Restructuring and cost reduction activities

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

Project K

Project K, a four-year efficiency and effectiveness program, was announced in November 2013, and is expected to continue generating a significant amount of savings that may be invested in key strategic areas of focus for the business. Additionally, the Company expects that these savings may be used to drive future growth in the business.

The focus of the program is to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation. The program is expected to continue to provide a number of benefits, including an optimized supply chain infrastructure, the implementation of global business services, and a new global focus on categories.

The Company currently anticipates that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.2 to $1.4 billion, with after-tax cash costs, including incremental capital investments, estimated to be $900 million 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 totaling $400 to $450 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs totaling $400 to $450 million which will include severance, pension and other termination benefits; and other costs totaling $400 to $500 million which will consist primarily of charges related to the design and implementation of global business capabilities. A significant portion of other costs are the result of the implementation of global business service centers which are intended to simplify and standardize business support processes.

The Company currently expects that total pre-tax charges will impact reportable segments as follows: U.S. Morning Foods (approximately 18%), U.S. Snacks (approximately 17%), U.S. Specialty (approximately 1%), North America Other (approximately 10%), Europe (approximately 17%), Latin America (approximately 2%), Asia-Pacific (approximately 6%), and Corporate (approximately 29%). Certain costs impacting Corporate relate to additional initiatives to be approved and executed in the future. When these initiatives are fully defined and approved, the Company will update its estimated costs by reportable segment as needed.

Since the inception of Project K, the Company has recognized charges of $960 million that have been attributed to the program. The charges consist of $6 million recorded as a reduction of revenue, $583 million recorded in COGS and $371 million recorded in SGA.

Other Projects

In 2015 the Company implemented a zero-based budgeting (ZBB) program in its North America business that is expected to deliver visibility to ongoing annual savings. During 2016, ZBB was expanded to include the international segments of the business. In support of the ZBB initiative, the Company incurred pre-tax charges of approximately $4 million and $21 million during the quarter and year-to-date period ended October 1, 2016, respectively. Total charges of $33 million have been recognized since the inception of the ZBB program.

Total Projects

During the quarter ended October 1, 2016, the Company recorded total charges of $40 million across all restructuring and cost reduction activities. The charges were comprised of $12 million recorded in cost of goods sold (COGS) and $28 million recorded in selling, general and administrative (SGA) expense. During the year-to-date period ended October 1, 2016, the Company recorded total charges of $164 million across all restructuring and cost reduction activities. The charges consist of $66 million recorded in COGS and $98 million recorded in SGA expense.

During the quarter ended October 3, 2015, the Company recorded total charges of $85 million across all restructuring and cost reduction activities. The charges consist of $2 million recorded as a reduction of revenue, $57 million recorded in COGS and $26 million recorded in SGA expense. During the year-to-date period ended October 3, 2015, the Company recorded total charges of $243 million across all restructuring and cost reduction activities. The charges consist of $4 million recorded as a reduction of revenue, $154 million recorded in COGS and $85 million recorded in SGA expense.

The tables below provide the details for charges across all restructuring and cost reduction activities incurred during the quarter and year-to-date periods ended October 1, 2016 and October 3, 2015 and program costs to date for programs currently active as of October 1, 2016.



	Quarter ended				Year-to-date period ended				Program costs to date
(millions)	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015		October 1, 2016
Employee related costs	$	6	$	31	$	26	$	64	$	285
Asset related costs	5		15		32		62		178
Asset impairment	—		—		16		18		121
Other costs	29		39		90		99		409
Total	$	40	$	85	$	164	$	243	$	993

	Quarter ended				Year-to-date period ended				Program costs to date
(millions)	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015		October 1, 2016
U.S. Morning Foods	$	4	$	30	$	13	$	51	$	231
U.S. Snacks	8		15		62		34		188
U.S. Specialty	1		1		4		3		15
North America Other	7		11		20		40		110
Europe	6		12		34		56		207
Latin America	2		1		6		2		22
Asia Pacific	2		2		6		10		80
Corporate	10		13		19		47		140
Total	$	40	$	85	$	164	$	243	$	993

For the quarters ended October 1, 2016 and October 3, 2015 employee related costs consist primarily of severance 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.

At October 1, 2016 total exit cost reserves were $67 million, related to severance payments and other costs of which a substantial portion will be paid out in 2016 and 2017. The following table provides details for exit cost reserves.



	Employee Related Costs			Asset Impairment			Asset Related Costs			Other Costs			Total
Liability as of January 2, 2016	$	55		$	—		$	—		$	33		$	88
2016 restructuring charges	26			16			32			90			164
Cash payments	(46		)	—			(14		)	(91		)	(151		)
Non-cash charges and other	—			(16		)	(18		)	—			(34		)
Liability as of October 1, 2016	$	35		$	—		$	—		$	32		$	67