30, ~~2017,~~2018, that materially affected, or are reasonably likely to materially affect our internal 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 December ~~31, 2016.~~30, 2017. 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

~~(c) Issuer Purchases of Equity Securities~~

~~(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 #1:
7/02/2017 - 7/29/2017 1.2
$ 66.82
—
$ 558
Month #2:
7/30/2017 - 8/26/2017 —
$ —
—
$ 558
Month #3:
8/27/2017 - 9/30/2017 —
$ —
—
$ 558
Total 1.2
$ 66.82
—

In December ~~2015, our~~2017, the board of directors approved ~~a share repurchase program authorizing us~~an authorization to repurchase ~~shares~~of up to $1.5 billion of our common stock ~~amounting to $1.5 billion~~ beginning in January ~~2016~~2018 through December ~~2017.~~2019. This authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. During the ~~third~~second quarter of ~~2017,~~2018, the Company repurchased ~~1.2~~0.8 million shares for a total of ~~$81~~$50 million.

The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended June 30, 2018.

(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 #1:
4/1/2018 - 4/28/2018	—	$	—	—	$	1,500
Month #2:
4/29/2018 - 5/26/2018	0.8	$	61.29	0.8	$	1,450
Month #3:
5/27/2018 - 6/30/2018	—	$	—	—	$	1,450
Total	0.8	$	61.29	0.8

Item 6. Exhibits


(a)	Exhibits:




31.1	Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane
31.2	Rule 13a-14(e)/15d-14(a) Certification from Fareed Khan
32.1	Section 1350 Certification from Steven A. Cahillane
32.2	Section 1350 Certification from 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/ Fareed Khan

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~~August 3, ~~2017~~2018

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 Steven A. Cahillane	E
31.2	Rule 13a-14(e)/15d-14(a) Certification from Fareed Khan	E
32.1	Section 1350 Certification from Steven A. Cahillane	E
32.2	Section 1350 Certification from 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

6260



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



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



(millions)	Gain (loss) recognized in AOCI				Location of gain (loss) reclassified from AOCI	Gain (loss) reclassified from AOCI into income						Location of gain (loss) recognized in income (a)	Gain (loss) recognized in income (a)
	September 30, 2017		October 1, 2016			September 30, 2017			October 1, 2016				September 30, 2017		October 1, 2016
Foreign currency exchange contracts	$	—	$	1	COGS	$	—		$	4		Other income (expense), net	$	—	$	(1	)
Foreign currency exchange contracts	—		1		SGA expense	—			1			Other income (expense), net	—		—
Interest rate contracts	—		1		Interest expense	(3		)	(2		)	N/A	—		—
Commodity contracts	—		—		COGS	—			(3		)	Other income (expense), net	—		—
Total	$	—	$	3		$	(3	)	$	—			$	—	$	(1	)



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



Quarter ended September 30, 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	$	710		$	760		$	290		$	420		$	599		$	240		$	254		$	—		$	3,273
Acquisitions	—			—			—			—			4			48			—			—			52
Comparable net sales	$	710		$	760		$	290		$	420		$	595		$	192		$	254		$	—		$	3,221
Foreign currency impact	—			—			—			7			7			6			1			—			21
Currency-neutral comparable net sales	$	710		$	760		$	290		$	413		$	588		$	186		$	253		$	—		$	3,200
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
Venezuela operations impact	—			—			—			—			—			7			—			—			7
Comparable net sales	$	733		$	796		$	284		$	402		$	594		$	190		$	248		$	—		$	3,247
% change - 2017 vs. 2016:
Reported growth	(3.0		)%	(4.5		)%	1.9		%	4.4		%	0.8		%	21.5		%	2.9		%	—		%	0.6		%
Acquisitions	—		%	—		%	—		%	—		%	0.7		%	24.4		%	—		%	—		%	1.6		%
Venezuela operations impact	—		%	—		%	—		%	—		%	—		%	(4.0		)%	—		%	—		%	(0.2		)%
Comparable growth	(3.0		)%	(4.5		)%	1.9		%	4.4		%	0.1		%	1.1		%	2.9		%	—		%	(0.8		)%
Foreign currency impact	—		%	—		%	—		%	1.5		%	1.2		%	3.2		%	0.9		%	—		%	0.6		%
Currency-neutral comparable growth	(3.0		)%	(4.5		)%	1.9		%	2.9		%	(1.1		)%	(2.1		)%	2.0		%	—		%	(1.4		)%



	Quarter ended						Year-to-date period ended
(dollars in millions)	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016
Reported gross profit (a)	$	1,232		$	1,264		$	3,701		$	3,779
Mark-to-market (COGS)	(69		)	(3		)	(90		)	(12		)
Project K and cost reduction activities (COGS)	9			(12		)	(26		)	(66		)
Integration and transaction costs (COGS)	—			—			—			(1		)
Acquisitions (COGS)	22			—			65			—
Venezuela operations impact (COGS)	—			2			—			9
Venezuela remeasurement (COGS)	—			—			—			(12		)
Comparable gross profit	$	1,270		$	1,277		$	3,752		$	3,861
Foreign currency impact	10						(10		)
Currency-neutral comparable gross profit	$	1,260					$	3,762
Reported SG&A	$	768		$	854		$	2,424		$	2,482
Mark-to-market (SG&A)	35			28			28			23
Project K and cost reduction activities (SG&A)	10			28			213			98
Integration and transaction costs (SG&A)	1			2			2			2
Acquisitions (SG&A)	20			—			53			—
Venezuela operations impact (SGA)	—			(1		)	—			1
Venezuela remeasurement (SG&A)	—			—			—			1
Comparable SG&A	$	702		$	797		$	2,128		$	2,357
Foreign currency impact	6						1
Currency-neutral comparable SG&A	$	696					$	2,127
Reported operating profit	$	464		$	410		$	1,277		$	1,297
Mark-to-market	(104		)	(31		)	(118		)	(35		)
Project K and cost reduction activities	(1		)	(40		)	(239		)	(164		)
Integration and transaction costs	(1		)	(2		)	(2		)	(3		)
Acquisitions	2			—			12			—
Venezuela operations impact	—			3			—			8
Venezuela remeasurement	—			—			—			(13		)
Comparable operating profit	$	568		$	480		$	1,624		$	1,504
Foreign currency impact	4						(11		)
Currency-neutral comparable operating profit	$	564					$	1,635