direct costs for employee incentive and retention programs, em- ployee separation and relocation benefits, and consulting con- tracts, and 3) impairment and accelerated depreciation of software assets being abandoned due to the conversion of our U.S. busi- ness to the SAP system. We estimate that these activities reduced net sales by $17.8 million, increased cost of goods sold by $5.6 million, and increased selling, general, and administrative expense by $51.0 million, for a total 2001 operating profit reduction of $74.4 million. Margin performance is presented in the following table. (a) Selling, general, and administrative expense as a percentage of net sales. The 2003 gross margin was unfavorably impacted by significant asset write-offs and exit costs related to cost-saving initiatives; higher commodity, energy, and employee benefit costs; and an in- crease in package-related promotional costs. These unfavorable factors were mitigated by the favorable impact of operating lever- age, pricing and mix improvements, and productivity savings, re- sulting in only a 60 basis point decline in gross margin versus the prior year. The SGA% was approximately even with the prior year, as significant increases in brand-building and innovation expendi- tures were offset by overhead savings. The 2002 gross margin improvement was attributable primarily to higher average pricing, improved mix, operating leverage, and cost savings related to the Keebler acquisition. Our 2002 gross margin was also favorably impacted by recognition of a $16.9 million cur- tailment gain related to a change in certain retiree health care plans, largely offset by asset impairment losses, an increase in package-related promotional costs, and costs and asset write-offs associated with various ongoing supply chain efficiency initiatives. The 2002 SGA% was 150 basis points lower than the prior year, due principally to our adoption of SFAS No. 142 on January 1, 2002, which eliminated most of our intangibles amortization ex- pense in post-2001 years. On March 26, 2001, we acquired Keebler Foods Company in a cash transaction valued at $4.56 billion, which was financed through a combination of short-term and long-term debt. As a re- sult of this significant debt issuance, interest expense increased dramatically in 2001 versus historical periods and again in 2002, due to the extra quarterly period of interest on Keebler acquisition- related debt. However, interest expense began to decline in 2003 as a result of continuous pay-down of debt balances throughout (a) Impact of Keebler integration activities during 2001. Refer to discussion of results of operations in paragraphs following these tables for further information. (b) Impact of results for the first twelve weeks of 2002 from Keebler Foods Company, acquired in March 2001; and impact of results for the comparable 2001 period subsequent to the April 2002 divestiture of the Bake-Line private label busi- ness. Refer to Note 2 within Notes to Consolidated Financial Statements for further information. (c) Operating profit for 2001 included 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 informa- tion. (d) Pro forma impact of amortization eliminated by SFAS No. 142. Refer to Note 1 within Notes to Consolidated Financial Statements for further information. (e) Includes Canada, Australia, and Asia. During 2002, we achieved strong internal sales growth of 4% on a consolidated basis, resulting primarily from pricing and mix im- provements in all operating segments. U.S. net sales in the retail cereal business increased approximately 6% and total interna- tional sales increased over 3% in local currencies. Excluding the impact of acquisitions, divestitures, and Keebler integration activi- ties, internal net sales in the U.S. retail snacks business were ap- proximately even with the prior year, as a double-digit increase in sales of our wholesome snack products offset a decline in cookie and cracker sales. We believe this decline was primarily as a result of weak consumption in the cookie and cracker categories throughout the year and our decision to cancel an end-of-year sales force incentive in order to improve efficiencies in our direct store door (DSD) delivery system. During 2002, consolidated and U.S. internal operating profit in- creased approximately 6% and 11%, respectively. Total interna- tional local currency operating profit was approximately even with the prior year, held down by a double-digit increase in marketing investment to drive core market sales growth. Cost of goods sold for 2002 includes an impairment loss of $5 million related to our manufacturing facility in China, representing a decline in real estate market value subsequent to an original im- pairment loss recognized for this property in 1997. The Company completed a sale of this facility in late 2003, and the carrying value of the property approximated the net sales proceeds. During 2001, sales and operating profit were reduced by the fi- nancial impact of Keebler integration activities (“integration im- pact”). This integration impact consisted primarily of 1) the sales and gross profit effect of lowering trade inventories to transfer our snack foods to Keebler’s DSD system during the second quarter, 2) 24 Earning Our Stripes Other United Latin operating Consoli- (dollars in millions) States Europe America (e) Corporate dated 2002 segment operating profit $1,073.0 $ 252.5 $ 170.1 $104.0 ($91.5) $1,508.1 2001 operating profit $745.5 $245.8 $170.7 $101.6 ($95.7) $1,167.9 Restructuring charges (c) 29.5 (.2) (.1) 1.4 2.7 33.3 Amortization (d) 100.5  — .5 .1 2.5 103.6 2001 segment operating profit $ 875.5 $ 245.6 $ 171.1 $103.1 ($90.5) $1,304.8 % change - 2002 vs. 2001: Internal business 10.6% -3.1% 4.9% -1.4% -10.5% 6.4% Integration impact (a) 8.7% — — — 9.4% 6.3% Acquisitions & dispositions (b) 3.3% — — — — 2.3% Foreign currency impact — 5.9% -5.5% 2.2% -.1% .6% Total change 22.6% 2.8% -.6% .8% -1.2% 15.6% Change vs. prior year (pts.) 2003 2002 2001 2003 2002 Gross margin 44.4% 45.0% 44.2% -.6 .8 SGA% (a) -26.9% -26.8% -28.3% -.1 1.5 Restructuring charges — — -.4% — .4 Operating margin 17.5% 18.2% 15.5% -.7 2.7 Margin performance Interest expense