Integration and Restructuring Expenses

As part of our restructuring activities, we incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs and other exit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits. Other exit costs primarily relate to lease and contract terminations. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include asset-related costs and other incremental costs. Asset-related costs primarily relate to accelerated depreciation and asset impairment charges, as well as costs to exit facilities, relocation costs, and start-up costs of new facilities. Other implementation costs primarily relate to professional fees, and other incremental third-party fees.

Employee severance and other termination benefit packages are primarily determined based on established benefit arrangements, local statutory requirements, or historical benefit practices. We recognize the contractual component of these benefits when payment is probable and estimable; additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over each employee’s required future service period. Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Asset impairments establish a new fair value basis for assets held for disposal or sale and those assets are written down to expected net realizable value if carrying value exceeds fair value. All other costs are recognized as incurred.

Integration Program:

Following the 2015 Merger, we announced a multi-year program (the “Integration Program”) designed to reduce costs, streamline and simplify our operating structure as well as optimize our production and supply chain network across our businesses in the United States and Canada segments. We expect to incur pre-tax costs of $2.0 billion related to the Integration Program, with approximately 60% reflected in cost of products sold within our United States and Canada segments. These pre-tax costs are comprised of the following categories:


•	Organization costs ($400 million) associated with our plans to streamline and simplify our operating structure, resulting in workforce reduction (primarily severance and employee benefit costs).


•	Footprint costs ($1.2 billion) associated with our plans to optimize our production and supply chain network, resulting in workforce reduction and facility closures and consolidations (primarily asset-related costs and severance and employee benefit costs).


•	Other costs ($400 million) incurred as a direct result of integration activities, including other exit costs (lease and contract terminations) and other implementation costs (professional services and other third-party fees).

Overall, as part of the Integration Program, we expect to eliminate 5,150 positions, close six factories, and consolidate our distribution network. At December 31, 2016, the total Integration Program liability related primarily to the elimination of general salaried and factory positions across the United States and Canada, 3,350 of whom have left the company by December 31, 2016.

As of December 31, 2016, we have incurred approximately $1.7 billion of cumulative costs under the Integration Program, including: $681 million of severance and employee benefit costs, $650 million of non-cash asset-related costs, $290 million of other implementation costs, and $95 million of other exit costs. We expect that approximately 60% of the Integration Program expenses will be cash expenditures.

The liability balance associated with the Integration Program, which qualifies as U.S. GAAP exit and disposal costs, was (in millions):



	Severance and Employee Benefit Costs			Other Exit Costs^(a)			Total
Balance at January 3, 2016	$	185		$	23		$	208
Charges	119			40			159
Cash payments	(182		)	(53		)	(235		)
Non-cash utilization	(23		)	—			(23		)
Balance at December 31, 2016	$	99		$	10		$	109

^(a) Other exit costs primarily represent contract and lease terminations.

We expect that a substantial portion of the Integration Program liability as of December 31, 2016 will be paid in 2017.

Restructuring Activities:

Prior to the 2015 Merger, we executed a number of other restructuring activities focused primarily on workforce reduction and factory closure and consolidation, which were substantially complete as of December 31, 2016. These programs, and other programs, resulted in the elimination of 8,350 positions and cumulative $589 million severance and employee benefit costs, $360 million non-cash asset-related costs, and $413 million other exit costs through December 31, 2016. Related to these restructuring activities, we incurred expenses of $125 million in 2016, $194 million in 2015, and $637 million in 2014.

As of December 31, 2016, the liability balance associated with active restructuring projects, which qualifies as U.S. GAAP exit and disposal costs, was (in millions):



	Severance and Employee Benefit Costs			Other Exit Costs^(a)			Total
Balance at January 3, 2016	$	25		$	30		$	55
Charges	38			2			40
Cash payments	(44		)	(7		)	(51		)
Non-cash utilization	(7		)	—			(7		)
Balance at December 31, 2016	$	12		$	25		$	37

^(a) Other exit costs primarily represent contract and lease terminations.

We expect that a substantial portion of the active restructuring projects liability as of December 31, 2016 will be paid in 2017.

Total Integration and Restructuring:

Total expenses related to our Integration Program and restructuring activities recorded in cost of products sold and SG&A for the years presented were (in millions):



	December 31, 2016 (52 weeks)		January 3, 2016 (53 weeks)		December 28, 2014 (52 weeks)
Severance and employee benefit costs - COGS	$	53	$	119	$	135
Severance and employee benefit costs - SG&A	104		519		67
Asset-related costs - COGS	496		186		199
Asset-related costs - SG&A	41		7		9
Other exit costs - COGS	162		99		179
Other exit costs - SG&A	156		93		48
	$	1,012	$	1,023	$	637

We do not include Integration Program and restructuring expenses within Segment Adjusted EBITDA. The pre-tax impact of allocating such expenses to our segments would have been (in millions):



	December 31, 2016 (52 weeks)		January 3, 2016 (53 weeks)		December 28, 2014 (52 weeks)
United States	$	759	$	790	$	227
Canada	45		47		101
Europe	85		142		228
Rest of World	6		12		58
General corporate expenses	117		32		23
	$	1,012	$	1,023	$	637

In the fourth quarter of 2016, we reorganized our segment structure to move our Russia business from the Rest of World segment to the Europe segment. We have reflected this change in all historical periods presented. This change did not have a material impact on our current or any prior period results. See Note 18, Segment Reporting, for additional information.