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Kellogg Reports Strong Third Quarter

BATTLE CREEK, Mich., Oct 28, 2002 /PRNewswire-FirstCall via COMTEX/ -- Kellogg Company (NYSE: K) today reported that it generated accelerated sales and profit growth in its third quarter, resulting in net earnings that exceeded its previous guidance.

Reported net earnings were $203.5 million, or $0.49 per diluted share, compared to last year's $150.3 million, or $0.37 per share. The year-ago quarter's EPS included $0.03 of adverse impact from specific activities related to integrating Keebler Foods, as well as $0.08 of amortization. (The Company adopted SFAS No. 142 in 2002, eliminating most of its amortization on a prospective basis.) Excluding these items, EPS in the third quarter of 2001 was $0.48.

"The changes we made to our Company last year were expected to create accelerated growth in 2002, and this acceleration continued in the third quarter," said Carlos M. Gutierrez, Kellogg's chairman and chief executive officer. "Our 'Volume to Value' initiatives drove an acceleration in internal net sales growth, an expansion in gross profit margin, and increased reinvestment in brand-building. Meanwhile, our principle of 'managing for cash' continued to result in strong cash flow and enhanced financial flexibility. The net result was another quarter of quality earnings growth."

On a comparable basis, the growth rates for net sales, operating profit, and EPS were 7%, 15%, and 2%, respectively. This basis adjusts year-ago sales and profit to exclude the impact of factors associated with the integration of Keebler, the amortization of intangible assets eliminated by SFAS No. 142, results attributable to the since-divested Bake-Line Products, and a difference in shipping days created by changing the interim reporting periods for all business units to uniform 13-week quarters. This basis adjusts year- ago EPS to exclude only the integration impact and the amortization eliminated by SFAS No. 142. On a reported basis, net sales were down 2%, primarily reflecting a fewer number of shipping days, while operating profit and EPS were up 20%, and 32%, respectively, in part because of integration costs in the year-earlier quarter and this year's SFAS 142 elimination of amortization.

The comparable-basis net sales gain of 7% represents an acceleration of a strong trend that began in late 2001. Best of all, this growth was broad- based: U.S. retail cereal was up 6% on a comparable basis, U.S. retail snacks increased 5%, and the other U.S. businesses collectively posted an 11% gain. International grew over 6%, or 5% in local currencies.

"Our sales growth featured continued strong contribution from mix and average pricing in virtually every business and market," said Mr. Gutierrez "This performance reflected improved execution of innovation and marketing, as well as the Company's focus on adding value for consumers, rather than discounting prices."

During the quarter, gross profit margin was up nearly a full percentage point, excluding value-added promotions that are now included in cost of goods sold. Mr. Gutierrez commented, "A priority for us in 2002 has been to grow our gross profit margins to levels that allow us to reinvest more in brand- building. In the third quarter, this gross profit margin improvement was again driven by higher sales, an improved sales mix, and cost savings, and we again increased our advertising and promotion investment."

Cash flow from operating activities less capital expenditures was $456 million in the quarter, which was well above the year-ago period's unusually strong $361 million. Through the first nine months of 2002, cash flow is up more than 33% year-over-year. This improvement has been driven by higher earnings, increased discipline in capital expenditure, and continuous reductions in working capital as a percentage of sales. Mr. Gutierrez said, "Debt reduction remains our priority for cash flow. However, we did begin to repurchase shares in the third quarter to offset the dilutive impact of exercised options. In addition, our cash flow and financial flexibility have improved enough that we are considering investing cash into our pension funds, to provide better security for our earnings and retirees going forward."

The Company reiterated its EPS guidance of $1.73 for the full year 2002. Kellogg also indicated that in 2003, strong underlying business momentum, improved sales mix, and productivity initiatives should more than offset higher commodity costs and employee benefits expense. As a result, Kellogg expects to achieve its goals of low single-digit net sales growth, mid-single- digit operating profit growth, and high single-digit EPS growth in 2003, translating into net earnings of approximately $1.86 - 1.90 per share.

"The goal of 2002 was to accelerate our growth, and we have clearly attained that acceleration, as evidenced by our strong third quarter results," concluded Mr. Gutierrez. "This performance is attributable to a better business model, enhanced capabilities, and improved execution. Therefore, we are confident that we can carry this momentum into 2003 and achieve our targeted growth, even despite cost challenges."

About Kellogg Company

With 2001 sales of about $8 billion, Kellogg Company is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and ice cream cones. The company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Austin, Morningstar Farms, Famous Amos, Carr's, Plantation, Ready Crust, and Kashi. Kellogg products are manufactured in 19 countries and marketed in more than 160 countries around the world. For more information, visit Kellogg's web site at http://www.kelloggs.com.

Forward-Looking Statements Disclosure

This news release contains forward-looking statements related to business performance, cash flow, costs, earnings and growth. Actual performance may differ materially from these statements due to factors related to the Keebler acquisition, including integration problems, failures to achieve synergies, unanticipated liabilities, and the substantial amount of indebtedness incurred to finance the acquisition (which could, among other things, hinder the company's ability to adjust rapidly, make the company more vulnerable to a downturn, and place the company at a competitive disadvantage to less- leveraged companies); competitive conditions and their impact; pricing and promotional spending; the effectiveness of marketing spending and programs; the success of productivity improvements and business transitions; the success of innovation and new product introductions; the availability of and interest rates on short-term financing; commodity prices and labor costs; employee benefits; changes in consumer behavior and preferences; economic factors such as interest rates, statutory tax rates, and foreign currency translations; legal factors; and other factors.

    Kellogg Company and Subsidiaries
    CONSOLIDATED EARNINGS
    (millions, except per share data)

Year-to- Year-to- date date Quarter Quarter period period ended ended ended ended Sept. 28, Sept. 30, Sept. 28, Sept. 30, (Results are unaudited) 2002 2001 2002 2001

Net sales $2,136.5 $2,190.6 $6,323.4 $5,651.5

Cost of goods sold 1,163.4 1,201.7 3,502.1 3,176.6 Selling and administrative expense 558.3 641.9 1,707.0 1,571.1 Restructuring charges - - - 48.3

Operating profit 414.8 347.0 1,114.3 855.5

Interest expense 102.2 104.2 297.2 251.8 Other income (expense), net 8.1 1.1 24.5 (5.9)

Earnings before income taxes, extraordinary loss, and cumulative effect of accounting change 320.7 243.9 841.6 597.8 Income taxes 117.2 93.6 311.7 240.4

Earnings before extraordinary loss and cumulative effect of accounting change 203.5 150.3 529.9 357.4 Extraordinary loss (net of tax) - - - (7.4) Cumulative effect of accounting change (net of tax) - - - (1.0)

Net earnings $203.5 $150.3 $529.9 $349.0

Per share amounts: Earnings before extraordinary loss and cumulative effect of accounting change: Basic $.50 $.37 $1.30 $.88 Diluted $.49 $.37 $1.29 $.88 Net earnings: Basic $.50 $.37 $1.30 $.86 Diluted $.49 $.37 $1.29 $.86

Dividends per share $.2525 $.2525 $.7575 $.7575

Average shares outstanding (basic) 409.4 406.2 408.6 405.9 Average shares outstanding (diluted) 412.0 408.3 411.4 406.7

Actual shares outstanding at period end 407.8 406.5

SUPPLEMENTAL FINANCIAL DATA (millions, except per share data)

Adjusted earnings per share (basic) $.50 $.48 $1.30 $1.17 Adjusted earnings per share (diluted) $.49 $.48 $1.29 $1.17 Amortization expense (net of tax) eliminated by SFAS No. 142 - $31.4 - $59.2 Cash flow (operating cash flow less property additions) $456.4 $361.0 $934.5 $700.9

On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, amortization of goodwill and indefinite-lived intangible assets is eliminated in periods subsequent to adoption. Prior period financial results are not restated. However, comparative earnings information for prior periods is disclosed.

Beginning January 1, 2002, the Company has applied the consensus reached by the Emerging Issues Task Force of the FASB in Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." As a result, the Company has reclassified certain promotional expenditures from selling, general, and administrative expense (SGA) to net sales, and has reclassified promotional package inserts from SGA to cost of goods sold. Prior-period financial statements have been reclassified to comply with this guidance.

Other income (expense), net, for the year-to-date period ended September 28, 2002, includes a $19.6 credit related to legal settlements.

Operating profit for the year-to-date period ended September 30, 2001, includes restructuring charges of $48.3 ($30.3 after tax or $.07 per share), related to preparing Kellogg for the Keebler integration and continued actions supporting the Company's "focus and align" strategy in the U.S. and S.E. Asia. Approximately 70% of these charges were comprised of asset write-offs, with the remainder consisting of employee severance and other cash costs.

Operating profit for the quarter and year-to-date periods ended September 30, 2001, includes the financial impact of Keebler integration activities. During the quarter, this integration impact consisted primarily of employee- related costs such as relocation and retention, and impairment and accelerated depreciation of software assets being abandoned due to the conversion of the Company's U.S. business to the SAP system. In the year-to-date period, this integration impact also included the sales and gross profit impact of lowering trade inventories in order to transfer Kellogg snack foods to Keebler's direct store delivery (DSD) system. For the quarter, management estimates that these activities reduced gross profit by $1.2, and increased selling, general, and administrative expense by $20.3, for a total operating profit reduction of $21.5. For the year-to-date period, management estimates that these activities reduced net sales by $17.8, reduced gross profit by $17.6, and increased selling, general and administrative expense by $25.4, for a total operating profit reduction of $43.0.

Net earnings for the year-to-date period ended September 30, 2001, include an extraordinary loss of $7.4 (net of tax benefit of $4.2) or $.02 per share, related to the extinguishment of $400 of long-term debt.

On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." For the year-to-date period ended September 30, 2001, the Company reported a charge to earnings of $1.0 (net of tax benefit of $.6) and a charge to other comprehensive income of $14.9 (net of tax benefit of $8.6) in order to recognize the fair value of derivative instruments as either assets or liabilities on the balance sheet.

Adjusted earnings per share is defined as net earnings excluding restructuring charges, integration impact, extraordinary loss, cumulative effect of accounting change, and the pro forma impact of amortization expense eliminated by SFAS No. 142, divided by average shares outstanding.



Kellogg Company and Subsidiaries SELECTED OPERATING SEGMENT DATA (millions)

Year-to- Year-to- date date Quarter Quarter period period ended ended ended ended Sept. 28, Sept. 30, Sept. 28, Sept. 30, (Results are unaudited) 2002 2001 2002 2001

Net sales United States (a) $1,405.4 $1,502.0 $4,231.6 $3,628.1 Europe 393.6 360.4 1,102.1 1,036.0 Latin America 160.5 164.7 480.6 490.7 All other operating segments** 177.0 163.5 509.1 496.7 Corporate - - - - Consolidated (a) $2,136.5 $2,190.6 $6,323.4 $5,651.5



Segment operating profit United States (b) $282.6 $280.2 $787.6 $656.2 Europe 76.8 69.3 189.5 190.5 Latin America 44.6 45.8 128.8 128.9 All other operating segments** 27.7 21.8 68.7 72.0 Corporate (b) (16.9) (30.6) (60.3) (70.9) Consolidated (b) 414.8 386.5 1,114.3 976.7

Amortization eliminated by SFAS No. 142* - (39.5) - (72.9) Restructuring charges - - - (48.3) Operating profit as reported (b) $414.8 $347.0 $1,114.3 $855.5



(a) Includes integration impact estimated to reduce net sales by $17.8 for the year-to-date period ended September 30, 2001.

(b) Includes integration impact estimated to reduce operating profit by $21.5 for the quarter and $43.0 for the year-to-date period ended September 30, 2001.

* Operating segment profitability in prior periods has been restated to reflect the pro forma impact of this standard.

** Includes Canada, Australia, and Asia.

Kellogg Company and Subsidiaries CONSOLIDATED BALANCE SHEET (millions, except per share data)

Sept. 28, December 31, 2002 2001 (unaudited) *

Current assets Cash and cash equivalents $461.2 $231.8 Accounts receivable, net 810.8 762.3 Inventories: Raw materials and supplies 182.5 170.7 Finished goods and materials in process 402.0 403.8 Other current assets 234.7 333.4

Total current assets 2,091.2 1,902.0 Property, net of accumulated depreciation of $2,948.4 and $2,659.2 2,807.7 2,952.8 Goodwill 3,109.7 3,069.5 Other intangibles, net of accumulated amortization of $20.2 and $19.1** 2,003.6 2,051.1 Other assets 437.3 393.2

Total assets $10,449.5 $10,368.6 Current liabilities Current maturities of long-term debt $778.5 $82.3 Notes payable 418.8 513.3 Accounts payable 572.9 577.5 Income taxes 164.9 77.3 Other current liabilities 1,137.7 957.2

Total current liabilities 3,072.8 2,207.6

Long-term debt 4,594.0 5,619.0 Nonpension postretirement benefits 459.4 475.1 Deferred income taxes and other liabilities 1,229.1 1,195.4

Shareholders' equity Common stock, $.25 par value 103.8 103.8 Capital in excess of par value 54.3 91.5 Retained earnings 1,784.6 1,564.7 Treasury stock, at cost (281.9) (337.1) Accumulated other comprehensive income (566.6) (551.4)

Total shareholders' equity 1,094.2 871.5

Total liabilities and shareholders' equity $10,449.5 $10,368.6

* Condensed from audited financial statements ** Effective January 1, 2002, the Company has reclassified accumulated amortization to the net carrying value of non-amortized intangibles pursuant to SFAS No. 142.

Kellogg Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (millions)

Year-to-date Year-to-date period period ended ended September 28, September 30, 2002 2001

Operating activities Net earnings $529.9 $349.0 Items in net earnings not requiring cash: Depreciation and amortization 260.4 319.6 Deferred income taxes 43.8 7.0 Restructuring charges, net of cash paid - 45.9 Other 36.5 (68.2) Postretirement benefit plan contributions (58.0) (58.1) Changes in operating assets and liabilities 257.9 259.6

Net cash provided by operating activities 1,070.5 854.8

Investing activities Additions to properties (136.0) (153.9) Acquisitions of businesses (2.2) (3,857.7) Dispositions of businesses 61.0 - Other (1.9) (3.0)

Net cash used in investing activities (79.1) (4,014.6)

Financing activities Net issuances (reductions) of notes payable (94.5) 533.2 Issuances of long-term debt - 4,626.4 Reductions of long-term debt (356.6) (1,589.7) Net issuances of common stock 91.4 21.4 Common stock repurchases (82.8) - Cash dividends (310.0) (308.3) Other - 0.6

Net cash provided by (used in) financing activities (752.5) 3,283.6

Effect of exchange rate changes on cash (9.1) (1.2)

Increase in cash and cash equivalents 229.8 122.6 Cash and cash equivalents at beginning of period 231.8 204.4

Cash and cash equivalents at end of period $461.6 $327.0

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