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 5-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

On February 8, 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 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 the program will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital expenditures, estimated to be approximately $1.1 billion. Based on current estimates and actual charges incurred to date, the Company expects the total project charges will consist of asset-related costs of approximately $500 million which consists primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $500 million which includes 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. 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 inception of Project K, the Company has recognized charges of $1,117 million that have been attributed to the program. The charges were comprised of $6 million being recorded as a reduction of revenue, $690 million being recorded in COGS and $421 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 $25 million and $12 million for the years ended December 31, 2016 and January 2, 2016, respectively. Total charges of $37 million have been recognized since the inception of the ZBB program.

All Projects

The Company recorded $325 million of costs in 2016 associated with cost reduction initiatives. The charges were comprised of $173 million being recorded in COGS and $152 million recorded in SGA expense.

During 2015, the Company recorded $323 million of charges associated with all cost reduction initiatives. The charges were comprised of $4 million being recorded as a reduction of revenue, $191 million being recorded in COGS and $128 million recorded in SGA expense.

During 2014, the Company recorded $298 million of charges associated with all cost reduction initiatives. The charges were comprised of $2 million being recorded as a reduction of revenue, $152 million being recorded in COGS and $144 million recorded in SGA expense.

The tables below provide the details for the charges incurred during 2016, 2015 and 2014 and program costs to date for all programs currently active as of December 31, 2016.



							Program costs to date
(millions)	2016		2015		2014		December 31, 2016
Employee related costs	$	109	$	62	$	90	$	368
Asset related costs	46		103		37		192
Asset impairment	50		18		21		155
Other costs	120		140		150		439
Total	$	325	$	323	$	298	$	1,154

							Program costs to date
(millions)	2016		2015		2014		December 31, 2016
U.S. Morning Foods	$	23	$	58	$	60	$	241
U.S. Snacks	76		50		57		202
U.S. Specialty	8		5		3		19
North America Other	38		63		18		128
Europe	126		74		80		299
Latin America	8		4		8		24
Asia Pacific	7		13		37		81
Corporate	39		56		35		160
Total	$	325	$	323	$	298	$	1,154

Employee related costs consisted of severance and pension charges. Asset impairments were recorded for fixed assets that were determined to be impaired and were written down to their estimated fair value. See Note 14 for more information. Asset related costs consist primarily of accelerated depreciation. Other costs incurred consist primarily of third-party incremental costs related to the development and implementation of global business capabilities.

At December 31, 2016 total project reserves were $131 million, related to severance payments and other costs of which a substantial portion will be paid in 2017 and 2018. The following table provides details for exit cost reserves.



(millions)	Employee Related Costs			Asset Impairment			Asset Related Costs			Other Costs			Total
Liability as of January 3, 2015	$	96		$	—		$	—		$	14		$	110
2015 restructuring charges	62			18			103			140			323
Cash payments	(116		)	—			(34		)	(121		)	(271		)
Non-cash charges and other	13			(18		)	(69		)	—			(74		)
Liability as of January 2, 2016	$	55		$	—		$	—		$	33		$	88
2016 restructuring charges	109			50			46			120			325
Cash payments	(62		)	—			(14		)	(124		)	(200		)
Non-cash charges and other	—			(50		)	(32		)	—			(82		)
Liability as of December 31, 2016	$	102		$	—		$	—		$	29		$	131