Kellogg's Second Quarter Earnings on Track, Driven by Strong Sales, Gross Profit, and Cash Flow

BATTLE CREEK, Mich., Jul 29, 2002 /PRNewswire-FirstCall via COMTEX/ -- Kellogg Company (NYSE: K) today reported that net earnings for the second quarter were right in line with guidance, driven by strong sales, gross profit margin, and cash flow.

Reported net earnings were $173.8 million, or $0.42 per share, compared to last year's $114.6 million, or $0.28 per share. The year-ago quarter's EPS included $0.04 of adverse impact from specific activities related to integrating Keebler Foods, as well as $0.06 of amortization. (The Company adopted SFAS No. 142 accounting standard in 2002, eliminating most of its amortization on a prospective basis.) Excluding these items, EPS in the second quarter of 2001 was $0.38.

"The second quarter represented further progress in our efforts to revitalize Kellogg Company," said Carlos M. Gutierrez, Kellogg's chairman and chief executive officer. "We exhibited solid performance in three priority areas: Net sales, gross profit margin, and cash flow. This allowed us to reinvest for future growth, while still achieving our earnings targets."

On a comparable basis, the growth rates for net sales, operating profit, and EPS were 4%, 4%, and 11%, 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 the integration impact and amortization eliminated by SFAS No. 142. On a reported basis, net sales, operating profit, and EPS were up 7%, 24%, and 50%, respectively.

Comparable-basis net sales growth of 4% continues a strong trend that began in late 2001. On this basis, U.S. retail cereal was up 6%, U.S. retail snacks increased 3%, and International grew 4%.

"Our internal sales growth continues to show acceleration from last year, as improved execution, increased brand-building investment, and a focus on value instead of volume lifted growth in each of the three major drivers of our business, U.S. Cereal, U.S. Snacks, and International. This was a top priority for 2002, and our broad-based gains in the second quarter were very encouraging."

During the quarter, gross profit margin increased by 110 basis points from year-ago levels, on a comparable basis. Mr. Gutierrez commented, "Another key priority for 2002 was improving our gross profit margin, which is critical for funding increased brand-building investment. The significant gross profit margin improvement in the second quarter was again driven by an improved sales mix, cost synergies, and operating leverage. This allowed us to increase our advertising and promotion investment substantially year-over-year, including in categories and countries that received little resources last year."

Cash flow from operating activities less capital expenditures was $224 million in the quarter, which was lower than the year-ago period's $288 million, because of the timing of an interest payment. Through the first six months of 2002, cash flow is up more than 40% year-over-year.

Mr. Gutierrez said, "The entire organization is committed to managing the business for cash flow, as evidenced by our continued discipline on capital expenditure and our reductions in working capital as a percentage of sales. We have used our strong cash flow to reduce our debt from $6.8 billion following the Keebler acquisition in March 2001, down to $5.8 billion at the end of the second quarter. This increased cash flow is restoring our financial flexibility and also improves our return on invested capital."

With earnings right on target for the second quarter and six months, the company reiterated its EPS guidance of $1.73 for the full year 2002.

Kellogg Company also announced that its Board of Directors has authorized a share repurchase program for up to $150 million during 2002. The authorization is intended to allow Kellogg to use proceeds from options exercised to offset their dilutive impact.

Mr. Gutierrez concluded, "As we have said repeatedly, 2002 is a year of acceleration following the enormous transitions we made last year. We have done the things we said we'd do, and our progress is clearly reflected in our improved results. As we aim for consistency and do what is right for the long-term health of our business, a stronger Kellogg is indeed emerging."

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, profitability, cash flow, growth, and the integration of Keebler. 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 new product introductions; the availability of and interest rates on short-term financing; commodity price and labor cost fluctuations; 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 June 29, June 30, June 29, June 30, (Results are unaudited) 2002 2001 2002 2001

Net sales $2,125.1 $1,989.2 $4,186.9 $3,460.9

Cost of goods sold 1,161.5 1,122.2 2,338.7 1,974.9 Selling and administrative expense 591.2 565.7 1,148.7 929.2 Restructuring charges - - - 48.3

Operating profit 372.4 301.3 699.5 508.5

Interest expense 96.9 106.9 195.0 147.6 Other income (expense), net 2.0 (8.9) 16.4 (7.0)

Earnings before income taxes, extraordinary loss, and cumulative effect of accounting change 277.5 185.5 520.9 353.9 Income taxes 103.7 70.9 194.5 146.8

Earnings before extraordinary loss and cumulative effect of accounting change 173.8 114.6 326.4 207.1 Extraordinary loss (net of tax) - - - (7.4) Cumulative effect of accounting change (net of tax) - - - (1.0)

Net earnings $173.8 $114.6 $326.4 $198.7

Per share amounts: Earnings before extraordinary loss and cumulative effect of accounting change: Basic $.42 $.28 $.80 $.51 Diluted $.42 $.28 $.79 $.51 Net earnings: Basic $.42 $.28 $.80 $.49 Diluted $.42 $.28 $.79 $.49

Dividends per share $.2525 $.2525 $.5050 $.5050

Average shares outstanding (basic) 409.2 405.9 408.1 405.8 Average shares outstanding (diluted) 412.6 406.3 410.9 406.2

Actual shares outstanding at period end 410.1 406.0

SUPPLEMENTAL FINANCIAL DATA (millions, except per share data)

Adjusted earnings per share (basic) $.42 $.38 $.80 $.69 Adjusted earnings per share (diluted) $.42 $.38 $.79 $.69 Amortization expense (net of tax) eliminated by SFAS No. 142 - $25.2 - $27.8 Cash flow (operating cash flow less property additions) $223.5 $288.4 $478.1 $339.9



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 June 29, 2002, includes a $16.5 credit ($10.2 after tax or $.02 per share), related to legal settlements.

Operating profit for the year-to-date period ended June 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 June 30, 2001, includes the financial impact of Keebler integration activities ("integration impact"), consisting primarily of the sales and gross profit impact of lowering trade inventories in order to transfer Kellogg snack foods to Keebler's direct store door delivery (DSD) system, and employee-related costs such as relocation and retention. For these periods, management estimates that these activities reduced net sales by $17.8, reduced gross profit by $16.4, and increased selling, general, and administrative expense by $5.1, for a total operating profit reduction of $21.5 ($13.3 after tax or $.04 per share).

Net earnings for the year-to-date period ended June 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 June 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 June 29, June 30, June 29, June 30, (Results are unaudited) 2002 2001 2002 2001

Net sales United States (a) $1,399.4 $1,299.7 $2,826.2 $2,126.1 Europe 382.7 345.2 708.5 675.6 Latin America 169.6 173.5 320.1 326.0 All other operating segments 173.4 170.8 332.1 333.2 Corporate - - - - Consolidated (a) $2,125.1 $1,989.2 $4,186.9 $3,460.9

Segment operating profit United States (b) $262.9 $214.7 $505.0 $376.0 Europe 67.2 67.6 112.7 121.2 Latin America 47.0 44.5 84.2 83.1 All other operating segments 20.8 26.5 41.0 50.2 Corporate (25.5) (21.9) (43.4) (40.3) Consolidated (b) 372.4 331.4 699.5 590.2

Amortization eliminated by SFAS No. 142* - (30.1) - (33.4) Restructuring charges - - - (48.3) Operating profit as reported (b) $372.4 $301.3 $699.5 $508.5

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

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

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





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

June 29, December 31, 2002 2001 (unaudited) *

Current assets Cash and cash equivalents $196.3 $231.8 Accounts receivable, net 826.7 762.3 Inventories: Raw materials and supplies 180.7 170.7 Finished goods and materials in process 375.1 403.8 Other current assets 278.2 333.4

Total current assets 1,857.0 1,902.0 Property, net of accumulated depreciation of $2,871.5 and $2,659.2 2,847.0 2,952.8 Goodwill 3,110.4 3,069.5 Other intangibles, net of accumulated amortization of $19.8 and $19.1** 2,004.0 2,051.1 Other assets 429.4 393.2

Total assets $10,247.8 $10,368.6

Current liabilities Current maturities of long-term debt $1,077.3 $82.3 Notes payable 111.5 513.3 Accounts payable 579.2 577.5 Income taxes 172.2 77.3 Other current liabilities 978.0 957.2

Total current liabilities 2,918.2 2,207.6

Long-term debt 4,592.1 5,619.0 Nonpension postretirement benefits 458.1 475.1 Deferred income taxes and other liabilities 1,214.1 1,195.4

Shareholders' equity Common stock, $.25 par value 103.8 103.8 Capital in excess of par value 57.9 91.5 Retained earnings 1,684.9 1,564.7 Treasury stock, at cost (209.0) (337.1) Accumulated other comprehensive income (572.3) (551.4)

Total shareholders' equity 1,065.3 871.5

Total liabilities and shareholders' equity $10,247.8 $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 ended period ended June 29, June 30, 2002 2001

Operating activities Net earnings $326.4 $198.7 Items in net earnings not requiring cash: Depreciation and amortization 169.8 185.1 Deferred income taxes 0.5 (20.0) Restructuring charges, net of cash paid - 46.4 Other (4.7) (67.9) Postretirement benefit plan contributions (42.7) (40.4) Changes in operating assets and liabilities 114.4 116.8

Net cash provided by operating activities 563.7 418.7

Investing activities Additions to properties (85.6) (78.8) Acquisitions of businesses (2.2) (3,853.7) Dispositions of businesses 65.1 - Other (1.2) 0.9

Net cash used in investing activities (23.9) (3,931.6)

Financing activities Net issuances (reductions) of notes payable (401.9) 128.7 Issuances of long-term debt - 4,567.0 Reductions of long-term debt (49.3) (946.9) Net issuances of common stock 81.5 9.6 Common stock repurchases (0.4) - Cash dividends (206.2) (205.4) Other - 0.6

Net cash provided by (used in) financing activities (576.3) 3,553.6

Effect of exchange rate changes on cash 1.0 (4.5)

Increase (decrease) in cash and cash equivalents (35.5) 36.2 Cash and cash equivalents at beginning of period 231.8 204.4

Cash and cash equivalents at end of period $196.3 $240.6