® KELLOGG COMPANY 2007 ANNUAL REPORT Sustainable ® Dependable Performance TM KELLOGG COMPANY • ONE KELLOGG SQUARE • BATTLE CREEK, MICHIGAN 49016 • TEL (269) 961-2000 • www.kelloggcompany.com 2007 ANNUAL REPORT TM Kellogg Company 2007 Annual Report Net Sales (million $) Total Shareowner Return Sustainable 11,776 20% 19% Dependable 18% 10,907 15% 16% 10,177 Performance 9,614 7% 5% 8,811 3% Vision To be the food company of choice. -1% Kellogg Mission To drive sustainable growth through the power of our people and brands S&P Packaged Foods Index -8% 03 04 05 06 07 03 04 05 06 07 by better serving the needs of our consumers, customers and communities. Net sales increased again For the seventh consecutive year, in 2007, the seventh Kellogg Company’s total return to With 2007 sales of nearly $12 billion, Kellogg Company is the world’s leading producer of cereal consecutive year of growth. shareowners exceeded that of the and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal S&P Packaged Food Index. bars, fruit-flavored snacks, frozen waffles, and veggie foods. The Company’s brands include Kellogg’s®, Keebler ®, Pop-Tarts®, Eggo®, Cheez-It ®, Nutri-Grain®, Rice Krispies ®, Morningstar Farms ®, Famous Amos ®, Special K ®, Stretch Island ®, All-Bran ®, Frosted Mini-Wheats®, Club ® and Kashi ®. Kellogg products Cash Flow (a) (million $) Dividends ($ per share) Net Earnings Per Share ($) (diluted) Operating Profit (million $) are manufactured in 18 countries and marketed in more than 180 countries around the world. 1,868 1,031 1.20 2.76 1,750 1,766 Table of Contents 1.14 1,681 950 957 2.51 924 1.06 Letter to Shareowners 2 2.36 1.01 1.01 1,544 Global Operations 8 2.14 769 1.92 Sustainable Dependable Global Brands 14 Our Nutrition Heritage 15 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 Our People 16 Dividends per share have Earnings per share of $2.76 Operating profit increased Including over $60 million of Environmental Sustainability 18 increased 19% over the past were 10% higher than 2006. despite significant cost voluntary pension contributions, 3 years. inflation and continued cash flow for 2007 remained Corporate Social Responsibility 20 reinvestment into our business. strong at $1.03 billion. Corporate Officers 22 Board of Directors 23 Financial Highlights Manufacturing Locations and Brands 24 (dollars in millions, except per share data) 2007 Change 2006 Change 2005 Change Annual Report on Form 10-K Net sales $11,776 8% $10,907 7% $10,177 6% Gross profit as a % of net sales 44.0% -0.2 pts 44.2% -0.7 pts 44.9% - Operating profit 1,868 6% 1,766 1% 1,750 4% Net earnings 1,103 10% 1,004 2% 980 10% Net earnings per share Basic 2.79 10% 2.53 6% 2.38 10% Diluted 2.76 10% 2.51 6% (b) 2.36 10% Cash flow (net cash provided by operating 1,031 8% 957 24% 769 -19% activities, reduced by capital expenditure) (a) Dividends per share $1.20 5% $1.14 8% $1.06 5% (a) Cash flow is defined as net cash provided by operating activities, reduced by capital expenditures. The Company uses this non-GAAP financial measure to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities and share repurchases. Refer to Management’s Discussion and Analysis within Form 10-K for reconciliation to the comparable GAAP measure. (b) Comparable 2006 earnings per share growth of 11% excludes $65 million ($42 million after tax or $.11 per share) of costs attributable to the Company’s adoption of a new accounting standard that required the expensing of stock options. TM At Kellogg we have an unwavering focus on the long-term health of our business. Letter to Shareowners Thanks to the hard work and passion of Kellogg Kellogg employees achieved these solid results Operating efficiencies. We continued the disciplined Brand building. In 2007 we continued to focus on Company employees around the world, 2007 was despite being faced with the most difficult operating funding of projects that will provide cost efficiencies building our brands through advertising and consumer another year of continued sales growth, strong environment our industry has experienced in many and enhanced productivity into the future. It has promotion. In fact, we spent more than $1 billion on financial results and increased shareowner return. years. World commodity prices for many of our raw become a part of the Kellogg culture for employees advertising this year. We also focused the expertise The growth was broad-based across categories and materials spiked to all-time highs. Fuel and energy throughout all areas of the organization to of our marketing and promotions groups geographies. Here are some highlights: inflation was dramatic, but the cost pressure did not continually assess our supply chain and throughout the world on increasing the ales • et S Exp shake the solid foundation upon which we have network for potential improvements l N an desirability of our brands and building a d rn G • Net sales increased 8% to $11.8 billion. built our business – a business model that is simple, in simplicity, effectiveness, cost e ro consumer brand loyalty. Advertising t s In s resilient and designed to deliver sustainable growth. control and quality. Solutions and and consumer promotions build • Internal net sales, which excludes the effects of w P o r r o Kellogg people rose to meet this year’s challenges system enhancement projects f sustainable brands sought by currency exchange rates, increased more than 5%. G i t by delivering compelling innovation, exciting new are initiated at all levels of • consumers and selected as • • Internal operating profit increased by 3%. x i advertising and cost efficiencies around the world. the company, and there is a I household mainstays. We SUSTAINABLE n M c 2 / 3 • Diluted net earnings per share (EPS) grew 10% This dedication to superior execution is characteristic pervasive sense of accountability r focused on increasing our e e c a i r to $2.76. of Kellogg employees everywhere, and we sincerely for keeping our cost structure s presence with more targeted e P GROWTH B thank each person in our organization for their lean while continuing to produce e communications at a lower cost, s • Cash flow was over $1 billion, or 9% of net sales. r a a n e commitment to success and their passion for results. We believe this is the right r allowing us to invest more in our d c • Total shareowner return was 7%. B n I u our business. way to run our business day-in, best ideas. i l • d i n n • The dividend was increased by 7% starting in the o g day-out, which is why we account i t a • v o D n r n i I v third quarter. A proven business model. At Kellogg we have an for these up-front investment costs e By continuing these significant • This was our sixth consecutive year of growth in unwavering focus on the long-term health of our within our P&L as part of the cost of investments, we are building a sales, operating profit and earnings per share. business. While we are realistic about the challenges doing business. This practice avoids the company with a solid future of dependable • We reinvested in the business through increased ahead, our performance in 2007 demonstrates the need for large, one-time charges that impair performance and consistent growth. Our brand building, innovation capability, expansion strength of our business model and its capacity to earnings quality or obscure actual performance commitment to reinvesting in the business is a core and cost-saving projects, all of which enhance produce growth, even under difficult conditions. for a particular quarter or year. pillar of our sustainable growth business model. our future sustainable performance Despite increased inflation, we continue to visibility. reinvest into our business. David Mackay (Left) President Chief Executive Officer Jim Jenness (Right) Chairman of the Board We take a global approach to innovation, expanding and adjusting our portfolio to meet consumer needs around the world. TM Letter to Shareowners Innovation. Kellogg drives development and visibility Realistic targets. Every day, we manage our business expenditures. In 2007 this disciplined financial A clear and focused strategy. The focal points for of a robust pipeline of new products. In 2007 we in a way that supports its dependable, sustainable strategy again enabled continued and rigorous building our business have remained constant over continued our commitment to this key growth driver performance. Our long-term targets of low single-digit review of costs while, importantly, funding the the past six years: by increasing our innovation. We take a global net sales growth, mid single-digit operating profit investments that will grow and sustain our business. approach to innovation, expanding and adjusting our growth, and high single-digit EPS growth encourage • Grow our cereal business portfolio to meet consumer needs around the world. Kellogg people to prioritize their activities and make Flexibility. Our strong cash flow allows us to actively • Expand our snacks business More than 270 new products or adaptations of other good decisions that support the long-term health make decisions based on what is best for sustaining successful products were introduced in 2007 alone of our business – not simply hit short-term, our business and for building shareowner return. • Pursue selected growth opportunities and we generated nearly $2 billion, about unsustainable goals.