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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 July 01, 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
KELLOGG COMPANY
State of Incorporation—Delaware  IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
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 filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging 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 July 1, 2023 — 342,346,679 shares

KELLOGG COMPANY
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

Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
July 1,
2023		December 31,
2022
Current assets
Cash and cash equivalents$308 $299 
Accounts receivable, net1,930 1,736 
Inventories1,706 1,768 
Other current assets344 383 
Total current assets4,288 4,186 
Property, net3,781 3,789 
Operating lease right-of-use assets607 617 
Goodwill5,517 5,686 
Other intangibles, net2,091 2,296 
Investments in unconsolidated entities323 432 
Other assets1,494 1,490 
Total assets$18,101 $18,496 
Current liabilities
Current maturities of long-term debt$1,199 $780 
Notes payable461 467 
Accounts payable2,810 2,973 
Current operating lease liabilities114 121 
Accrued advertising and promotion850 766 
Accrued salaries and wages243 370 
Other current liabilities799 872 
Total current liabilities6,476 6,349 
Long-term debt5,078 5,317 
Operating lease liabilities478 486 
Deferred income taxes659 760 
Pension liability712 709 
Other liabilities477 500 
Commitments and contingencies
Equity
Common stock, $.25 par value
105 105 
Capital in excess of par value1,056 1,068 
Retained earnings9,447 9,197 
Treasury stock, at cost(4,700)(4,721)
Accumulated other comprehensive income (loss)(1,943)(1,708)
Total Kellogg Company equity3,965 3,941 
Noncontrolling interests256 434 
Total equity4,221 4,375 
Total liabilities and equity$18,101 $18,496 
See accompanying Notes to Consolidated Financial Statements.

3

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
 Quarter endedYear-to-date period ended
(unaudited)July 1,
2023		July 2,
2022		July 1,
2023		July 2,
2022
Net sales$4,041 $3,864 $8,094 $7,536 
Cost of goods sold2,708 2,721 5,551 5,234 
Selling, general and administrative expense824 728 1,594 1,370 
Operating profit509 415 949 932 
Interest expense82 54 162 110 
Other income (expense), net36 60 62 134 
Income before income taxes463 421 849 956 
Income taxes104 97 190 209 
Earnings (loss) from unconsolidated entities3 2 5 3 
Net income362 326 664 750 
Net income (loss) attributable to noncontrolling interests5 — 9 2 
Net income attributable to Kellogg Company$357 $326 $655 $748 
Per share amounts:
Basic earnings$1.04 $0.96 $1.91 $2.20 
Diluted earnings$1.03 $0.95 $1.90 $2.19 
Average shares outstanding:
Basic343 339 342 340 
Diluted345 342 345 342 
Actual shares outstanding at period end342 340 
See accompanying Notes to Consolidated Financial Statements.

4

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)
Quarter endedYear-to-date period ended
July 1, 2023July 1, 2023
(unaudited)Pre-tax
amount		Tax (expense)
benefit		After-tax
amount		Pre-tax
amount		Tax (expense)
benefit		After-tax
amount
Net income$362 $664 
Other comprehensive income (loss):
Foreign currency translation adjustments:
Foreign currency translation adjustments during period$(383)$(1)(384)$(341)$2 (339)
Net investment hedges:
Net investment hedges gain (loss)(37)7 (30)(94)22 (72)
Cash flow hedges:
Net deferred gain (loss) on cash flow hedges 15 (4)11 (3)1 (2)
Reclassification to net income2 — 2 5 (1)4 
Postretirement and postemployment benefits:
Reclassification to net income:
   Net experience (gain) loss— — — (1)— (1)
Available-for-sale securities:
Unrealized gain (loss) — — — 1 — 1 
Other comprehensive income (loss) $(403)$2 $(401)$(433)$24 $(409)
Comprehensive income$(39)$255 
Net Income attributable to noncontrolling interests5 9 
Other comprehensive income (loss) attributable to noncontrolling interests(171)(174)
Comprehensive income attributable to Kellogg Company$127 $420 
Quarter endedYear-to-date period ended
 July 2, 2022July 2, 2022
(unaudited)Pre-tax
amount		Tax (expense)
benefit		After-tax
amount		Pre-tax
amount		Tax (expense)
benefit		After-tax
amount
Net income$326 $750 
Other comprehensive income (loss):
Foreign currency translation adjustments:
Foreign currency translation adjustments during period$(243)$1 (242)$(260)$2 (258)
Net investment hedges:
Net investment hedges gain (loss)255 (67)188 356 (94)262 
Cash flow hedges:
Net deferred gain (loss) on cash flow hedges74 (20)54 151 (40)111 
Reclassification to net income4 (1)3 8 (2)6 
Postretirement and postemployment benefits:
Reclassification to net income:
Net experience (gain) loss(1)1 — (2)1 (1)
Available-for-sale securities:
Unrealized gain (loss)(1)— (1)(4)— (4)
Other comprehensive income (loss)$88 $(86)$2 $249 $(133)$116 
Comprehensive income$328 $866 
Net Income attributable to noncontrolling interests— 2 
Other comprehensive income (loss) attributable to noncontrolling interests(8)(4)
Comprehensive income attributable to Kellogg Company$336 $868 
See accompanying Notes to Consolidated Financial Statements.
5

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
 
Quarter ended July 1, 2023
 
 
Common
stock
Capital in
excess of
par value		Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)		Total Kellogg
Company
equity		Non-controlling
interests		Total
equity
(unaudited)sharesamountsharesamount
Balance, April 1, 2023421 $105 $1,033 $9,293 78 $(4,666)$(1,713)$4,052 $427 $4,479 
Common stock repurchases1 (60)(60)(60)
Net income357 357 5 362 
Dividends declared ($0.59 per share)
(202)(202)(202)
Distributions to noncontrolling interest— (5)(5)
Other comprehensive income (loss)(230)(230)(171)(401)
Stock compensation21 21 21 
Stock options exercised, issuance of other stock awards and other2 (1)— 26 27 27 
Balance, July 1, 2023421 $105 $1,056 $9,447 79 $(4,700)$(1,943)$3,965 $256 $4,221 
Year-to-date period ended July 1, 2023
 
 
Common
stock
Capital in
excess of
par value		Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)		Total Kellogg
Company
equity		Non-controlling
interests		Total
equity
(unaudited)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 income655 655 9 664 
Dividends declared ($1.18 per share)
(404)(404)(404)
Distributions to noncontrolling interest— (13)(13)
Other comprehensive income (loss)(235)(235)(174)(409)
Stock compensation43 43 43 
Stock options exercised, issuance of other stock awards and other(55)(1)(1)81 25 25 
Balance, July 1, 2023421 $105 $1,056 $9,447 79 $(4,700)$(1,943)$3,965 $256 $4,221 
See accompanying Notes to Consolidated Financial Statements.


6

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY (cont.)
(millions)
Quarter ended July 2, 2022
 
 
Common
stock
Capital in
excess of
par value		Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)		Total Kellogg
Company
equity		Non-controlling
interests		Total
equity
(unaudited)sharesamountsharesamount
Balance, April 2, 2022421 $105 $993 $9,254 83 $(4,946)$(1,611)$3,795 $500 $4,295 
Net income326 326 — 326 
Dividends declared ($0.58 per share)
(197)(197)(197)
Distributions to noncontrolling interest— (16)(16)
Other comprehensive income10 10 (8)2 
Stock compensation19 19 19 
Stock options exercised and other(4)4 (2)129 129 129 
Balance, July 2, 2022421 $105 $1,008 $9,387 81 $(4,817)$(1,601)$4,082 $476 $4,558 
Year-to-date period ended July 2, 2022
 
 
Common
stock
Capital in
excess of
par value		Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)		Total Kellogg
Company
equity		Non-controlling
interests		Total
equity
(unaudited)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 income748 748 2 750 
Dividends declared ($1.16 per share)
(394)(394)(394)
Distributions to noncontrolling interest— (17)(17)
Other comprehensive income120 120 (4)116 
Stock compensation35 35 35 
Stock options exercised and other(50)5 (4)198 153 153 
Balance, July 2, 2022421 $105 $1,008 $9,387 81 $(4,817)$(1,601)$4,082 $476 $4,558 
See accompanying Notes to Consolidated Financial Statements.
7

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
 Year-to-date period ended
(unaudited)July 1,
2023		July 2,
2022
Operating activities
Net income$664 $750 
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization226 238 
Postretirement benefit plan expense (benefit)(32)(137)
Deferred income taxes(9)32 
Stock compensation43 35 
Other(10)8 
Postretirement benefit plan contributions(11)(12)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables(193)(343)
Inventories17 (306)
Accounts payable(39)468 
All other current assets and liabilities(12)72 
Net cash provided by (used in) operating activities644 805 
Investing activities
Additions to properties(339)(267)
Issuance of notes receivable(4)— 
Repayments from notes receivable— 10 
Purchases of available for sale securities(9)(10)
Sales of available for sale securities10 9 
Settlement of net investment hedges17 37 
Collateral paid on derivatives(18)(103)
Other(1)6 
Net cash provided by (used in) investing activities(344)(318)
Financing activities
Net issuances (reductions) of notes payable(7)183 
Issuances of long-term debt401 — 
Reductions of long-term debt(221)(28)
Net issuances of common stock45 173 
Common stock repurchases(60)(300)
Cash dividends(404)(394)
Other(53)(17)
Net cash provided by (used in) financing activities(299)(383)
Effect of exchange rate changes on cash and cash equivalents8 (67)
Increase (decrease) in cash and cash equivalents9 37 
Cash and cash equivalents at beginning of period299 286 
Cash and cash equivalents at end of period$308 $323 
Supplemental cash flow disclosures of non-cash investing activities:
   Additions to properties included in accounts payable$98 $48 
See accompanying Notes to Consolidated Financial Statements.
8

Notes to Consolidated Financial Statements
for the quarter ended July 1, 2023 (unaudited)
Note 1 Accounting policies

Basis of presentation
The unaudited interim financial information of Kellogg Company (the 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. 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 July 1, 2023 are not necessarily indicative of the results to be expected for other interim periods or the full year.

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 July 1, 2023, $1.1 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.

9

Note 2 Proposed separation transaction
During 2022, the Company announced its intent to separate its North American cereal business, via tax-free spin-off, with a target to complete the transaction during the fourth quarter of 2023, resulting in two independent public companies, each better positioned to unlock their full standalone potential.
The transaction will follow the satisfaction of customary conditions, including reviews and final approval by Kellogg’s Board of Directors, receipt of an Internal Revenue Service ruling and relevant tax opinions with respect to the tax-free nature of the transaction, effectiveness of appropriate filings with the U.S. Securities and Exchange Commission, and the completion of audited financials of the new independent company. We cannot assure that the North American cereal transaction will be completed on the anticipated timeline or at all or that the terms of the separation will not change.

The Company incurred pre-tax charges related to the proposed separation of $77 million and $128 million for the quarter and year-to-date period ended July 1, 2023, respectively, including $14 million and $18 million recorded in COGS, respectively, and $63 million and $110 million recorded in SG&A, respectively. The Company incurred pre-tax charges of $4 million for the quarter and year-to-date period ended July 2, 2022, all of which were recorded in SG&A. These charges were primarily related to legal and consulting costs.

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 July 1, 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 $999 million and $865 million remained outstanding under these arrangements as of July 1, 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 $15 million and $27 million for the quarter and year-to-date period ended July 1, 2023, respectively and was $3 million and $5 million for the quarter and year-to-date period ended July 2, 2022. The recorded loss is included in Other income and expense, net (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 $8 million and $31 million remained outstanding under these programs as of July 1, 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.


10

Note 4 Divestiture
Russia
In December 2022 the Company entered into an agreement to sell our Russian business to a third party, pending a number of local government regulatory approvals. The business is a part of our Europe reportable segment. The sale includes the entirety of the Company’s operations in Russia and will result in a complete exit from the market. As of July 1, 2023, the pending sale did not meet the criteria for held for sale accounting due to uncertainty related to the evolving Russian regulatory approvals required to sell a business in Russia. The net value of assets and CTA losses collectively represent less than 1% of total Company assets as of July 1, 2023. The Kellogg business in Russia represents approximately 1% of consolidated Kellogg Company net sales.

Subsequent to July 1, 2023, the Company cleared all regulatory approvals, received the related cash consideration and completed the sale of the Russian business. As a result of completing the transaction, the Company will derecognize net assets of approximately $63 million and record a non-cash loss on the transaction of approximately $112 million, primarily related to the release of historical currency translation adjustments, in the third quarter of 2023.
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.

Due to the devaluation of the Naira in June 2023 and the accounting method used by the Company to record the results of operations of TAF on a one-month-lag, the Company expects to record additional foreign currency translation adjustments on the value of the TAF investment during the third quarter of 2023. Based on the foreign currency exchange rates at the end of June 2023, the adjustment is expected to result in translation losses of approximately $120 million through 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 4 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended July 1, 2023. There were approximately 4 million and 6 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended July 2, 2022. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quarters ended July 1, 2023 and July 2, 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 quarter and year-to-date periods ended July 1, 2023, the Company repurchased approximately 1 million shares of common stock for a total of $60 million. During the year-to-date period ended July 2, 2022, the Company repurchased approximately 5 million shares of common stock for a total of $300 million.

11

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 July 1, 2023 and December 31, 2022 consisted of the following:
(millions)July 1,
2023		December 31,
2022
Foreign currency translation adjustments$(2,276)$(2,111)
Net investment hedges gain (loss)210 282 
Cash flow hedges — net deferred gain (loss)152 150 
Postretirement and postemployment benefits:
Net experience gain (loss)1 2 
Prior service credit (cost)(27)(27)
Available-for-sale securities unrealized net gain (loss)(3)(4)
Total accumulated other comprehensive income (loss)$(1,943)$(1,708)
Note 7 Long-term debt
During the first quarter of 2023, the Company 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, the Company 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 July 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.



12


Pension
 Quarter endedYear-to-date period ended
(millions)July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Service cost$6 $8 $12 $17 
Interest cost44 28 88 57 
Expected return on plan assets(54)(72)(107)(143)
Amortization of unrecognized prior service cost3 3 5 5 
Recognized net gain— (10)— (31)
Total pension income$(1)$(43)$(2)$(95)

Other nonpension postretirement
 Quarter endedYear-to-date period ended
(millions)July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Service cost$1 $3 $3 $6 
Interest cost10 6 20 12 
Expected return on plan assets(24)(27)(48)(55)
Amortization of unrecognized prior service cost(3)(3)(5)(5)
Total postretirement benefit income$(16)$(21)$(30)$(42)
Postemployment
 Quarter endedYear-to-date period ended
(millions)July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Service cost$— $1 $1 $2 
Interest cost1 — 1 — 
Recognized net experience gain— (1)(1)(2)
Total postemployment expense$1 $— $1 $— 

For the quarter and year-to-date periods ended July 2, 2022, the Company recognized a gain of $10 million and $31 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.

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:
July 1, 2023$— $6 $6 
July 2, 2022$— $5 $5 
Year-to-date period ended:
July 1, 2023$— $11 $11 
July 2, 2022$1 $11 $12 
Full year:
Fiscal year 2023 (projected)$5 $21 $26 
Fiscal year 2022 (actual)$3 $20 $23 

13

Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
Note 9 Income taxes
The consolidated effective tax rate for the quarters ended July 1, 2023 and July 2, 2022 was 22% and 23%, respectively. The consolidated effective tax rates for the year-to-date periods ended July 1, 2023 and July 2, 2022 was 22%.

As of July 1, 2023, the Company classified $14 million of unrecognized tax benefits as a net 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 July 1, 2023 was $35 million. Of this balance, $29 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
The accrual balance for tax-related interest was approximately $7 million at July 1, 2023.
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 July 1, 2023 and December 31, 2022 were as follows:
(millions)July 1,
2023		December 31,
2022
Foreign currency exchange contracts$3,042 $2,502 
Cross-currency contracts2,029 1,983 
Interest rate contracts2,276 2,657 
Commodity contracts436 230 
Total$7,783 $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 July 1, 2023 and December 31, 2022, measured on a recurring basis.
14

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 July 1, 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 July 1, 2023 and December 31, 2022:
Derivatives designated as hedging instruments
 July 1, 2023December 31, 2022
(millions)Level 1Level 2TotalLevel 1Level 2Total
Assets:
Cross-currency contracts:
Other current assets$— $42 $42 $— $88 $88 
Other assets— 16 16 — 36 36 
Interest rate contracts:
Other current assets— — — — 45 45 
Other assets— — — — 25 25 
Total assets$— $58 $58 $— $194 $194 
Liabilities:
Cross-currency contracts:
Other current liabilities$— $(11)$(11)$— $— $— 
   Other liabilities— — — — — — 
Interest rate contracts(a):
Other current liabilities— (27)(27)— — — 
Other liabilities— (57)(57)— (86)(86)
Total liabilities$— $(95)$(95)$— $(86)$(86)
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.1 billion as of July 1, 2023 and December 31, 2022, respectively.
15

Derivatives not designated as hedging instruments
 July 1, 2023December 31, 2022
(millions)Level 1Level 2TotalLevel 1Level 2Total
Assets:
Foreign currency exchange contracts:
Other current assets$— $60 $60 $— $74 $74 
Other assets— 13 13 — 14 14 
Interest rate contracts:
Other current assets— 9 9 — 4 4 
Other assets— 15 15 — 14 14 
Commodity contracts:
Other current assets9 — 9 4 — 4 
Total assets$9 $97 $106 $4 $106 $110 
Liabilities:
Foreign currency exchange contracts:
Other current liabilities$— $(59)$(59)$— $(50)$(50)
Other liabilities— (14)(14)— (9)(9)
Interest rate contracts:
Other current liabilities— (11)(11)— (7)(7)
Other liabilities— (18)(18)— (18)(18)
Commodity contracts:
Other current liabilities(22)— (22)(2)— (2)
Total liabilities$(22)$(102)$(124)$(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 July 1, 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 July 1, 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)
July 1,
2023		December 31,
2022		July 1,
2023		December 31,
2022
Interest rate contractsCurrent maturities of long-term debt$909 $483 $4 $(3)
Interest rate contractsLong-term debt$1,646 $2,250 $(53)$(74)
(a) The fair value adjustment related to current maturities of long-term debt includes $4 million and ($3) million from discontinued hedging relationships as of July 1, 2023 and December 31, 2022, respectively. The fair value adjustment related to long-term debt includes $4 million and $13 million from discontinued hedging relationships as of July 1, 2023 and December 31, 2022, respectively.
16

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 July 1, 2023 and December 31, 2022 would be adjusted as detailed in the following table:
    
As of July 1, 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$164 $(150)$— $14 
Total liability derivatives$(219)$150 $51 $(18)

 
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 year-to-date periods ended July 1, 2023 and July 2, 2022, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $71 million and $82 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 year-to-date periods ended July 1, 2023 and July 2, 2022, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $17 million and $37 million, respectively. These cross currency swaps were accounted for as net investment hedges and the related net gain was recorded in accumulated other comprehensive income.

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended July 1, 2023 and July 2, 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
 July 1,
2023		July 2,
2022		July 1,
2023		July 2,
2022
Foreign currency denominated long-term debt$(2)$134 $— $— 
Cross-currency contracts(35)121 14 11 Interest expense
Total$(37)$255 $14 $11 
Derivatives not designated as hedging instruments
(millions)Location of gain
(loss) recognized
in income		Gain (loss)
recognized in
income
  July 1,
2023		July 2,
2022
Foreign currency exchange contractsCOGS$(8)$32 
Foreign currency exchange contractsOther income (expense), net(6)(7)
Foreign currency exchange contractsSG&A(3)4 
Interest rate contractsInterest expense— 1 
Commodity contractsCOGS(24)(78)
Total$(41)$(48)
17


The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended July 1, 2023 and July 2, 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 effectiveness