THE TIGER INSIDE KELLOGG COMPANY ANNUAL REPORT 2005 86589 Cover_epiN2.indd 3 2/17/06 10:24:20 AM Net Sales (millions $) Operating Profit (millions $) Cash Flow (a) (millions $) Net Earnings Per Share (diluted) Total Share Owner Return 924 950 $2.36 1,750 10,177 1,681 856 $2.14 20% 9,614 19% 1,544 769 $1.92 17% 8,812 1,508 746 15% 8,304 $1.75 7,548 1,168 18% Kellogg $1.16 & 2% 5% S P Packaged 3% -1% Foods Index -8% 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 Net sales increased again in Operating profi t increased Cash fl ow was $769 million Earnings per share of $2.36 For the fi fth consecutive year, 2005, the fi fth consecutive despite signifi cant investment including $400 million in were 10% higher than in Kellogg Company’s total return to year of growth. in future growth. contributions to benefi t plans. 2004. share owners has exceeded that of the S&P Packaged Foods Index. Financial Highlights (dollars in millions, except per share data) 2005 Change 2004 Change 2003 Change Net sales $10,177.2 6% $9,613.9 9% $8,811.5 6% Gross profi t as a % of net sales 44.9% — 44.9% .5 pts 44.4% -.6 pts Operating profi t 1750.3 4% 1,681.1 9% 1,544.1 2% Net earnings 980.4 10% 890.6 13% 787.1 9% Net earnings per share Basic 2.38 10% 2.16 12% 1.93 9% Diluted 2.36 10% 2.14 11% 1.92 10% Cash fl ow (a) 769.1 -19% 950.4 3% 923.8 24% Dividends per share $1.06 5% $1.01 — $1.01 — (a) Cash fl ow is defi ned as net cash provided by operating activities, reduced by capital expenditure. The Company uses this non-GAAP fi nancial measure to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchase. Refer to Management’s Discussion and Analysis within Form 10-K for reconciliation to the comparable GAAP measure. 86589 Cover_epiN2.indd 4 2/23/06 9:43:29 AM In 2005, Kellogg Company delivered another year of strong performance. We met or exceeded our goals while investing in our brands, our people, and our future. We have a proven, focused strategy and pragmatic operating principles in Volume to Value and Manage for Cash that keep us focused on the right metrics. All of this, in combination with our realistic growth targets, drives sustainable and dependable performance. We really do have The Tiger Inside. 2005 Annual Report Table of Contents With 2005 sales in excess of $10 billion, Kellogg Company is 2 Letter to Share Owners 22 Operating Principles the world’s leading producer of cereal and a leading producer of 8 Global Infrastructure 24 Sustainable Performance convenience foods, including cookies, crackers, toaster pastries, 10 North American 26 Social Responsibility and K Values cereal bars, frozen waffl es, meat alternatives, pie crusts, and ice Retail Cereal 28 Board of Directors and Offi cers cream cones. The Company’s brands include Kellogg’s®, Keebler®, 12 North American 30 Manufacturing Locations and Brands Pop-Tarts®, Eggo®, Cheez-It®, Nutri-Grain®, Rice Krispies®, Murray®, Retail Snacks Austin®, Morningstar Farms®, Famous Amos®, and KashiTM. 14 North American Frozen & Form 10-K Kellogg products are manufactured in 17 countries and Specialty Channels Corporate & Share Owner Information marketed in more than 180 countries around the world. 16 Europe 18 Latin America 20 Asia Pacifi c 86589_epi.indd 5 2/20/06 10:12:57 AM To Our Share Owners As we enter our 100th year, I believe and earnings per share growth for the Revenue Growth. In 2005, we the foundation of Kellogg Company fourth consecutive year; we gained posted reported revenue growth of is strong. Our heritage, and focus share in the U.S. ready-to-eat cereal six percent. Our long-term internal on health and wellness, are highly category for the sixth consecutive revenue growth target is for low relevant to consumers today. There year; and we held or gained category single-digit growth. Internal revenue is no doubt in my mind that Mr. share in nine of our ten focus busi- growth, which excludes the effect of Kellogg would be very proud of this nesses outside the U.S. This broad- foreign currency translation, acquisi- wonderful, thriving company and the based growth gives us confi dence for tions, divestitures, and differences thousands of dedicated Kellogg the future and proves the viability in the number of shipping days, was employees who, over the years, of our strategy, operating principles, also six percent. Both of these results believed in and nurtured his vision and business model. In 2005, we were signifi cantly greater than our and were guided and inspired by his made signifi cant investment in brand targets and are testament to the values. It is a deep privilege for me building, innovation, and cost-saving strength of our brand-building cam- to work for Kellogg Company. With initiatives, which provide us ongoing paigns, the excellent new products “Our strategy is aimed The Tiger Inside and driving us, I have visibility. introduced during the year, and fl aw- every confi dence that our 26,000 less execution by our employees. at providing sustainable employees and our board of directors RELIABLE GROWTH rates of performance for will continue our success and will de- We manage our Company for the the foreseeable future.” liver sustainable, dependable growth. long-term and having realistic perfor- mance targets is a core component Our performance in 2005 was the of our business model. In fact, these strongest since we implemented our targets provide us the fl exibility neces- focused strategy. In fact, we met or sary to make signifi cant investments exceeded all of our long-term targets: in the business and are crucial we exceeded our targets for revenue to our continued success. 2 86589_epi.indd Sec1:2 2/17/06 1:57:11 PM Operating Profi t Growth. We con- and only through continuous cash we repurchased $664 million of our tinuously focus on profi table revenue fl ow growth can a company generate shares in 2005 and we have a $650 growth; our long-term target is for mid increasing value. That is why one of million repurchase authorization single-digit internal operating profi t our core operating principles, Manage for 2006. growth. We achieved this goal and for Cash, focuses the entire organiza- posted fi ve percent growth in 2005 tion on maximizing cash fl ow. In Share Owner Return. We have had despite increased investment in future 2005, we generated $769 million of excellent success over the last fi ve growth and signifi cantly higher input cash fl ow including contributions to years and this has been refl ected in costs which affected the entire industry. benefi t plans of approximately $400 our share price. The total return to Earnings Growth. Our long-term million, which was approximately investors since the end of 2000 has target is for earnings per share to $200 million more than in 2004. been approximately 90%, or a 14% increase at a high single-digit rate. This amount of cash fl ow provides compound annual growth rate, signifi - We exceeded this goal again in 2005 us with signifi cant fi nancial fl exibil- cantly greater than the industry’s four and posted ten percent growth; this ity. Since 2001, we have paid down percent compound annual growth was the fourth consecutive year approximately $2 billion of the debt rate. The Company’s total return in of double-digit earnings per share taken on to fund the Keebler 2005 of negative one percent was growth. This performance primarily acquisition. In recent years we have dramatically greater than the aver- resulted from strong revenue growth, shifted our focus from debt repay- age return of the entire industry, a focus on cost-containment, lower ment alone, to a balance between measured by the S&P Packaged Food interest expense, a lower tax rate, and debt reduction and other uses of cash index, which declined by eight per- fewer shares outstanding. fl ow. As a result, in 2005, we also cent. So, our total return, again, far increased the dividend for the fi rst exceeded the industry average. Cash Flow. Cash fl ow is the ulti- time in four years and increased the mate measure of a company’s success share repurchase program. In fact, 3 86589_epi.indd Sec1:3 2/14/06 6:53:59 PM THE TIGER INSIDE globally and responds well to news innovation. For example, our Kashi Organizational focus is one of in the form of either innovation or brand posted strong double-digit Kellogg Company’s competitive brand building. We defi ne brand growth in revenues in 2005. We also advantages. We operate in only a building as advertising and consumer introduced new products such as few categories and we know them promotion, or any activity that adds Cran-Vanilla Crunch and Toasted well. We recognize that share owners to the desirability of the brand. It Honey Crunch, which joined the suc- do not need or want us to diversify does not include price-related pro- cessful Raisin Bran Crunch brand in for them; they want us to maximize motions, discounts, or coupons, as the U.S. and All-Bran became our fast- the value of our Company through these activities, while they may drive est growing global brand as a result superior execution and the genera- volume gains in the short-term, do of strong innovation including tion of consistent, dependable rates not add to the value of the brand or All-Bran Flakes with Yoghurt in the of growth.