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

Project K, a four-year efficiency and effectiveness program, was announced in November 2013 and is expected to generate a significant amount of savings that will be invested in key strategic areas of focus for the business. The Company expects that this investment will drive future growth in revenues, gross margin, operating profit, and cash flow.

The focus of the program will be 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 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 the program 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 expenditures, estimated to be $900 million to $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 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 related to Project K will impact reportable segments as follows: U.S. Morning Foods (approximately 18%), U.S. Snacks (approximately 13%), U.S. Specialty (approximately 1%), North America Other (approximately 10%), Europe (approximately 17%), Latin America (approximately 2%), Asia-Pacific (approximately 6%), and Corporate (approximately 33%). 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 estimated costs by reportable segment as needed.

Since inception of Project K, the Company has recognized charges of $817 million that have been attributed to the program. The charges were comprised of $6 million being recorded as a reduction of revenue, $517 million being recorded in COGS and $294 million recorded in SGA.

Other Projects

In 2015 we initiated the implementation of a zero-based budgeting (ZBB) program in our North America business that is expected to deliver visibility to ongoing annual savings. In support of the ZBB initiative, we incurred pre-tax charges of approximately $12 million in 2015.

All Projects

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 million being recorded as a reduction of revenue, $152 million being recorded in COGS and $144 million recorded in SGA expense.

The Company recorded $250 million of costs in 2013 associated with cost reduction initiatives. The charges were comprised of $195 million being recorded in COGS and $55 million recorded in SGA expense.

The tables below provide the details for the charges incurred during 2015, 2014 and 2013 and program costs to date for all programs currently active as of January 2, 2016.



							Program costs to date
(millions)	2015		2014		2013		January 2, 2016
Employee related costs	$	62	$	90	$	114	$	259
Asset related costs	103		37		10		146
Asset impairment	18		21		70		105
Other costs	140		150		56		319
Total	$	323	$	298	$	250	$	829

							Program costs to date
(millions)	2015		2014		2013		January 2, 2016
U.S. Morning Foods	$	58	$	60	$	109	$	218
U.S. Snacks	50		57		30		126
U.S. Specialty	5		3		5		11
North America Other	63		18		11		90
Europe	74		80		27		173
Latin America	4		8		5		16
Asia Pacific	13		37		32		74
Corporate	56		35		31		121
Total	$	323	$	298	$	250	$	829

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 13 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 January 2, 2016 total project reserves were $88 million, related to severance payments and other costs of which a substantial portion will be paid in 2016 and 2017. The following table provides details for exit cost reserves.



(millions)	Employee Related Costs			Asset Impairment			Asset Related Costs			Other Costs			Total
Liability as of December 28, 2013	$	66		$	—		$	—		$	12		$	78
2014 restructuring charges	90			21			37			150			298
Cash payments	(84		)	—			(24		)	(148		)	(256		)
Non-cash charges and other	24			(21		)	(13		)	—			(10		)
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