Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 3, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 8, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (Aug 8, 2016)
  • 10-Q (May 9, 2016)

 
8-K

 
Other

Kellogg Company 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Document

 
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 April 1, 2017
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 1-4171
KELLOGG COMPANY
 
State of Incorporation—Delaware
  
IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting  company  ¨
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Common Stock outstanding as of April 29, 2017 — 350,277,682 shares
 



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




Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
 
April 1,
2017 (unaudited)
December 31,
2016 *
Current assets
 
 
Cash and cash equivalents
$
298

$
280

Accounts receivable, net
1,464

1,231

Inventories:
 
 
Raw materials and supplies
318

315

Finished goods and materials in process
877

923

Other prepaid assets
189

191

Total current assets
3,146

2,940

Property, net of accumulated depreciation of $5,397 and $5,280
3,576

3,569

Investments in unconsolidated entities
440

438

Goodwill
5,084

5,166

Other intangibles, net of accumulated amortization of $56 and $54
2,442

2,369

Other assets
739

629

Total assets
$
15,427

$
15,111

Current liabilities
 
 
Current maturities of long-term debt
$
632

$
631

Notes payable
629

438

Accounts payable
1,995

2,014

Accrued advertising and promotion
464

436

Accrued income taxes
141

47

Accrued salaries and wages
251

318

Other current liabilities
620

590

Total current liabilities
4,732

4,474

Long-term debt
6,715

6,698

Deferred income taxes
456

525

Pension liability
1,008

1,024

Other liabilities
494

464

Commitments and contingencies


Equity
 
 
Common stock, $.25 par value
105

105

Capital in excess of par value
817

806

Retained earnings
6,650

6,571

Treasury stock, at cost
(4,078
)
(3,997
)
Accumulated other comprehensive income (loss)
(1,488
)
(1,575
)
Total Kellogg Company equity
2,006

1,910

Noncontrolling interests
16

16

Total equity
2,022

1,926

Total liabilities and equity
$
15,427

$
15,111

* Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

3


Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
 
Quarter ended
(Results are unaudited)
April 1,
2017
April 2,
2016
Net sales
$
3,254

$
3,395

Cost of goods sold
2,050

2,150

Selling, general and administrative expense
844

807

Operating profit
360

438

Interest expense
61

217

Other income (expense), net
3


Income before income taxes
302

221

Income taxes
42

47

Earnings (loss) from unconsolidated entities
2

1

Net Income
$
262

$
175

Per share amounts:
 
 
Basic earnings
$
0.75

$
0.50

Diluted earnings
$
0.74

$
0.49

Dividends
$
0.52

$
0.50

Average shares outstanding:
 
 
Basic
351

351

Diluted
354

355

Actual shares outstanding at period end
350

350

Refer to Notes to Consolidated Financial Statements.

4


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

Quarter ended
April 1, 2017
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
262

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

9

85

Cash flow hedges:
 
 
 
Reclassification to net income
2

(1
)
1

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


1

Other comprehensive income (loss)
$
79

$
8

$
87

Comprehensive income
 
 
$
349








 
Quarter ended
April 2, 2016
(Results are unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
175

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(55
)
29

(26
)
Cash flow hedges:
 
 
 
Unrealized gain (loss) on cash flow hedges
(57
)
23

(34
)
Reclassification to net income
2

(1
)
1

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


1

Other comprehensive income (loss)
$
(109
)
$
51

$
(58
)
Comprehensive income
 
 
$
117

Refer to Notes to Consolidated Financial Statements.

5


Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
 
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellogg
Company
equity
Non-controlling
interests
Total
equity
(unaudited)
shares
amount
shares
amount
Balance, January 2, 2016
420

$
105

$
745

$
6,597

70

$
(3,943
)
$
(1,376
)
$
2,128

$
10

$
2,138

Common stock repurchases
 
 


 
6

(426
)
 
(426
)
 
(426
)
Net income
 
 
 
694

 
 
 
694

1

695

Acquisition of noncontrolling interest
 
 
 
 
 
 
 

5

5

Dividends
 
 
 
(716
)
 
 
 
(716
)


(716
)
Other comprehensive loss
 
 
 
 
 
 
(199
)
(199
)

(199
)
Stock compensation
 
 
63

 
 
 
 
63

 
63

Stock options exercised and other
 
 
(2
)
(4
)
(7
)
372

 
366

 
366

Balance, December 31, 2016
420

$
105

$
806

$
6,571

69

$
(3,997
)
$
(1,575
)
$
1,910

$
16

$
1,926

Common stock repurchases
 
 


 
2

(125
)
 
(125
)
 
(125
)
Net income
 
 
 
262

 
 
 
262



262

Dividends
 
 
 
(182
)
 
 
 
(182
)
 
(182
)
Other comprehensive income
 
 
 
 
 
 
87

87



87

Stock compensation
 
 
17

 
 
 
 
17

 
17

Stock options exercised and other
 
 
(6
)
(1
)
(1
)
44

 
37



37

Balance, April 1, 2017
420

$
105

$
817

$
6,650

70

$
(4,078
)
$
(1,488
)
$
2,006

$
16

$
2,022

Refer to notes to Consolidated Financial Statements.

6


Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
 
 
Quarter ended
(unaudited)
April 1,
2017
April 2,
2016
Operating activities
 
 
Net income
$
262

$
175

Adjustments to reconcile net income to operating cash flows:
 
 
Depreciation and amortization
121

115

Postretirement benefit plan expense (benefit)
(56
)
(28
)
Deferred income taxes
(67
)

Stock compensation
17

15

Other
30

(27
)
Postretirement benefit plan contributions
(24
)
(17
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
Trade receivables
(192
)
(201
)
Inventories
58

49

Accounts payable
11

89

Accrued income taxes
92

(13
)
Accrued interest expense
48

12

Accrued and prepaid advertising and promotion
18

12

Accrued salaries and wages
(71
)
(113
)
All other current assets and liabilities
(36
)
(63
)
Net cash provided by (used in) operating activities
211

5

Investing activities
 
 
Additions to properties
(130
)
(144
)
Acquisitions, net of cash acquired

(18
)
Other
(1
)
7

Net cash provided by (used in) investing activities
(131
)
(155
)
Financing activities
 
 
Net issuances (reductions) of notes payable
191

(485
)
Issuances of long-term debt

1,382

Reductions of long-term debt
(1
)
(473
)
Net issuances of common stock
40

164

Common stock repurchases
(125
)
(198
)
Cash dividends
(182
)
(176
)
Other


Net cash provided by (used in) financing activities
(77
)
214

Effect of exchange rate changes on cash and cash equivalents
15

(5
)
Increase (decrease) in cash and cash equivalents
18

59

Cash and cash equivalents at beginning of period
280

251

Cash and cash equivalents at end of period
$
298

$
310

 
 
 
Supplemental cash flow disclosures
 
 
Interest paid
$
16

$
199

Income taxes paid
$
16

$
59

 
 
 
Supplemental cash flow disclosures of non-cash investing activities:
 
 
Additions to properties included in accounts payable
$
106

$
88


Refer to Notes to Consolidated Financial Statements.

7


Notes to Consolidated Financial Statements
for the quarter ended April 1, 2017 (unaudited)
Note 1 Accounting policies

Basis of presentation
The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects all adjustments, all of which are of a normal and recurring nature, that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2016 Annual Report on Form 10-K.

The condensed balance sheet information at December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended April 1, 2017 are not necessarily indicative of the results to be expected for other interim periods or the full year.

Accounts payable
The Company has agreements with certain third parties to provide accounts payable tracking systems which facilitates participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these agreements is to capture overall supplier savings, in the form of payment terms or vendor funding, created by facilitating suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreement for those payment obligations that have been sold by suppliers. As of April 1, 2017, $731 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $543 million of those payment obligations to participating financial institutions. As of December 31, 2016, $677 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $507 million of those payment obligations to participating financial institutions.

New accounting standards
Income Taxes. In October 2016, the FASB, as part of their simplification initiative, issued an ASU to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current Generally Accepted Accounting Principles (GAAP) prohibit recognition of current and deferred income taxes for intra-entity asset transfers until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendments in the ASU eliminate the exception, such that entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. That is, early adoption should be the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the period of adoption.  The Company early adopted the ASU in the first quarter of 2017. As a result of an intercompany transfer of intellectual property, the Company recorded a $38 million reduction in income tax expense in the quarter ended April 1, 2017. Upon adoption, there was no cumulative effect adjustment to retained earnings.

Accounting standards to be adopted in future periods
Improving the Presentation of net Periodic Pension Cost and net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the

8


period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, early adoption should be the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company will adopt the ASU in the first quarter of 2018. See further discussion in Accounting policies to be adopted in future periods section of MD&A.

Simplifying the test for goodwill impairment. In January 2017, the FASB issued an ASU to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The ASU is effective for an entity's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU should be applied on a prospective basis. The Company is currently assessing the impact and timing of adoption of this ASU.

Statement of Cash Flows. In August 2016, the FASB issued an ASU to provide cash flow statement classification guidance for certain cash receipts and payments including (a) debt prepayment or extinguishment costs; (b) contingent consideration payments made after a business combination; (c) insurance settlement proceeds; (d) distributions from equity method investees; (e) beneficial interests in securitization transactions and (f) application of the predominance principle for cash receipts and payments with aspects of more than one class of cash flows.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, in which case adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.   The amendments in this ASU should be applied retrospectively.  The Company will adopt the new ASU in the first quarter of 2018. The Company doesn't expect material impacts to the financial statements upon adoption, activities impacted by adoption of this ASU will continue to be monitored throughout its 2017 fiscal year.

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

Revenue from contracts with customers. In May 2014, the FASB issued an ASU, as amended, which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. To achieve that core principle, an entity would be required to apply the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity

9


satisfies a performance obligation. When the ASU was originally issued it was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption was not permitted. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The updated standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Entities will be permitted to adopt the new revenue standard early, but not before the original effective date.  Entities will have the option to apply the final standard retrospectively or use a modified retrospective method, recognizing the cumulative effect of the ASU in retained earnings at the date of initial application. An entity will not restate prior periods if it uses the modified retrospective method, but will be required to disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the ASU as compared to the guidance in effect prior to the change, as well as reasons for significant changes. The Company will adopt the updated standard in the first quarter of 2018, using a modified retrospective transition method, and the adoption is not expected to have a significant impact on its historical financial statements.

Note 2 Sale of accounts receivable

In March 2016, the Company entered into an agreement (the “Receivable Sales Agreement”), to sell, on a revolving basis, certain trade accounts receivable balances to a third party financial institution. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Receivable Sales Agreement provides for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is $700 million.  During the quarters ended April 1, 2017 and April 2, 2016 approximately $535 million and $53 million, respectively, of accounts receivable have been sold via this arrangement. Accounts receivable sold of $611 million and $562 million remained outstanding under this arrangement as of April 1, 2017 and December 31, 2016, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables was immaterial for the quarters ended April 1, 2017 and April 2, 2016 and is included in Other income and expense.

In July 2016, the Company entered into a U.S. accounts receivable securitization program with a third party financial institution. Under the program, we receive cash consideration of up to $600 million and a deferred purchase price asset for the remainder of the purchase price. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. This securitization program utilizes Kellogg Funding Company (Kellogg Funding), a wholly-owned subsidiary of the Company. Kellogg Funding's sole business consists of the purchase of receivables, from its parent or other subsidiary and subsequent transfer of such receivables and related assets to financial institutions. Although Kellogg Funding is included in our consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of Kellogg Funding assets prior to any assets or value in Kellogg Funding becoming available to the Company or its subsidiaries. The assets of Kellogg Funding are not available to pay creditors of the Company or its subsidiaries. This program expires in July 2017 but can be renewed with consent from the parties to the program.

During the quarter ended April 1, 2017, $595 million of accounts receivable were sold via the accounts receivable securitization program. As of April 1, 2017, approximately $353 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company received net cash proceeds of approximately $303 million and a deferred purchase price asset of approximately $50 million. As of December 31, 2016, approximately $292 million of accounts receivable sold to Kellogg Funding under the securitization program remained outstanding, for which the Company received net cash proceeds of approximately $255 million and a deferred purchase price asset of approximately $37 million. The portion of the purchase price for the receivables which is not paid in cash by the financial institutions is a deferred purchase price asset, which is paid to Kellogg Funding as payments on the receivables are collected from customers. The deferred purchase price asset represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price asset is included in Other prepaid assets on the Consolidated Balance Sheet. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables for the quarter ended April 1, 2017 is included in Other income and expense and is not material.

The Company has no retained interests in the receivables sold under the programs above which primarily enables the Company to extend customers payment terms for a net economic benefit attained on a cash flow neutral basis. The Company does have collection and administrative responsibilities for the sold receivables. The Company has

10


not recorded any servicing assets or liabilities as of April 1, 2017 and December 31, 2016 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.

Additionally, from time to time certain of the Company's foreign subsidiaries will 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 quarter ended April 1, 2017, $55 million of accounts receivable have been sold via these programs. Accounts receivable sold of $50 million and $124 million remained outstanding under these programs as of April 1, 2017 and December 31, 2016, respectively. The recorded net loss on the sale of these receivables is included in Other income and expense and is not material.

Note 3 Goodwill and other intangible assets

Parati acquisition
In December 2016, the Company acquired Ritmo Investimentos, controlling shareholder of Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading Brazilian food group for approximately BRL 1.38 billion ($381 million) or $379 million, net of cash and cash equivalents. The purchase price 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 acquisition was accounted for under the purchase price method and was financed with cash on hand and short-term borrowings. The assets and liabilities of the Parati Group are included in the Consolidated Balance Sheet as of April 1, 2017 within the Latin America segment. The acquired assets and assumed liabilities include the following:
(millions)
 
 
December 1, 2016
Current assets
 
 
$
44

Property
 
72
 
Goodwill
 
145
 
Intangible assets
 
179
 
Current liabilities
 
(48
)
Non-current deferred tax liability and other
 
(13
)
 
 
 
$
379


The above amounts represent the allocation of purchase price as of April 1, 2017 and are subject to revision when the working capital and net debt adjustments to the purchase price are agreed between the parties and appraisals are finalized for property and intangible assets. These items will be finalized during 2017.

As of April 1, 2017, the Company had finalized plans to merge the acquired and pre-existing Brazilian legal entities, which will result in tax basis of the acquired intangible assets. Accordingly, deferred tax liabilities and goodwill were both reduced by $41 million in the quarter ended April 1, 2017. In addition, during the first quarter, the value of intangible assets subject to amortization increased $57 million and intangible assets not subject to amortization increased $4 million with an offsetting $61 million adjustment to goodwill in conjunction with the 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. The Company is still evaluating these amounts, which could result in the recognition of certain contingent liabilities along with corresponding receivables from the escrow account.

11



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

Carrying amount of goodwill
(millions)
U.S.
Morning
Foods
U.S.
Snacks
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 31, 2016
$
131

$
3,568

$
82

$
457

$
376

$
328

$
224

$
5,166

Purchase price allocation adjustment





(102
)

(102
)
Currency translation adjustment



1

7

9

3

20

April 1, 2017
$
131

$
3,568

$
82

$
458

$
383

$
235

$
227

$
5,084


Intangible assets subject to amortization
Gross carrying amount
 
 
 
 
 
 
 
 
(millions)
U.S.
Morning
Foods
U.S.
Snacks
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 31, 2016
$
8

$
42

$

$
5

$
40

$
36

$
10

$
141

Purchase price allocation adjustment





57


57

Currency translation adjustment




1

4


5

April 1, 2017
$
8

$
42

$

$
5

$
41

$
97

$
10

$
203

 
 
 
 
 
 
 
 
 
Accumulated Amortization
 
 
 
 
 
 
 
 
December 31, 2016
$
8

$
19

$

$
4

$
14

$
6

$
3

$
54

Amortization

1



1



2

April 1, 2017
$
8

$
20

$

$
4

$
15

$
6

$
3

$
56

 
 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
 
 
 
 
 
 
December 31, 2016
$

$
23

$

$
1

$
26

$
30

$
7

$
87

Purchase price allocation adjustment





57


57

Currency translation adjustment




1

4


5

Amortization

(1
)


(1
)


(2
)
April 1, 2017
$

$
22

$

$
1

$
26

$
91

$
7

$
147

For intangible assets in the preceding table, amortization was $2 million and $2 million for the quarters ended April 1, 2017 and April 2, 2016, respectively. The currently estimated aggregate annual amortization expense for full-year 2017 is approximately $8 million.
Intangible assets not subject to amortization
(millions)
U.S.
Morning
Foods
U.S.
Snacks
U.S.
Specialty
North
America
Other
Europe
Latin
America
Asia
Pacific
Consoli-
dated
December 31, 2016
$

$
1,625

$

$
176

$
383

$
98

$

$
2,282

Purchase price allocation adjustment





4


4

Currency translation adjustment




5

4


9

April 1, 2017
$

$
1,625

$

$
176

$
388

$
106

$

$
2,295



12


Note 4 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 April 1, 2017, the Company recorded total charges of $142 million across all restructuring and cost reduction activities. The charges were comprised of $15 million recorded in cost of goods sold (COGS) and $127 million recorded in selling, general and administrative (SG&A) expense.
During the quarter ended April 2, 2016, the Company recorded total charges of $52 million across all restructuring and cost reduction activities. The charges consist of $18 million recorded in COGS and $34 million recorded in SG&A expense.
Project K
In February 2017, the Company announced an expansion and an extension to its previously-announced global efficiency and effectiveness program (“Project K”), to reflect additional and changed initiatives. Project K is expected to continue generating a significant amount of savings that may be invested in key strategic areas of focus for the business or utilized to achieve our 2018 Margin Expansion target. The Company expects that these savings may be used to improve operating margins or drive future growth in the business.
In addition to the original program’s focus on strengthening existing businesses in core markets, increasing growth in developing and emerging markets, and driving an increased level of value-added innovation, the extended program will also focus on implementing a more efficient go-to-market model for certain businesses and creating a more efficient organizational design in several markets. Since inception, Project K has provided significant benefits and is expected to continue to provide a number of benefits in the future, including an optimized supply chain infrastructure, the implementation of global business services, a new global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market strategies.
The Company currently anticipates that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be to $1.1 billion. Based on current estimates and actual charges to date, the Company expects the total project charges will consist of asset-related costs of approximately $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $500 million which will include severance, pension and other termination benefits; and other costs of approximately $600 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.
The Company currently expects that total pre-tax charges will impact reportable segments as follows: U.S. Morning Foods (approximately 13%), U.S. Snacks (approximately 35%), U.S. Specialty (approximately 1%), North America Other (approximately 11%), Europe (approximately 21%), Latin America (approximately 1%), Asia-Pacific (approximately 6%), and Corporate (approximately 12%).

Since the inception of Project K, the Company has recognized charges of $1,258 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $705 million recorded in COGS and $547 million recorded in SG&A expense.

Other Projects
In 2015 the Company implemented a zero-based budgeting (ZBB) program in its North America business that has deliver 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 $7 million during the quarters ended April 1, 2017 and April 2, 2016, respectively. Total charges of $38 million have been recognized since the inception of the ZBB program.



13


The tables below provide the details for charges across all restructuring and cost reduction activities incurred during the quarter and year-to-date periods ended April 1, 2017 and April 2, 2016 and program costs to date for programs currently active as of April 1, 2017.
 
Quarter ended
 
Program costs to date
(millions)
April 1, 2017
April 2, 2016
 
April 1, 2017
Employee related costs
$
111

$
14

 
$
479

Asset related costs
10

10

 
202

Asset impairment


 
155

Other costs
21

28

 
460

Total
$
142

$
52

 
$
1,296

 
 
 
 
 
 
Quarter ended
 
Program costs to date
(millions)
April 1, 2017
April 2, 2016
 
April 1, 2017
U.S. Morning Foods
$
1

$
5

 
$
242

U.S. Snacks
120

20

 
322

U.S. Specialty

2

 
19

North America Other
7

9

 
135

Europe
6

14

 
305

Latin America
1


 
25

Asia Pacific
1


 
82

Corporate
6

2

 
166

Total
$
142

$
52

 
$
1,296

For the quarters ended April 1, 2017 and April 2, 2016 employee related costs consist primarily of severance and other termination related benefits, asset related costs consist primarily of accelerated depreciation, and other costs consist primarily of third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.
At April 1, 2017 total exit cost reserves were $204 million, related to severance payments and other costs of which a substantial portion will be paid out in 2017 and 2018. The following table provides details for exit cost reserves.
 
Employee
Related
Costs
Asset
Impairment
Asset
Related
Costs
Other
Costs
Total
Liability as of December 31, 2016
$
102

$

$

$
29

$
131

2017 restructuring charges
111


10

21

142

Cash payments
(16
)


(39
)
(55
)
Non-cash charges and other
(4
)

(10
)

(14
)
Liability as of April 1, 2017
$
193

$

$

$
11

$
204

Note 5 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, 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 4 million and 2 million anti-dilutive potential common shares excluded from the reconciliation for the quarters ended April 1, 2017 and April 2, 2016, respectively.

14



Quarters ended April 1, 2017 and April 2, 2016:
(millions, except per share data)
Net income

Average
shares
outstanding
Earnings
per share
2017
 
 
 
Basic
$
262

351

$
0.75

Dilutive potential common shares
 
3

(0.01
)
Diluted
$
262

354

$
0.74

2016
 
 
 
Basic
$
175

351

$
0.50

Dilutive potential common shares
 
4

(0.01
)
Diluted
$
175

355

$
0.49


 
 
 
 
In December 2015, the board of directors approved a new authorization to repurchase of up to $1.5 billion of our common stock beginning in 2016 through December 2017. As of April 1, 2017, $949 million remains available under the authorization.
During the quarter ended April 1, 2017, the Company repurchased approximately 2 million shares of common stock for a total of $125 million. During the quarter ended April 2, 2016, the Company repurchased 3 million shares of common stock for a total of $210 million.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience losses and prior service cost related to employee benefit plans.

15


Reclassifications out of AOCI for the quarter ended April 1, 2017 consisted of the following:

(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
April 1, 2017
Quarter ended
April 2, 2016
  
(Gains) losses on cash flow hedges:
 
 
 
Foreign currency exchange contracts
$
(1
)
$
(7
)
COGS
Foreign currency exchange contracts


SG&A
Interest rate contracts
2

6

Interest expense
Commodity contracts

3

COGS
 
$
1

$
2

Total before tax
 

(1
)
Tax expense (benefit)
 
$
1

$
1

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

$
1

See Note 8 for further details
Prior service cost


See Note 8 for further details
 
$
1

$
1

Total before tax
 


Tax expense (benefit)
 
$
1

$
1

Net of tax
Total reclassifications
$
2

$
2

Net of tax

 
 
 
 
Accumulated other comprehensive income (loss) as of April 1, 2017 and December 31, 2016 consisted of the following:
(millions)
April 1,
2017
December 31,
 2016
Foreign currency translation adjustments
$
(1,420
)
$
(1,505
)
Cash flow hedges — unrealized net gain (loss)
(66
)
(67
)
Postretirement and postemployment benefits:
 
 
Net experience loss
(13
)
(14
)
Prior service cost
11

11

Total accumulated other comprehensive income (loss)
$
(1,488
)
$
(1,575
)

Note 6 Debt
The following table presents the components of notes payable at April 1, 2017 and December 31, 2016:
 
April 1, 2017
 
December 31, 2016
(millions)
Principal
amount
Effective
interest rate (a)
 
Principal
amount
Effective
interest rate (a)
U.S. commercial paper
$
242

0.85
 %
 
$
80

0.61
 %
Europe commercial paper
315

(0.17
)%
 
306

(0.18
)%
Bank borrowings
72

 
 
52

 
Total
$
629

 
 
$
438

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

16


The Company has entered into interest rate swaps with notional amounts totaling $2.2 billion, which effectively converts a portion of the associated U.S. Dollar Notes 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 April 1, 2017 were as follows: (a) five-year 1.75% U.S. Dollar Notes due 2017 –  1.94%; (b) seven-year 3.25% U.S. Dollar Notes due 20182.56%; (c) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.53%; (d) ten-year 4.00% U.S. Dollar Notes due 2020 – 2.91%; (e) ten-year 3.125% U.S. Dollar Notes due 2022 – 2.32%; (f) ten-year 2.75% U.S. Dollar Notes due 2023 – 2.47%; (g) seven-year 2.65% U.S. Dollar Notes due 2023 – 2.23%; (h) eight-year 1.00% Euro Notes due 2024 – 0.74% and (i) ten-year 3.25% U.S. Notes due 2026 – 3.52%.
Note 7 Stock compensation
The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2016 Annual Report on Form 10-K.
The Company classifies pre-tax stock compensation expense in COGS and SG&A expense principally within its Corporate segment. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized was as follows:
 
Quarter ended
(millions)
April 1, 2017
April 2, 2016
Pre-tax compensation expense
$
18

$
16

Related income tax benefit
$
6

$
6

As of April 1, 2017, total stock-based compensation cost related to non-vested awards not yet recognized was $145 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Stock options
During the quarters ended April 1, 2017 and April 2, 2016, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 2016 Annual Report on Form 10-K.
Quarter ended April 1, 2017:
 
Employee and director stock options
Shares (millions)
Weighted-
average
exercise price
Weighted-
average
remaining
contractual term (yrs.)
Aggregate
intrinsic
value (millions)
 
 
Outstanding, beginning of period
15

$
62

 
 
 
Granted
2

73

 
 
 
Exercised
(1
)
56

 
 
 
Forfeitures and expirations


 
 
 
Outstanding, end of period
16

$
64

7.2
$
147

 
Exercisable, end of period
11

$
60

6.3
$
140


17


Quarter ended April 2, 2016:
 
Employee and director stock options
Shares (millions)
Weighted-
average
exercise price
Weighted-
average
remaining
contractual term (yrs.)
Aggregate
intrinsic
value (millions)
 
 
Outstanding, beginning of period
19

$
58

 
 
 
Granted
3

76

 
 
 
Exercised
(3
)
55

 
 
 
Forfeitures and expirations


 
 
 
Outstanding, end of period
19

$
61

7.4
$
306

 
Exercisable, end of period
12

$
57

6.4
$
242


The weighted-average grant date fair value of options granted was $10.14 per share and $9.45 per share for the quarters ended April 1, 2017 and April 2, 2016, respectively. The fair value was estimated using the following assumptions:
 
Weighted-
average
expected
volatility
Weighted-
average
expected
term
(years)
Weighted-
average
risk-free
interest
rate
Dividend
yield
Grants within the quarter ended April 1, 2017:
18
%
6.6
2.26
%
2.80
%
Grants within the quarter ended April 2, 2016:
17
%
6.9
1.60
%
2.60
%
The total intrinsic value of options exercised was $12 million and $50 million for the quarters ended April 1, 2017 and April 2, 2016, respectively.
Performance shares
In the first quarter of 2017, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include currency-neutral comparable operating margin and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.
A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of currency-neutral comparable operating margin expansion. Compensation cost related to currency-neutral comparable operating margin performance is revised for changes in the expected outcome. The 2017 target grant currently corresponds to approximately 189,000 shares, with a grant-date fair value of $67 per share.
Based on the market price of the Company’s common stock at April 1, 2017, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:
(millions)
April 1, 2017
2015 Award
$
23

2016 Award
$
26

2017 Award
$
27

The 2014 performance share award, payable in stock, was settled at 35% of target in February 2017 for a total dollar equivalent of $5 million.
Other stock-based awards
During the quarter ended April 1, 2017, the Company granted restricted stock units and a nominal number of restricted stock awards to eligible employees as presented in the following table. Terms of these grants and the

18


Company’s method of determining grant-date fair value were consistent with that described within the stock compensation footnote in the Company’s 2016 Annual Report on Form 10-K.
Quarter ended April 1, 2017:
Employee restricted stock and restricted stock units
Shares (thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
1,166

$
63

Granted
629

67

Vested
(25
)
55

Forfeited
(22
)
64

Non-vested, end of period
1,748

$
65

Quarter ended April 2, 2016:
Employee restricted stock and restricted stock units
Shares (thousands)
Weighted-average grant-date fair value
Non-vested, beginning of year
806

$
58

Granted
547

70

Vested
(47
)
55

Forfeited
(15
)
56

Non-vested, end of period
1,291

$
63

Note 8 Employee benefits
The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 2016 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.
Pension
 
Quarter ended
(millions)
April 1, 2017
April 2, 2016
Service cost
$
25

$
24

Interest cost
41

44

Expected return on plan assets
(90
)
(89
)
Amortization of unrecognized prior service cost
2

3

Recognized net loss
3


Curtailment loss
1


Total pension (income) expense
$
(18
)
$
(18
)

19


Other nonpension postretirement
 
Quarter ended
(millions)
April 1, 2017
April 2, 2016
Service cost
$
5

$
5

Interest cost
9

10

Expected return on plan assets
(24
)
(22
)
Amortization of unrecognized prior service cost (credit)
(2
)
(3
)
Recognized net (gain) loss
(29
)

Curtailment loss
3


Total postretirement benefit (income) expense
$
(38
)
$
(10
)
Postemployment
 
Quarter ended
(millions)
April 1, 2017
April 2, 2016
Service cost
$
1

$
2

Interest cost
1

1

Recognized net loss
1

1

Total postemployment benefit expense
$
3

$
4

During the quarter ended April 1, 2017, the Company recognized curtailment losses of $1 million and $3 million within pension and nonpension postretirement plans, respectively, in conjunction with Project K restructuring activity. In addition, the Company remeasured the benefit obligation for impacted pension and nonpension postretirement plans. The remeasurement resulted in a mark-to-market loss of $3 million on a pension plan due primarily to a lower discount rate and a $29 million gain on a nonpension postretirement plan primarily due to plan asset investment returns slightly mitigated by the impact of a lower discount rate.
Company contributions to employee benefit plans are summarized as follows:
(millions)
Pension
Nonpension postretirement
Total
Quarter ended:
 
 
 
April 1, 2017
$
21

$
3

$
24

April 2, 2016
$
13

$
4

$
17

Full year:
 
 
 
Fiscal year 2017 (projected)
$
26

$
16

$
42

Fiscal year 2016 (actual)
$
18

$
15

$
33

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

Additionally, during the quarter ended April 1, 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 9 Income taxes
The consolidated effective tax rate for the quarter ended April 1, 2017 was 14% as compared to the prior year’s rate of 21%. For the quarter ended April 1, 2017, the effective tax rate benefited from a deferred tax benefit of $38 million resulting from an intercompany transfer of intellectual property under the application of the newly adopted standard. See discussion regarding the adoption of ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, in Note 1.

20



The effective tax rate for 2016 benefited from excess tax benefits from share-based compensation, the completion of certain tax examinations partially offset by the establishment of a valuation allowance for certain deferred tax assets.
As of April 1, 2017, the Company classified $11 million of unrecognized tax benefits as a net current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance expected to be settled within one year, offset by approximately $6 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the quarter ended April 1, 2017; $40 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

Tax positions related to current year:
 
Additions
1

Reductions

Tax positions related to prior years:
 
Additions
1

Reductions
(5
)
Settlements

Lapse in statute of limitations

April 1, 2017
$
60


The accrual balance for tax-related interest was $20 million at April 1, 2017.
Note 10 Derivative instruments and fair value measurements
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
Total notional amounts of the Company’s derivative instruments as of April 1, 2017 and December 31, 2016 were as follows:
(millions)
April 1,
2017
December 31,
2016
Foreign currency exchange contracts
$
1,385

$
1,396

Interest rate contracts
2,190

2,185

Commodity contracts
608

437

Total
$
4,183

$
4,018

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

21


Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of April 1, 2017 or December 31, 2016.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of April 1, 2017 and December 31, 2016:

Derivatives designated as hedging instruments
 
April 1, 2017
 
December 31, 2016
(millions)
Level 1
Level 2
Total
 
Level 1
Level 2
Total
Assets:
 
 
 
 
 
 
 
Foreign currency exchange contracts:
 
 
 
 
 
 
 
Other prepaid assets
$

$

$

 
$

$
2

$
2

Interest rate contracts:
 
 

 
 
 

Other assets (a)



 

1

1

Total assets
$

$

$


$

$
3

$
3

Liabilities:
 
 

 
 
 

Interest rate contracts:
 
 

 
 
 

Other liabilities (a)

(68
)
(68
)
 

(65