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Table of Contents

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)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
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
Kellanova
State of Incorporation—Delaware  IRS Employer Identification No.38-0710690
412 N. Wells Street, Chicago , IL 60654
Registrant’s telephone number: 269-961-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.25 par value per shareKNew York Stock Exchange
1.000% Senior Notes due 2024K 24New York Stock Exchange
1.250% Senior Notes due 2025K 25New York Stock Exchange
0.500% Senior Notes due 2029K 29New York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes      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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
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  
Common Stock outstanding as of October 28, 2023 — 342,519,743 shares


Table of Contents

KELLANOVA
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


Table of Contents

Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars, except per share data)
(Unaudited)
September 30,
2023
December 31,
2022
Current assets
Cash and cash equivalents$1,099 $299 
Accounts receivable, net1,876 1,736 
Inventories1,632 1,768 
Other current assets379 383 
Total current assets4,986 4,186 
Property, net3,762 3,789 
Operating lease right-of-use assets605 617 
Goodwill5,496 5,686 
Other intangibles, net2,065 2,296 
Investments in unconsolidated entities194 432 
Other assets1,587 1,490 
Total assets$18,695 $18,496 
Current liabilities
Current maturities of long-term debt$1,193 $780 
Notes payable353 467 
Accounts payable2,789 2,973 
Current operating lease liabilities127 121 
Accrued advertising and promotion886 766 
Accrued salaries and wages305 370 
Other current liabilities871 872 
Total current liabilities6,524 6,349 
Long-term debt5,530 5,317 
Operating lease liabilities471 486 
Deferred income taxes702 760 
Pension liability722 709 
Other liabilities469 500 
Commitments and contingencies
Equity
Common stock, $.25 par value
105 105 
Capital in excess of par value1,070 1,068 
Retained earnings9,509 9,197 
Treasury stock, at cost(4,692)(4,721)
Accumulated other comprehensive income (loss)(1,954)(1,708)
Total Kellanova equity4,038 3,941 
Noncontrolling interests239 434 
Total equity4,277 4,375 
Total liabilities and equity$18,695 $18,496 
See accompanying Notes to Consolidated Financial Statements.

3


Table of Contents

Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF INCOME
(in millions of U.S. dollars, except per share data)
(Unaudited)
 Quarter endedYear-to-date period ended
September 30,
2023
October 1,
2022
September 30,
2023
October 1,
2022
Net sales$3,939 $3,946 $12,033 $11,482 
Cost of goods sold2,596 2,793 8,147 8,027 
Selling, general and administrative expense861 785 2,455 2,155 
Operating profit482 368 1,431 1,300 
Interest expense83 39 245 149 
Other income (expense), net(24)54 38 188 
Income before income taxes375 383 1,224 1,339 
Income taxes104 74 294 283 
Earnings (loss) from unconsolidated entities(1)3 4 6 
Net income270 312 934 1,062 
Net income (loss) attributable to noncontrolling interests1 2 10 4 
Net income attributable to Kellanova$269 $310 $924 $1,058 
Per share amounts:
Basic earnings$0.79 $0.91 $2.70 $3.11 
Diluted earnings$0.78 $0.90 $2.68 $3.09 
Average shares outstanding:
Basic342 341 342 340 
Diluted345 344 345 343 
Actual shares outstanding at period end343 341 
See accompanying Notes to Consolidated Financial Statements.

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Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions of U.S. dollars) (Unaudited)
Quarter endedYear-to-date period ended
September 30, 2023September 30, 2023
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income$270 $934 
Other comprehensive income (loss):
Foreign currency translation adjustments:
Foreign currency translation adjustments during period$(134)$1 (133)$(475)$3 (472)
Net investment hedges:
Net investment hedges gain (loss)111 (26)85 17 (4)13 
Cash flow hedges:
Net deferred gain (loss) on cash flow hedges 40 (10)30 37 (9)28 
Reclassification to net income2 (1)1 7 (2)5 
Postretirement and postemployment benefits:
Reclassification to net income:
   Net experience (gain) loss(1) (1)(2) (2)
Available-for-sale securities:
Unrealized gain (loss) (1) (1)   
Reclassification to net income1  1 1  1 
Other comprehensive income (loss) $18 $(36)$(18)$(415)$(12)$(427)
Comprehensive income$252 $507 
Net Income attributable to noncontrolling interests1 10 
Other comprehensive income (loss) attributable to noncontrolling interests(7)(181)
Comprehensive income attributable to Kellanova$258 $678 
Quarter endedYear-to-date period ended
 October 1, 2022October 1, 2022
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income$312 $1,062 
Other comprehensive income (loss):
Foreign currency translation adjustments:
Foreign currency translation adjustments during period$(249)$4 (245)$(509)$6 (503)
Net investment hedges:
Net investment hedges gain (loss)260 (68)192 616 (162)454 
Cash flow hedges:
Net deferred gain (loss) on cash flow hedges62 (16)46 213 (56)157 
Reclassification to net income(14)3 (11)(6)1 (5)
Postretirement and postemployment benefits:
Reclassification to net income:
Net experience (gain) loss   (2)1 (1)
Available-for-sale securities:
Unrealized gain (loss)(2) (2)(6) (6)
Reclassification to net income1  1 1  1 
Other comprehensive income (loss)$58 $(77)$(19)$307 $(210)$97 
Comprehensive income$293 $1,159 
Net Income attributable to noncontrolling interests2 4 
Other comprehensive income (loss) attributable to noncontrolling interests(22)(26)
Comprehensive income attributable to Kellanova$313 $1,181 
See accompanying Notes to Consolidated Financial Statements.
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Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF EQUITY
(in millions of U.S. dollars, except per share data)
(Unaudited)
 
Quarter ended September 30, 2023
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellanova
equity
Non-controlling
interests
Total
equity
sharesamountsharesamount
Balance, July 1, 2023421 $105 $1,056 $9,447 79 $(4,700)$(1,943)$3,965 $256 $4,221 
Common stock repurchases    
Net income269 269 1 270 
Dividends declared ($0.60 per share)
(205)(205)(205)
Distributions to noncontrolling interest (11)(11)
Other comprehensive income (loss)(11)(11)(7)(18)
Stock compensation19 19 19 
Stock options exercised, issuance of other stock awards and other(5)(2) 8 1 1 
Balance, September 30, 2023421 $105 $1,070 $9,509 79 $(4,692)$(1,954)$4,038 $239 $4,277 

Year-to-date period ended September 30, 2023
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellanova
equity
Non-controlling
interests
Total
equity
sharesamountsharesamount
Balance, December 31, 2022421 $105 $1,068 $9,197 79 $(4,721)$(1,708)$3,941 $434 $4,375 
Common stock repurchases1 (60)(60)(60)
Net income924 924 10 934 
Dividends declared ($1.78 per share)
(610)(610)(610)
Distributions to noncontrolling interest (24)(24)
Other comprehensive income (loss)(246)(246)(181)(427)
Stock compensation62 62 62 
Stock options exercised, issuance of other stock awards and other(60)(2)(1)89 27 27 
Balance, September 30, 2023421 $105 $1,070 $9,509 79 $(4,692)$(1,954)$4,038 $239 $4,277 
See accompanying Notes to Consolidated Financial Statements.


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Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF EQUITY (cont.)
(in millions of U.S. dollars, except per share data)
(Unaudited)
Quarter ended October 1, 2022
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total 
Kellanova
equity
Non-controlling
interests
Total
equity
sharesamountsharesamount
Balance, July 2, 2022421 $105 $1,008 $9,387 81 $(4,817)$(1,601)$4,082 $476 $4,558 
Net income310 310 2 312 
Dividends declared ($0.59 per share)
(202)(202)(202)
Distributions to noncontrolling interest (1)(1)
Other comprehensive income3 3 (22)(19)
Stock compensation21 21 21 
Stock options exercised and other(2)4 (1)67 69 69 
Balance, October 1, 2022421 $105 $1,027 $9,499 80 $(4,750)$(1,598)$4,283 $455 $4,738 

Year-to-date period ended October 1, 2022
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total
 Kellanova
equity
Non-controlling
interests
Total
equity
sharesamountsharesamount
Balance, January 1, 2022421 $105 $1,023 $9,028 80 $(4,715)$(1,721)$3,720 $495 $4,215 
Common stock repurchases5 (300)(300)(300)
Net income1,058 1,058 4 1,062 
Dividends declared ($1.75 per share)
(596)(596)(596)
Distributions to noncontrolling interest (18)(18)
Other comprehensive income123 123 (26)97 
Stock compensation56 56 56 
Stock options exercised and other(52)9 (5)265 222 222 
Balance, October 1, 2022421 $105 $1,027 $9,499 80 $(4,750)$(1,598)$4,283 $455 $4,738 
See accompanying Notes to Consolidated Financial Statements.
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Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of U.S. dollars)
(Unaudited)
 Year-to-date period ended
September 30,
2023
October 1,
2022
Operating activities
Net income$934 $1,062 
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization338 351 
Postretirement benefit plan expense (benefit)(105)(189)
Deferred income taxes 26 
Stock compensation62 56 
Loss on Russia divestiture113  
Other9 (16)
Postretirement benefit plan contributions(13)(17)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables(229)(526)
Inventories69 (343)
Accounts payable(32)501 
All other current assets and liabilities254 275 
Net cash provided by (used in) operating activities1,400 1,180 
Investing activities
Additions to properties(506)(350)
Issuance of notes receivable(4) 
Repayments from notes receivable 10 
Purchases of available for sale securities(15)(15)
Sales of available for sale securities15 14 
Settlement of net investment hedges29 37 
Other9 (8)
Net cash provided by (used in) investing activities(472)(312)
Financing activities
Net issuances (reductions) of notes payable(115)37 
Issuances of long-term debt896  
Reductions of long-term debt(227)(33)
Net issuances of common stock51 244 
Common stock repurchases(60)(300)
Cash dividends(610)(596)
Other(55)(17)
Net cash provided by (used in) financing activities(120)(665)
Effect of exchange rate changes on cash and cash equivalents(8)(116)
Increase (decrease) in cash and cash equivalents800 87 
Cash and cash equivalents at beginning of period299 286 
Cash and cash equivalents at end of period$1,099 $373 
Supplemental cash flow disclosures of non-cash investing activities:
   Additions to properties included in accounts payable$107 $75 
See accompanying Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
for the quarter ended September 30, 2023 (unaudited)
Note 1 Accounting policies
Basis of presentation
The unaudited interim financial information of Kellanova (the Company), formerly Kellogg 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. The accompanying unaudited financial statements also include the historical results of WK Kellogg Co, as the separation was completed on October 2, 2023. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2022 Annual Report on Form 10-K.

The balance sheet information at December 31, 2022 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 quarter ended September 30, 2023 are not necessarily indicative of the results to be expected for other interim periods or the full year.

Certain prior period amounts have been reclassified to conform with current period presentation.

Accounts payable - Supplier Finance Programs
The Company establishes competitive market-based terms with our suppliers, regardless of whether they participate in supplier finance programs, which generally range from 0 to 150 days dependent on their respective industry and geography.

The Company has agreements with third parties to provide accounts payable tracking systems which facilitate 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 has 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 the arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of September 30, 2023, $1.0 billion of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system. As of December 31, 2022, $1.1 billion of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system.

Accounting standards adopted in the period
Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued an ASU to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a rollforward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company has historically presented information regarding the nature and amount of outstanding Accounts Payable obligations confirmed into supplier finance programs within the Accounting Policies note of the financial statements. The Company adopted the ASU in the first quarter of 2023 and plans to include the rollforward information in the first quarter of 2024.

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Note 2 Separation transaction
During 2022, Kellogg Company announced its intent to separate its North American cereal business, via tax-free spin-off, resulting in two independent public companies, Kellanova (formerly Kellogg Company) and WK Kellogg Co.

In preparation of the separation, the Company incurred pre-tax charges related to the separation of $56 million and $184 million for the quarter and year-to-date period ended September 30, 2023, respectively, including $3 million and $21 million recorded in COGS, respectively, and $53 million and $163 million recorded in SG&A, respectively. The Company incurred pre-tax charges of $18 million and $22 million for the quarter and year-to-date period ended October 1, 2022, respectively, all of which were recorded in SG&A. These charges were primarily related to legal and consulting costs.

In connection with the separation, WK Kellogg Co entered into several agreements with Kellanova that govern the relationship of the parties following the Spin-Off including a Separation and Distribution Agreement, a Manufacturing and Supply Agreement, a Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, and various lease agreements

On October 2, 2023, the Company completed the separation of its North America cereal business resulting in two independent companies, Kellanova and WK Kellogg Co. As a result of the distribution, Kellanova shareholders of record on September 21, 2023, received one share of WK Kellogg Co common stock for every four shares of Kellanova common stock. On October 2, 2023, WK Kellogg Co began trading as an independent publicly traded company under the stock symbol “KLG” on the New York Stock Exchange and Kellanova continued trading under the stock symbol "K".


Note 3 Sale of accounts receivable
The Company has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).

The Company has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact 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. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The 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 approximately $1.1 billion. During 2023 the Company amended the agreements to increase the previous maximum receivables sold limit from approximately $920 million as of December 31, 2022. 

The Company has no retained interest in the receivables sold, however 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, 2023 and December 31, 2022 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.

Accounts receivable sold of $957 million and $865 million remained outstanding under these arrangements as of September 30, 2023 and December 31, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on sale of receivables was $14 million and $40 million for the quarter and year-to-date period ended September 30, 2023, respectively and was $6 million and $11 million for the quarter and year-to-date period ended October 1, 2022. The recorded loss is included in Other income and expense (OIE).
Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable invoices 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. Accounts receivable sold of $40 million and $31 million remained outstanding under these programs as of September 30, 2023 and December 31, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on the sale of these receivables is included in OIE and is not material.

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Note 4 Divestiture
Russia
In July 2023 the Company completed the sale of its Russian business. As a result of completing the transaction, the Company derecognized net assets of approximately $65 million and recorded a non-cash loss on the transaction of approximately $113 million in OIE, primarily related to the release of historical currency translation adjustments. The business was part of the Europe reportable segment and the sale resulted in a complete exit from the Russian market. The business in Russia represented approximately 1% of consolidated Kellanova net sales.
Note 5 Investments in unconsolidated entities
The Company holds a 50% ownership interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% interest in Dufil Prima Foods, Plc, a food manufacturer in West Africa. The investment in TAF is accounted for under the equity method of accounting and is evaluated for indicators of other than temporary impairment. The company records the activity of TAF on a one-month lag due to the timing required to obtain the financial statements from TAF management.

During the second quarter of 2023, the Company recorded an out-of-period adjustment to correct an error in the foreign currency translation of its investment in TAF. The adjustment decreased investments in unconsolidated entities and increased other comprehensive loss by $113 million, respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the quarter and year to date periods ended July 1, 2023 and related prior annual and quarterly periods.

During the third quarter of 2023, the devaluation of the Nigerian Naira required an additional foreign currency translation adjustment. Based on the foreign currency exchange rates at the end of August 2023 and the accounting method used by the Company to record the results of operations of TAF on a one-month lag, the adjustment resulted in additional translation losses of approximately $129 million recognized in other comprehensive income.
Note 6 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 certain contingently issuable performance shares. There were approximately 6 million and 4 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended September 30, 2023, respectively. There were approximately 2 million and 4 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended October 1, 2022, respectively. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quarter and year-to-date periods ended September 30, 2023 and October 1, 2022.

Share repurchases
In December 2022, the Board of Directors approved an authorization to repurchase up to $1.5 billion of our common stock through December 2025. During the year-to-date period ended September 30, 2023, the Company repurchased approximately 1 million shares of common stock for a total of $60 million. During the year-to-date period ended October 1, 2022, the Company repurchased approximately 5 million shares of common stock for a total of $300 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, which are recorded in interest expense within the statement of income, upon reclassification from Accumulated Other Comprehensive Income (AOCI), adjustments for net experience gains (losses), prior service credit (costs) related to employee benefit plans and adjustments for unrealized (gains) losses on available-for-sale securities, which are recorded in other income (expense) within the statement of income, upon reclassification from AOCI. The related tax effects of these items are recorded in income tax expense within the statement of income, upon reclassification from AOCI.
Accumulated other comprehensive income (loss), net of tax, as of September 30, 2023 and December 31, 2022 consisted of the following:
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(millions)September 30,
2023
December 31,
2022
Foreign currency translation adjustments$(2,401)$(2,111)
Net investment hedges gain (loss)295 282 
Cash flow hedges — net deferred gain (loss)183 150 
Postretirement and postemployment benefits:
Net experience gain (loss) 2 
Prior service credit (cost)(27)(27)
Available-for-sale securities unrealized net gain (loss)(4)(4)
Total accumulated other comprehensive income (loss)$(1,954)$(1,708)
Note 7 Notes payable and long-term debt
The following table presents the components of Notes payable at September 30, 2023 and December 31, 2022:
 September 30, 2023December 31, 2022
(millions)Principal
amount
Effective
interest rate
Principal
amount
Effective
interest rate
U.S. commercial paper$ 5.44 %$330 4.46 %
Bank borrowings353 137 
Total$353 $467 
On September 29, 2023, in connection with the planned separation, WK Kellogg Co entered into a Credit Agreement (the “Credit Agreement”), consisting of a $500 million (the "Term Loan"), $250 million delayed draw term loan, and $350 million equivalent multicurrency revolving credit facility (collectively, the “Credit Facility”).

The Credit Facility has an initial term of five years and matures on September 29, 2028. Interest on the loans under the Credit Agreement are to be calculated by reference to Secured Overnight Financing Rate (“SOFR”) or an alternative base rate, plus an interest rate margin equal to (x) in the case of SOFR loans, 1.75% and (y) in the case of alternate base rate loans, 0.75%, each with related step-ups and step-downs based on WK Kellogg Co’s consolidated net leverage ratio as defined by the Credit Agreement. Interest expense for the quarter and year-to-date period ended September 30, 2023 was immaterial.

Under the Credit Facility, WK Kellogg Co has the right at any time, subject to customary conditions, to request incremental term loans or an increase to the revolving credit facility in an aggregate principal amount of (i) up to the greater of (x) $250 million and (y) 100% of Consolidated EBITDA, as defined in the Credit Agreement, for the preceding four fiscal quarters of WK Kellogg Co. Any such addition of or increase in loans will be subject to certain customary conditions precedent and other provisions.

The Credit Facility also contains customary mandatory prepayments, including with respect to asset sale proceeds and proceeds from certain occurrences of indebtedness. WK Kellogg Co may voluntarily repay outstanding loans under the Credit Facility at any time without premium or penalty.

The Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 2.50% in year one, 5.00% in year two and three, 7.50% in year four and 10.00% in year five, of the original principal amount thereon, with the balance being payable on the date that is five years after the closing of the Credit Facility.

The obligations under the Credit Facility (collectively, “Credit Facility Obligations”) are guaranteed (the “Credit Facility Guarantees”) exclusively by the existing and future direct and indirect subsidiaries of WK Kellogg Co (in such capacity, the “Credit Facility Guarantors”). The Credit Facility Obligations are expected to be secured by first priority liens on substantially all assets, subject to customary exceptions, of WK Kellogg Co and the Credit Facility Guarantors. The Credit Facility Guarantee and security interest of a Credit Facility Guarantor may be released where such Credit Facility Guarantor ceases to be a consolidated subsidiary of WK Kellogg Co pursuant to a transaction permitted under the Credit Facility. The Credit Facility contains various covenants, including, for example, those that restrict WK Kellogg Co's ability and the ability of their consolidated subsidiaries to incur certain types of indebtedness or to grant certain liens on their respective property or assets.

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WK Kellogg Co incurred $7 million of debt issuance costs, of which $5 million is related to the term loan and is reflected as a reduction in long-term debt, and $2 million is related to the revolving credit facility and is reflected in other assets.

As of September 30, 2023, WK Kellogg Co borrowings under the Credit Facility included a $500 million term loan, of which $9 million represents the current portion, and $164 million of borrowings under the revolving credit facility was recognized as notes payable.

During the first quarter of 2023, Kellanova issued $400 million of ten-year 5.25% Notes due 2033, resulting in net proceeds after discount and underwriting commissions of $396 million. The proceeds from these notes were used for general corporate purposes, including the payment of offering related fees and expenses, repayment of the $210 million 2.75% Notes when they matured on March 1, 2023, and repayment of a portion of commercial paper borrowings. 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 connection with the debt issuance, Kellanova terminated forward starting interest rate swaps with notional amounts totaling $400 million, resulting in a gain of $47 million in the first quarter of 2023. These derivatives were accounted for as cash flow hedges. The total net gain of $91 million, including those realized in prior periods, were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the Notes. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement is 3.06% at April 1, 2023.
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 2022 Annual Report on Form 10-K. Components of Company benefit plan (income) expense for the periods presented are included in the tables below. Excluding the service cost component, these amounts are included within Other income (expense) in the Consolidated Statement of Income.

In connection with the planned separation transaction, the company amended and legally split certain pension and postretirement benefit plans, several remeasurements occurred during the third quarter of 2023.

Pension
 Quarter endedYear-to-date period ended
(millions)September 30, 2023October 1, 2022September 30, 2023October 1, 2022
Service cost$6 $6 $18 $23 
Interest cost44 34 132 91 
Expected return on plan assets(54)(57)(161)(200)
Amortization of unrecognized prior service cost2 2 7 7 
Recognized net loss (gain)10 (15)10 (46)
Total pension income$8 $(30)$6 $(125)

For the quarter and year-to-date periods ended September 30, 2023, the Company recognized a loss of $10 million related to the remeasurement of a U.S. pension plan. The remeasurement was due to the amendment of the plan to split the pension plan in anticipation of the separation transaction. The remeasurement recognized was due primarily to a lower than expected return on plan assets.

For the quarter and year-to-date periods ended October 1, 2022, the Company recognized a gain of $15 million and $46 million, respectively, related to the remeasurement of two U.S. pension plans. These remeasurements were the result of distributions that exceeded service and interest costs resulting in settlement accounting for those specific plans. The remeasurements recognized were due primarily to an increase in the discount rate relative to the previous remeasurement date partially offset by lower than expected return on plan assets.




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Other nonpension postretirement
 Quarter endedYear-to-date period ended
(millions)September 30, 2023October 1, 2022September 30, 2023October 1, 2022
Service cost$2 $2 $5 $8 
Interest cost11 6 31 18 
Expected return on plan assets(25)(28)(73)(83)
Amortization of unrecognized prior service cost(2)(2)(7)(7)
Recognized net (gain) loss(67) (67) 
Total postretirement benefit income$(81)$(22)$(111)$(64)

For the quarter and year-to-date periods ended September 30, 2023, the Company recognized a gain of $67 million related to the remeasurement of other postretirement benefit plans. These remeasurements were the result of separating the other postretirement benefit plans impacted by the separation transaction. The remeasurements recognized were due primarily to a higher than expected return on plan assets.

Postemployment
 Quarter endedYear-to-date period ended
(millions)September 30, 2023October 1, 2022September 30, 2023October 1, 2022
Service cost$1 $ $2 $2 
Interest cost1 1 2 1 
Recognized net experience gain(1) (2)(2)
Total postemployment expense$1 $1 $2 $1 
For the quarter and year-to-date periods ended September 30, 2023, the Company recognized a gain of $1 million and $2 million, respectively, related to the remeasurement of a U.S. postemployment benefit plan. The remeasurement was the result of separating the postemployment plan impacted by the separation transaction. The remeasurement recognized was due primarily to a higher than expected return on plan assets.

In May 2023, the Company purchased a group annuity to cover pension benefit obligations of certain participants of the United Kingdom defined benefit pension plan for approximately $590 million. This transaction represents an annuity buy-in, under which the Company retains both the fair value of the annuity contract (within plan assets) and the pension benefit obligation related to these participants.

Company contributions to employee benefit plans are summarized as follows:
(millions)PensionNonpension postretirementTotal
Quarter ended:
September 30, 2023$ $3 $3 
October 1, 2022$1 $4 $5 
Year-to-date period ended:
September 30, 2023$ $13 $13 
October 1, 2022$2 $15 $17 
Full year:
Fiscal year 2023 (projected)$5 $21 $26 
Fiscal year 2022 (actual)$3 $20 $23 

Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
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Note 9 Income taxes
The consolidated effective tax rate for the quarters ended September 30, 2023 and October 1, 2022 was 28% and 19%, respectively. The consolidated effective tax rates for the year-to-date periods ended September 30, 2023 and October 1, 2022 was 24% and 21%, respectively.

The increase in effective tax rate for the quarter ended September 30, 2023 versus the prior year quarter is due to zero tax benefit recognized on the $113 million loss incurred on the divestiture of the Russia business.

As of September 30, 2023, the Company classified $11 million of unrecognized tax benefits as a current tax liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $3 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.
The Company’s total gross unrecognized tax benefits as of September 30, 2023 was $34 million. Of this balance, $28 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
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 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.

Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year.  Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position.  Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet.  On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item.  Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Total notional amounts of the Company’s derivative instruments as of September 30, 2023 and December 31, 2022 were as follows:
(millions)September 30,
2023
December 31,
2022
Foreign currency exchange contracts$2,826 $2,502 
Cross-currency contracts1,925 1,983 
Interest rate contracts2,251 2,657 
Commodity contracts376 230 
Total$7,378 $7,372 
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 30, 2023 and December 31, 2022, measured on a recurring basis.
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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. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. 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 30, 2023 or December 31, 2022.
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 30, 2023 and December 31, 2022:
Derivatives designated as hedging instruments
 September 30, 2023December 31, 2022
(millions)Level 1Level 2TotalLevel 1Level 2Total
Assets:
Cross-currency contracts:
Other current assets$ $77 $77 $ $88 $88 
Other assets 25 25  36 36 
Interest rate contracts:
Other current assets 23 23  45 45 
Other assets    25 25 
Total assets$ $125 $125 $ $194 $194 
Liabilities:
Cross-currency contracts:
Other current liabilities$ $ $ $ $ $ 
   Other liabilities      
Interest rate contracts(a):
Other current liabilities (16)(16)   
Other liabilities (62)(62) (86)(86)
Total liabilities$ $(78)$(78)$ $(86)$(86)
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.0 billion as of September 30, 2023 and $1.1 billion as of December 31, 2022.

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Derivatives not designated as hedging instruments
 September 30, 2023December 31, 2022
(millions)Level 1Level 2TotalLevel 1Level 2Total
Assets:
Foreign currency exchange contracts:
Other current assets$ $56 $56 $ $74 $74 
Other assets 7 7  14 14 
Interest rate contracts:
Other current assets 9 9  4 4 
Other assets 11 11  14 14 
Commodity contracts:
Other current assets4  4 4  4 
Total assets$4 $83 $87 $4 $106 $110 
Liabilities:
Foreign currency exchange contracts:
Other current liabilities$ $(49)$(49)$ $(50)$(50)
Other liabilities (3)(3) (9)(9)
Interest rate contracts:
Other current liabilities (11)(11) (7)(7)
Other liabilities (14)(14) (18)(18)
Commodity contracts:
Other current liabilities(12) (12)(2) (2)
Total liabilities$(12)$(77)$(89)$(2)$(84)$(86)
The Company has designated its outstanding foreign currency denominated 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, including current and long-term, was approximately $1.6 billion as of September 30, 2023 and December 31, 2022, respectively.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of September 30, 2023 and December 31, 2022.
(millions)Line Item in the Consolidated Balance Sheet in which the hedged item is includedCarrying amount of the hedged liabilitiesCumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
September 30,
2023
December 31,
2022
September 30,
2023
December 31,
2022
Interest rate contractsCurrent maturities of long-term debt$897 $483 $3 $(3)
Interest rate contractsLong-term debt$1,623 $2,250 $(59)$(74)
(a) The fair value adjustment related to current maturities of long-term debt includes $3 million and ($3) million from discontinued hedging relationships as of September 30, 2023 and December 31, 2022, respectively. The fair value adjustment related to long-term debt includes $3 million and $13 million from discontinued hedging relationships as of September 30, 2023 and December 31, 2022, respectively.
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The Company has elected to not 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 30, 2023 and December 31, 2022 would be adjusted as detailed in the following table:
    
As of September 30, 2023:
  
Gross Amounts Not Offset in the
Consolidated Balance Sheet
  
  
Amounts
Presented in the
Consolidated
Balance Sheet
Financial
Instruments
Cash Collateral
Received/
Posted
Net
Amount
Total asset derivatives$212 $(138)$25 $99 
Total liability derivatives$(167)$138 $29 $ 

 
As of December 31, 2022:
  
Gross Amounts Not Offset in the
Consolidated Balance Sheet
  
  
Amounts
Presented in the
Consolidated
Balance Sheet
Financial
Instruments
Cash Collateral
Received/
Posted
Net
Amount
Total asset derivatives$304 $(153)$(33)$118 
Total liability derivatives$(172)$153 $19 $ 

During the quarter and year-to-date periods ended September 30, 2023, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $14 million and $85 million, respectively. During the quarter and year-to-date periods ended October 1, 2022, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $83 million and $165 million, respectively. These derivatives were accounted for as cash flow hedges and the related net gains were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the related forecasted fixed rate debt, once issued. During the quarter ended October 1, 2022, the Company recognized an $18 million gain related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.

During the quarter and year-to-date periods ended September 30, 2023, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $12 million and $29 million, respectively. During the year-to-date period ended October 1, 2022, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $37 million. These cross currency swaps were accounted for as net investment hedges and the related net gain was recorded in accumulated other comprehensive income.
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The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended September 30, 2023 and October 1, 2022 was as follows:

Derivatives and non-derivatives in net investment hedging relationships
(millions)Gain (loss)
recognized in
AOCI
Gain (loss) excluded from assessment of hedge effectivenessLocation of gain (loss) in income of excluded component