Kellogg Company (NYSE: K) yesterday reported that net earnings for the third quarter of 2001 were $150.3 million compared to last year’s $181.9 million and earnings per share were $.37 compared to last year’s $.45. Excluding the cost impact of integrating Keebler Foods Co., earnings per share were $.40, exceeding Kellogg’s public forecasts made on that basis by $.03.


Cash flow also was above expectations at $361 million, up 87 percent over the third quarter of 2000. Management expects cash flow to be strong for the full year, a key factor helping Kellogg retire debt from the March 26 purchase of Keebler and prepare for future growth initiatives.


“We are pleased that our third quarter earnings, like our second quarter earnings, came in better than expected,” said Kellogg Chairman and Chief Executive Officer Carlos M. Gutierrez. “When you consider the amount of change going on inside our company this year, this delivery of better-than- expected earnings and cash flow is a very favorable sign.”


Third quarter net sales were $2.59 billion compared to $1.85 billion in the third quarter of 2000. If Keebler’s 2000 results are included, sales declined during the third quarter, due in part to changes related to Kellogg’s new business strategy and the Keebler integration. Gutierrez said these changes, coupled with challenges such as currency fluctuations, have affected both sales and operating profit performance throughout the year.


“Our reported results mask the tremendous progress we are making in changing our business for better execution,” he emphasized. “For example, during the third quarter, our dollar share of the U.S. cereal category continued to increase, with higher unpromoted base sales. Keebler’s profitability was enhanced by increased sales of higher-margin products. The transfer of Kellogg’s Nutri-Grain Bars and Rice Krispies Treats Squares into Keebler’s direct store door (DSD) delivery system was seamless for customers and resulted in strong growth for featured flavors and product sizes (SKUs).”


For the first nine months of 2001, Kellogg had net sales of $6.64 billion compared to $5.40 billion in 2000, net earnings of $349 million compared to $494.5 million in 2000, and earnings per share of $.86 compared to $1.22 in 2000.


Excluding restructuring charges, integration impact, the cumulative effect of an accounting change, and extraordinary items, net earnings for the nine months were $414.5 million compared to $509.2 million in 2000 and earnings per share were $1.02 compared to $1.26 in 2000.


Foreign exchange rates reduced EPS by $.02 for the quarter and by $.05 for the nine months.


About Kellogg Company
With projected annual sales of more than $9 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 preferences; economic factors such as interest rates, statutory tax rates, and foreign currency translations; and other factors.

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

Three months ended Nine months ended
September 30, September 30,
(Results are unaudited) 2001 2000 2001 2000

Net sales $2,590.1 $1,845.7 $6,640.3 $5,398.7

Cost of goods sold 1,180.7 875.7 3,106.0 2,562.1
Selling and administrative expense 1,062.4 661.9 2,630.5 1,963.4
Restructuring charges – – 48.3 21.3

Operating profit 347.0 308.1 855.5 851.9

Interest expense 104.2 36.4 251.8 102.4
Other income (expense), net 1.1 0.2 (5.9) 7.8

Earnings before income taxes 243.9 271.9 597.8 757.3
Income taxes 93.6 90.0 240.4 262.8

Earnings before extraordinary loss
and cumulative effect of
accounting change 150.3 181.9 357.4 494.5
Extraordinary loss (net of tax) – – (7.4) –
Cumulative effect of accounting
change (net of tax) – – (1.0) –

Net earnings $150.3 $181.9 $349.0 $494.5

Per share amounts (basic and diluted):
Earnings before extraordinary
loss and cumulative effect of
accounting change $.37 $.45 $.88 $1.22
Extraordinary loss (net of tax) – – ($.02) –
Cumulative effect of
accounting change (net of tax) – – – –
Net earnings per share (basic
and diluted) $.37 $.45 $.86 $1.22

Dividends per share $.2525 $.2525 $.7575 $.7425

Average shares outstanding 406.2 405.6 405.9 405.6

Actual shares outstanding at
period end 406.5 405.6

SUPPLEMENTAL FINANCIAL DATA
(millions, except per share data)

Cash earnings per share (basic and
diluted) $.45 $.46 $1.11 $1.28
Amortization expense (net of tax) $33.5 $3.0 $61.9 $8.2
Cash flow (operating cash flow
less property additions) $361.0 $193.1 $700.9 $457.6

Operating profit for the nine months 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 the charges were comprised of asset write-offs, with the
remainder consisting of employee severance and other cash costs.

Net earnings for the nine months ended September 30, 2001, includes 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 nine months 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.

Operating profit for the nine months ended September 30, 2000, includes
restructuring charges of $21.3 ($14.7 after tax or $.04 per share) for a
supply chain efficiency initiative in Europe. The charges were comprised
principally of voluntary employee retirement and separation benefits.

Cash earnings per share is defined as net earnings excluding restructuring
charges, extraordinary loss, cumulative effect of accounting change, and
amortization expense divided by average shares outstanding.

Kellogg Company and Subsidiaries
SELECTED OPERATING SEGMENT DATA
(millions)

Three months ended Nine months ended
September 30, September 30,
(Results are unaudited) 2001 2000 2001 2000

Net sales
United States (a) $1,883.9 $1,102.8 $4,568.9 $3,184.1
Europe 361.1 373.0 1,037.6 1,129.6
Latin America 165.3 166.2 492.8 473.4
All other operating segments 179.8 198.6 541.0 599.5
Corporate – 5.1 – 12.1
Consolidated (a) $2,590.1 $1,845.7 $6,640.3 $5,398.7

Operating profit excluding
restructuring charges and Keebler
amortization expense
United States (b) $298.6 $207.1 $706.6 $605.1
Europe 69.3 71.7 190.5 192.2
Latin America 45.8 45.5 128.7 121.5
All other operating segments 21.7 17.0 71.8 69.5
Corporate (b) (52.3) (33.2) (130.7) (115.1)
Consolidated (b) 383.1 308.1 966.9 873.2

Keebler amortization expense (36.1) – (63.1) –
Restructuring charges – – (48.3) (21.3)
Operating profit as reported (b) $347.0 $308.1 $855.5 $851.9

(a) Includes Keebler integration impact estimated to reduce net sales by
$17.8 for the nine months ended September 30, 2001.
(b) United States includes Keebler integration impact estimated to reduce
operating profit by $13.1 for the three months ended September 30, 2001 and
$34.6 for the nine months ended September 30, 2001. Corporate includes
Keebler integration impact estimated to reduce operating profit by $8.4 for
the three and nine months ended September 30, 2001.

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

September 30, December 31,
2001 2000
(unaudited) *

Current assets
Cash and cash equivalents $327.0 $204.4
Accounts receivable, net 901.0 685.3
Inventories:
Raw materials and supplies 172.1 138.2
Finished goods and materials in process 363.6 305.6
Other current assets 306.8 273.3

Total current assets 2,070.5 1,606.8
Property, net of accumulated depreciation
of $2,654.5 and $2,508.3 2,954.8 2,526.9
Goodwill, net of accumulated
amortization of $50.5 and $10.5 3,074.3 208.2
Other intangibles, net of accumulated
amortization of $52.8 and $18.6 2,063.6 199.2
Other assets 424.6 355.2

Total assets $10,587.8 $4,896.3
Current liabilities
Current maturities of long-term debt $8.3 $901.1
Notes payable 1,016.5 485.2
Accounts payable 529.1 388.2
Income taxes 83.8 130.8
Other current liabilities 1,075.1 587.3

Total current liabilities 2,712.8 2,492.6

Long-term debt 5,328.9 709.2
Nonpension postretirement benefits 481.7 408.5
Deferred income taxes and other liabilities 1,192.4 388.5

Shareholders’ equity
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value 91.5 102.0
Retained earnings 1,541.8 1,501.0
Treasury stock, at cost (342.0) (374.0)
Accumulated other comprehensive income (523.1) (435.3)

Total shareholders’ equity 872.0 897.5

Total liabilities and shareholders’ equity $10,587.8 $4,896.3

* Condensed from audited financial statements

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

Nine months ended
September 30,
(Results are unaudited) 2001 2000

Operating activities
Net earnings $349.0 $494.5
Items in net earnings not requiring cash:
Depreciation and amortization 319.6 217.3
Deferred income taxes 7.0 34.1
Restructuring charges, net of cash paid 45.9 17.8
Other (68.2) 16.8
Postretirement benefit plan contributions (58.1) (61.9)
Changes in operating assets and liabilities 259.6 (88.5)

Net cash provided by operating activities 854.8 630.1

Investing activities
Additions to properties (153.9) (172.5)
Acquisitions of businesses (3,857.7) (135.3)
Other (3.0) (4.7)

Net cash used in investing activities (4,014.6) (312.5)

Financing activities
Net issuances of notes payable 533.2 55.1
Issuances of long-term debt 4,626.4 –
Reductions of long-term debt (1,589.7) (1.1)
Net issuances of common stock 21.4 4.5
Cash dividends (308.3) (301.2)
Other 0.6 –

Net cash provided by (used in)
financing activities 3,283.6 (242.7)

Effect of exchange rate changes on cash (1.2) (9.2)

Increase in cash and cash equivalents 122.6 65.7
Cash and cash equivalents at
beginning of period 204.4 150.6

Cash and cash equivalents at end of period $327.0 $216.3