Results of operations Overview Management’s Discussion and Analysis Kellogg Company and Subsidiaries Net sales and operating profit 2003 compared to 2002 22 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, and meat alternatives. Kellogg products are manufactured and marketed globally. In re- cent years, our Company has been managed in two major divisions - the United States and International - with International further delineated into Europe, Latin America, Canada, Australia, and Asia. While this historical organizational structure is the basis of the op- erating segment data presented in this report, we recently reorgan- ized our geographic management structure to North America, Europe, Latin America, and Asia Pacific, and we will begin reporting on this basis for 2004. prior-year results. For the year ended December 28, 2002, our Company reported net earnings per diluted share of $1.75 versus $1.16 in 2001. Results for 2001 were reduced by several charges and expense items, as presented in the table below. Our strategy is to manage our Company for steady, consistent growth and an attractive dividend yield, which together should provide strong total return for shareholders. We achieve this sustainability through a focused strategy to grow our cereal business, expand our snacks busi- ness, and pursue selective growth opportunities. We support our busi- ness strategy with a financial model that emphasizes sales dollars over shipment volume ( Volume to Value ), as well as cash flow and return on invested capital ( Manage for Cash ). We believe the success of our strat- egy and financial principles are reflected in the steady improvement of our Company’s financial results over the past three years. During 2001, our Company experienced a significant transition re- lated to the acquisition and first phase of the integration of Keebler Foods Company (the “Keebler acquisition”), as well as the fundamental refocus of our business model. While net earnings were dampened by increased interest and tax expense, and other short-term financial impacts of this transition, we achieved several important goals during 2001: increased dollar share in the U.S. ce- real category; pricing and mix-related improvements in net sales; expansion of gross profit margin; and the highest cash flow (net cash provided from operating activities less expenditures for prop- erty additions) to that date in our Company’s history. In 2002, our Company accelerated its performance in several key metrics: internal sales growth, expansion of gross profit margin, and continued strong cash flow. We believe improved execution, in- creased brand-building investment, better innovation, and a focus on value over volume were important drivers of this performance. In 2003, our Company continued to demonstrate business mo- mentum with solid financial performance, achieving broad-based sales and operating profit growth, despite substantial reinvest- ment in brand building and productivity initiatives. For the year ended December 27, 2003, our Company reported net earnings per diluted share of $1.92, a 10% increase over The following tables provide an analysis of net sales and operating profit performance for 2003 versus 2002: Earning Our Stripes (a) Impact of results for the comparable 2002 periods prior to divestiture of the Bake-Line private label business in April 2002 and additional private label operations in Janurary 2003. Refer to Note 2 within Notes to Consolidated Financial Statements for further information. (b) Includes Canada, Australia, and Asia. (e) Net earnings for 2001 include a charge for the cumulative effect of accounting change related to the adoption of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” Refer to Note 1 within Notes to Consolidated Financial Statements for further information. (d) Under SFAS No. 142, which we adopted in 2002, virtually all of our intangibles amortization expense was eliminated in post-2001 fiscal years. Refer to Notes 1 and 15 within Notes to Consolidated Financial Statements for further information. (c) Sales and operating profit for 2001 were reduced by the financial impact of Keebler integration activities. Refer to the dis- cussion of 2002 and 2001 results on page 24 for further information.  (b) Operating profit for 2001 includes restructuring charges related to implementing our operating principles and preparing Kellogg for the Keebler integration. Refer to Note 3 within Notes to Consolidated Financial Statements for further information. (a) Net earnings for 2001 include a debt extinguishment charge of $7.4 (net of tax benefit of $4.2), which was originally clas- sified as an extraordinary loss. Under SFAS No. 145, which we adopted in 2003, generally, debt extinguishments are no longer classified as extraordinary items. Accordingly, the extraordinary loss for 2001 has been reclassified to Earnings before cumulative effect of accounting change. 2001 expense items affecting comparability with 2002 results Per share (basic (millions except per share data) Net earnings and diluted) Debt extinguishment charge (a) $ 7.4 $ .02 Restructuring charges, net of credits (b) 20.5 .05 Keebler integration impact (c) 46.2 .11 Amortization eliminated by SFAS No. 142 (d) 85.0 .21 Cumulative effect of accounting change (e) 1.0 .— Other United Latin operating Consoli- (dollars in millions) States Europe America (b) Corporate dated 2003 net sales $5,629.3 $1,734.2 $645.7 $802.3 $ — $8,811.5 2002 net sales $5,525.4 $1,469.8 $631.1 $677.8 $ — $8,304.1 % change - 2003 vs. 2002: Volume (tonnage) -.2% -.6% 6.6% -3.4% — — Pricing/mix 3.2% 3.4% 6.7% 7.1% — 3.8% Subtotal - internal business 3.0% 2.8% 13.3% 3.7% — 3.8% Dispositions (a) -1.1% — — — — -.8% Foreign currency impact — 15.2% -11.0% 14.7% — 3.1% Total change 1.9% 18.0% 2.3% 18.4% — 6.1% Other United Latin operating Consoli- (dollars in millions) States Europe America (b) Corporate dated 2003 operating profit  $1,055.0 $ 279.8 $168.5 $140.0 ($99.2) $1,544.1 2002 operating profit  $1,073.0 $ 252.5 $170.1 $104.0 ($91.5) $1,508.1 % change — 2003 vs. 2002: Internal business -.8% -2.1% 11.4% 18.5% -8.5% 1.1% Dispositions (a) -.9% — — — — -.6% Foreign currency impact — 12.9% -12.3% 16.2% — 1.9% Total change -1.7% 10.8% -.9% 34.7% -8.5% 2.4%