UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

KELLOGG COMPANY

State of Incorporation—Delaware		IRS Employer Identification No.38-0710690

One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599

Registrant’s telephone number: 269-961-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer þ                    Accelerated filer o                    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Common Stock outstanding as of October 26, 2007 — 393,908,428 shares

 

 

KELLOGG COMPANY

INDEX

		Page
PART I — Financial Information
Item 1:
Consolidated Balance Sheet — September 29, 2007 and December 30, 2006			2
Consolidated Statement of Earnings — quarters and year-to-date periods ended September 29, 2007 and September 30, 2006			3
Consolidated Statement of Cash Flows — year-to-date periods ended September 29, 2007 and September 30, 2006			4
Notes to Consolidated Financial Statements			5-17
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations			18-27
Item 3:
Quantitative and Qualitative Disclosures about Market Risk			28
Item 4:
Controls and Procedures			28
PART II — Other Information
Item 1A:
Risk Factors			29
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 6:
Exhibits			30
Signatures			31
Exhibit Index			32
Rule 13a-14(e)/15d-14(a) Certification from A.D. David Mackay
Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant
Section 1350 Certification from A.D. David Mackay
Section 1350 Certification from John A. Bryant

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET
(millions, except per share data)

		September 29,				December 30,
		2007				2006
		(unaudited)				*
Current assets
Cash and cash equivalents		$	576			$	411
Accounts receivable, net			1,157				945
Inventories:
Raw materials and supplies			227				201
Finished goods and materials in process			608				623
Deferred income taxes			163				116
Other prepaid assets			141				131
Total current assets			2,872				2,427
Property, net of accumulated depreciation of $4,383 and $4,102			2,894				2,816
Goodwill			3,448				3,448
Other intangibles, net of accumulated amortization of $41 and $49			1,412				1,420
Pension			391				353
Other assets			255				250
Total assets		$	11,272			$	10,714
Current liabilities
Current maturities of long-term debt		$	466			$	723
Notes payable			1,836				1,268
Accounts payable			1,014				910
Accrued advertising and promotion			447				338
Accrued income taxes			73				152
Accrued salaries and wages			269				311
Other current liabilities			386				318
Total current liabilities			4,491				4,020
Long-term debt			2,588				3,053
Deferred income taxes			581				619
Other liabilities			1,105				953
Shareholders’ equity
Common stock, $.25 par value			105				105
Capital in excess of par value			344				292
Retained earnings			4,190				3,630
Treasury stock, at cost			(1,148	)			(912	)
Accumulated other comprehensive income (loss)			(984	)			(1,046	)
Total shareholders’ equity			2,507				2,069
Total liabilities and shareholders’ equity		$	11,272			$	10,714

Refer to Notes to Consolidated Financial Statements.

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

		Quarter ended								Year-to-date period ended
		September 29,				September 30,				September 29,				September 30,
(Results are unaudited)		2007				2006				2007				2006
Net sales		$	3,004			$	2,823			$	8,982			$	8,323
Cost of goods sold			1,662				1,549				4,999				4,617
Selling and administrative expense			850				787				2,474				2,285
Operating profit			492				487				1,509				1,421
Interest expense			79				75				233				227
Other income (expense), net			3				2				5				11
Earnings before income taxes			416				414				1,281				1,205
Income taxes			111				133				354				383
Net earnings		$	305			$	281			$	927			$	822
Net earnings per share:
Basic		$	.77			$	.71			$	2.34			$	2.07
Diluted		$	.76			$	.70			$	2.31			$	2.06
Dividends per share		$	.3100			$	.2910			$	.8920			$	.8460
Average shares outstanding:
Basic			395				397				397				397
Diluted			399				400				401				399
Actual shares outstanding at period end											394				398

Refer to Notes to Consolidated Financial Statements.

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

		Year-to-date period ended
		September 29,				September 30,
(unaudited)		2007				2006
Operating activities
Net earnings		$	927			$	822
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization			275				258
Deferred income taxes			(114	)			2
Other (a)			138				140
Postretirement benefit plan contributions			(42	)			(38	)
Changes in operating assets and liabilities			69				(72	)
Net cash provided by operating activities			1,253				1,112
Investing activities
Additions to properties			(292	)			(262	)
Investments in joint ventures and other			(4	)			5
Net cash used in investing activities			(296	)			(257	)
Financing activities
Net issuances of notes payable			566				94
Reductions of long-term debt			(730	)			(7	)
Issuances of common stock			141				197
Common stock repurchases			(417	)			(580	)
Cash dividends			(354	)			(334	)
Other			8				16
Net cash used in financing activities			(786	)			(614	)
Effect of exchange rate changes on cash			(6	)			3
Increase in cash and cash equivalents			165				244
Cash and cash equivalents at beginning of period			411				219
Cash and cash equivalents at end of period		$	576			$	463

Refer to Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements
for the quarter and year-to-date periods ended September 29, 2007 (unaudited)

Note 1 Accounting policies

Basis of presentation

The unaudited interim financial information included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, financial position, and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 27 to 56 of the Company’s 2006 Annual Report on Form 10-K.

The condensed balance sheet data at December 30, 2006 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly and year-to-date periods ended September 29, 2007 are not necessarily indicative of the results to be expected for other interim periods or the full year.

The Company’s fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53^rd week is added approximately every sixth year. Under this convention, the Company’s 2006 fiscal year ended on December 30 and its 2007 fiscal year will end on December 29, 2007. Each quarterly period in 2006 and 2007 includes thirteen weeks.

The accounting policies used in preparing these financial statements are the same as those applied in the prior year, except that the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes,” as of the beginning of its 2007 fiscal year, which is discussed in Note 10. Additionally, the Company adopted FASB Statement of Financial Accounting Standard (SFAS) No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” as of the end of its 2006 fiscal year, which affected only the year-end balance sheet presentation of postretirement and postemployment benefit obligations. Accordingly, the Company’s 2007 fiscal year (and interim periods within that year) is the first reporting period for which total comprehensive income will be affected by the adoption of this standard. Refer to page 33 of the Company’s 2006 Annual Report on Form 10-K for further information on SFAS No. 158. Lastly, the Company is continuing to evaluate the impact of adopting SFAS No. 157 “Fair Value Measurements” in the first quarter of its 2008 fiscal year. Based on the work completed so far, management does not currently believe that the adoption will have a material impact on how the Company’s assets and liabilities are measured. Refer to page 34 of the Company’s 2006 Annual Report on Form 10-K for further information on SFAS No. 157.

Note 2 Acquisitions, other investments, and intangibles

Joint venture arrangement

During the second quarter of 2007, the Company contributed an additional $4 million in cash to its Turkish joint venture, in which it owns a 50% equity interest, bringing the total cumulative investment to approximately $7 million. Refer to page 35 of the Company’s 2006 Annual Report on Form 10-K for further information on this arrangement.

Goodwill and other intangible assets

For the quarter ended June 30, 2007, the Company recorded impairment losses of $7 million in corporate selling, general, and administrative expense to write off the remaining carrying value of several individually-insignificant trademarks, which were abandoned as of June 30, 2007. As presented in the following table, associated gross carrying amounts and accumulated amortization of $16 million were retired from the Company’s balance sheet.

Intangible assets subject to amortization

(millions)		Gross carrying amount								Accumulated amortization
		September 29,				December 30,				September 29,				December 30,
		2007				2006				2007				2006
Trademarks		$	14			$	30			$	13			$	22
Other			29				29				28				27
Total		$	43			$	59			$	41			$	49

		September 29,				September 30,
Amortization expense		2007				2006
Year-to-date		$	8			$	1

For intangible assets in the preceding table, amortization (excluding the aforementioned impairment losses) was less than $1 million for each of the current and prior-year quarterly periods. The currently-estimated aggregate amortization expense for full-year 2007 and each of the three succeeding fiscal years is approximately $1 million per year and less than $1 million per year for the fourth and fifth succeeding years.

Intangible assets not subject to amortization

(millions)		Total carrying amount
		September 29,				December 30,
		2007				2006
Trademarks		$	1,410			$	1,410

There were no changes in the carrying amount of goodwill for the year-to-date period ended September 29, 2007.

Carrying amount of goodwill

(millions)		United States				Europe				Latin America				Asia Pacific (a)				Consolidated
December 30, 2006 and September 29, 2007		$	3,446				—				—			$	2			$	3,448

(a)		Includes Australia, Asia and South Africa.

Subsequent events

On November 1, 2007, a subsidiary of the Company acquired Bear Naked, Inc., a leading seller of natural granola products. On November 5, 2007, the Company acquired certain assets and liabilities of the Wholesome & Hearty Foods Company, a U.S. manufacturer of veggie foods marketed under the Gardenburger® brand. The Company paid a total of approximately $122 million in cash for these businesses.

Note 3 Exit or disposal plans

The Company views its continued spending on cost-reduction initiatives as part of its ongoing operating principles to reinvest earnings so as to provide greater visibility in meeting long-term growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion (“expected pay-back target”). Each cost-reduction initiative is normally one to three years in duration. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation, which is then used to fund new initiatives. Certain of these initiatives represent exit or disposal plans for which material charges will be incurred.

In 2006, the Company commenced a multi-year European manufacturing optimization plan to improve utilization of its facility in Manchester, England and to better align production in Europe. Based on forecasted foreign exchange rates, the Company currently expects to incur approximately $60 million in total project costs (including those already incurred in 2006), largely comprised of voluntary early retirement and severance benefits to eliminate approximately 220 hourly and salaried employee positions from the Manchester facility by the end of 2008.

For 2006, the Company incurred approximately $28 million of total project costs and currently expects to incur approximately $18 million in 2007, with the remainder to be incurred in 2008. (Refer to page 36 of the Company’s 2006 Annual Report on Form 10-K for further information on this initiative.)

All of the costs for the European manufacturing optimization plan have been recorded in cost of goods sold within the Company’s European operating segment. The following tables present total project costs to date and a reconciliation of employee severance reserves for this initiative. All other cash costs were paid in the period incurred.

		Employee				Other cash				Asset write-				Retirement
Project costs to date (in millions)		severance				costs (a)				offs				benefits (b)				Total
Year ended December 30, 2006		$	12			$	2				$5				$9			$	28
Quarter ended March 31, 2007			3				1				1				—				5
Quarter ended June 30, 2007			4				1				2				—				7
Quarter ended September 29, 2007			—				2				—				—				2
Total project to date		$	19			$	6				$8				$9			$	42

(a)		Primarily includes expenditures for equipment removal and relocation, and temporary contracted services to facilitate employee transactions.
(b)		Pension plan curtailment losses and special termination benefits recognized under SFAS No. 88 “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.”

Employee severance reserves to		Beginning of												End of
date (in millions)		period				Accruals				Payments				period
Year ended December 30, 2006		$	—			$	12			$	—			$	12
Quarter ended March 31, 2007			12				3				(9	)			6
Quarter ended June 30, 2007			6				4				(5	)			5
Quarter ended September 29, 2007			5				—				(5	)			—
Total project to date						$	19			$	(19	)

In July 2007, management commenced a plan to reorganize the Company’s direct store-door delivery (DSD) operations in the southeastern United States. This DSD reorganization plan is intended to integrate the Company’s southeastern sales and distribution regions with the rest of its U.S. direct store-door operations, resulting in greater efficiency across the nationwide network. In preparation for this initiative, in June 2007, the Company began to extend offers to exit approximately 517 distribution route franchise agreements with independent contractors, which were substantially accepted as of July 2007. The plan is expected to result in the involuntary termination or relocation of approximately 300 employee positions. Management expects to substantially complete this initiative by the end of 2007 and to incur approximately $80 million of total project costs during that period, principally consisting of cash expenditures for route franchise settlements and to a lesser extent, for employee separation, relocation, and reorganization.

All of the costs for the U.S. DSD reorganization plan have been recorded in selling, general, and administrative expense within the Company’s North America operating segment. The following tables present total project costs to date and a reconciliation of reserves for route franchise settlements and employee severance.

		Route
		franchise								Retirement				Asset write-
Project costs to date (in millions)		settlements				Severance				benefits (a)				offs				Total
Quarter ended June 30, 2007		$	38			$	—			$	—			$	—			$	38
Quarter ended September 29, 2007			23				2				2				1				28
Total project to date		$	61			$	2			$	2			$	1			$	66

(a)		Estimated multiemployer pension plan withdrawal liability.

Route franchise settlements		Beginning of												End of
reserves to date (in millions)		period				Accruals				Payments				period
Quarter ended June 30, 2007		$	—			$	38			$	—			$	38
Quarter ended September 29, 2007			38				23				(51	)			10
Total project to date						$	61			$	(51	)

Employee severance reserves to		Beginning												End of
date (in millions)		of period				Accruals				Payments				period
Quarter ended June 30, 2007		$	—			$	—			$	—			$	—
Quarter ended September 29, 2007			—				2				(1	)			1
Total project to date						$	2			$	(1	)

In summary, operating profit for the quarter ended September 29, 2007 included total exit plan-related charges of $30 million, comprised of $2 million recorded in cost of goods sold and $28 million recorded in selling, general, and administrative expense. The operating segment impact of these costs was (in millions): North America-$28; Europe-$2. On a year-to-date basis, operating profit included total exit plan-related charges of $80 million, comprised of $14 million recorded in cost of goods sold and $66 million recorded in selling, general, and administrative expense. The operating segment impact of these costs was (in millions): North America-$66; Europe-$14.

Cost of goods sold for the quarter and year-to-date periods ended September 30, 2006, included total exit plan-related charges of approximately $9 million and $36 million, respectively. The total year-to-date amount for 2006 was comprised of $15 million of asset write-offs, $4 million attributable to a multiemployer pension plan withdrawal liability, and $17 million of cash expenditures, which consisted principally of severance, removals, and production relocation costs. For the quarter, the operating segment impact of these costs was (in millions): North America-$5; Europe-$4. For the year-to-date period, the operating segment impact was (in millions): North America-$32; Europe-$4. The North America costs related to a U.S. bakery consolidation initiative, which was completed in 2006. The details of this initiative are provided on page 37 of the Company’s 2006 Annual Report on Form 10-K. The European costs were incurred as part of a multi-year European manufacturing optimization plan described above and on page 36 of the Company’s 2006 Annual Report on Form 10-K.

Subsequent events

On October 26, 2007, management committed to reorganize certain production processes between the Company’s plants in Valls, Spain and Bremen, Germany. Commencement of this plan follows consultation with union representatives at the Bremen facility regarding the elimination of approximately 120 employee positions. This reorganization plan is specifically intended to improve manufacturing and distribution efficiency across the Company’s continental European operations, and is expected to be completed by mid 2008.

Based on current foreign exchange rates, management expects to incur approximately $23 million of total project costs, comprised approximately 50% of asset-write-offs and 50% of employee separation benefits and other cash costs. Based on the current project timetable, virtually all of these costs are expected to be recognized in 2008.

Note 4 Other income (expense), net

Other income (expense), net includes non-operating items such as interest income, charitable donations, and foreign exchange gains and losses. Net foreign exchange transaction gains (losses) recognized were ($3) million and ($10) million for the respective quarter and year-to-date periods ended September 29, 2007, as compared to ($4) million and less than ($1) million for the respective quarter and year-to-date periods ended September 30, 2006.

Note 5 Equity

Earnings per share

Basic net earnings per share is determined by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is similarly determined, except that the

denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares are comprised principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic net earnings per share is reconciled to diluted net earnings per share in the following table. The total number of anti-dilutive potential common shares excluded from the reconciliation was .2 million and .7 million for the respective quarter and year-to-date periods ended September 29, 2007, as compared to .2 million and .5 million for the respective quarter and year-to-date periods ended September 30, 2006.

Quarter						Average				Net
(millions, except		Net				shares				earnings
per share data)		earnings				outstanding				per share
2007
Basic		$	305				395			$	.77
Dilutive potential common shares			—				4				(.01	)
Diluted		$	305				399			$	.76
2006
Basic		$	281				397			$	.71
Dilutive potential common shares			—				3				(.01	)
Diluted		$	281				400			$	.70

Year-to-date						Average				Net
(millions, except		Net				shares				earnings
per share data)		earnings				outstanding				per share
2007
Basic		$	927				397			$	2.34
Dilutive potential common shares			—				4				(.03	)
Diluted		$	927				401			$	2.31
2006
Basic		$	822				397			$	2.07
Dilutive potential common shares			—				2				(.01	)
Diluted		$	822				399			$	2.06

During the year-to-date period ended September 29, 2007, the Company issued 2 million shares to employees and directors under various benefit plans and stock purchase programs, as further discussed in Note 8. To offset these issuances and for general corporate purposes, the Company’s Board of Directors has authorized management to repurchase up to $650 million of the Company’s common stock during 2007. In connection with this authorization, during the year-to-date period ended September 29, 2007, the Company spent $417 million to repurchase approximately 8 million shares. On October 26, 2007, the Board approved a similar stock repurchase authorization for 2008 of up to $650 million.

Comprehensive Income

Comprehensive income includes net earnings and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income for all periods presented consists of foreign currency translation adjustments pursuant to SFAS No. 52 “Foreign Currency Translation” and fair value adjustments associated with cash flow hedges pursuant to SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” Additionally, other comprehensive income for 2007 includes adjustments for net experience losses and prior service cost pursuant to SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The Company adopted SFAS No. 158 as of the end of its 2006 fiscal year; however, comprehensive income for certain interim periods of 2006 continued to include minimum pension liability adjustments pursuant to SFAS No. 87 “Employers’ Accounting for Pensions.”

The Company’s benefit plan-related net experience losses and prior service cost increased by $10 million for the quarter and $23 million for the year-to-date period due to foreign currency remeasurement. Additionally for the year-to-date period, the Company recorded an increase in benefit plan-related experience losses of $26 million for a census-related valuation update pursuant to SFAS No. 158. These amounts are presented in the following table as amounts arising during the period:

Quarter

		Pre-tax				Tax (expense)				After-tax
(millions)		amount				or benefit				amount
2007
Net earnings										$	305
Other comprehensive income:
Foreign currency translation adjustments			11				—				11
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			5				(2	)			3
Reclassification to net earnings			(3	)			1				(2	)
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience loss			(9	)			(3	)			(12	)
Prior service cost			(1	)			—				(1	)
Reclassification to net earnings:
Net experience loss			23				(8	)			15
Prior service cost			3				(1	)			2
			29				(13	)			16
Total comprehensive income										$	321

		Pre-tax				Tax (expense)				After-tax
(millions)		amount				or benefit				amount
2006
Net earnings										$	281
Other comprehensive income:
Foreign currency translation adjustments			29				—				29
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			(17	)			6				(11	)
Reclassification to net earnings			3				(1	)			2
			15				5				20
Total comprehensive income										$	301

Year-to-date

						Tax (expense) or
(millions)		Pre-tax amount				benefit				After-tax amount
2007
Net earnings										$	927
Other comprehensive income:
Foreign currency translation adjustments			38				—				38
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			22				(8	)			14
Reclassification to net earnings			(2	)			1				(1	)
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience loss			(47	)			10				(37	)
Prior service cost			(2	)			—				(2	)
Reclassification to net earnings:
Net experience loss			68				(23	)			45
Prior service cost			8				(3	)			5
			85				(23	)			62
Total comprehensive income										$	989

						Tax (expense) or
(millions)		Pre-tax amount				benefit				After-tax amount
2006
Net earnings										$	822
Other comprehensive income:
Foreign currency translation adjustments			(9	)			—				(9	)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			(11	)			4				(7	)
Reclassification to net earnings			7				(3	)			4
			(13	)			1				(12	)
Total comprehensive income										$	810

Accumulated other comprehensive income (loss) as of September 29, 2007 and December 30, 2006 consisted of the following:

		September 29,				December 30,
(millions)		2007				2006
Foreign currency translation adjustments		$	(371	)		$	(409	)
Cash flow hedges — unrealized net loss			(20	)			(33	)
Postretirement and postemployment benefits:
Net experience loss			(532	)			(540	)
Prior service cost			(61	)			(64	)
Total accumulated other comprehensive income (loss)		$	(984	)		$	(1,046	)

Note 6 Leases and other commitments

The Company was subject to a maximum residual value guarantee on one operating lease of a snacks manufacturing facility in Chicago, Illinois, for approximately $13 million, which was scheduled to expire in July 2007. During the first quarter of 2007, the Company recognized a liability in connection with this guarantee of approximately $5 million, which was recorded in cost of goods sold within the Company’s North America operating segment. During the second quarter of 2007, the Company terminated the lease agreement and purchased the facility for approximately $16 million, which discharged the residual value guarantee obligation.

Note 7 Debt

On February 28, 2007, a subsidiary of the Company redeemed Euro 550 million of Guaranteed Floating Rate Notes otherwise due May 2007 for $728 million. To partially refinance this redemption, the Company and two of its subsidiaries (the “Issuers”) established a program under which the Issuers may issue euro-commercial paper notes up to a maximum aggregate amount outstanding at any time of $750 million or its equivalent in alternative currencies. The notes may have maturities ranging up to 364 days and are senior unsecured obligations of the applicable Issuer. Notes issued by subsidiary Issuers are guaranteed by the Company. The notes may be issued at a discount or may bear fixed or floating rate interest or a coupon calculated by reference to an index or formula. On June 13, 2007, management also increased the aggregate principal amount of notes that may be outstanding at any time under the Company’s U.S. commercial paper program from $2.0 billion to $2.5 billion.

In connection with these financing activities, the Company increased its short-term lines of credit from $2.2 billion at December 30, 2006 to approximately $3.3 billion at September 29, 2007. This increase was achieved via a $400 million unsecured 364-Day Credit Agreement effective January 31, 2007 and a $700 million 364-Day Credit Agreement effective June 13, 2007. These 364-Day Agreements contain customary covenants, warranties, and restrictions similar to those described for the Five-Year Credit Agreement on page 41 of the Company’s 2006 Annual Report on Form 10-K. The Company’s credit facilities are available for general corporate purposes, including commercial paper back-up, although management does not currently anticipate any draw-down of the facilities.

As of September 29, 2007, notes outstanding under the Company’s commercial paper programs were (in millions): U.S.-$1,790; Europe-$0; Canada-$0. Refer to page 40 of the Company’s 2006 annual report on Form 10-K for comparable information as of December 30, 2006.

Note 8 Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, and to a lesser extent, executive performance shares and restricted stock grants. Additionally, the Company awards stock options and restricted stock to its outside directors. These awards are administered through several plans, as described on pages 41 to 44 of the Company’s 2006 Annual Report on Form 10-K.

Beginning in 2006, the Company has followed SFAS No. 123(R) “Share-Based Payment” to account for its equity-based compensation programs. For the periods presented, the Company classified pre-tax stock compensation expense in selling, general, and administrative expense principally within its corporate operations. For further information on the Company’s stock compensation accounting methods, refer to pages 32 and 33 of the Company’s 2006 Annual Report on Form 10-K.

For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized are as follows:

		Quarter ended								Year-to-date period ended
		September 29,				September 30,				September 29,				September 30,
(millions)		2007				2006				2007				2006
Pre-tax compensation expense		$	18			$	23			$	65			$	68
Related income tax benefit		$	6			$	8			$	23			$	24

As of September 29, 2007, total stock-based compensation cost related to nonvested awards not yet recognized was approximately $43 million and the weighted-average period over which this amount is expected to be recognized was approximately 1.3 years.

Stock Options

During the year-to-date periods ended September 29, 2007 and September 30, 2006, the Company granted non-qualified stock options to eligible employees and outside directors as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described on page 43 of the Company’s 2006 Annual Report on Form 10-K.

Year-to-date period ended September 29, 2007:

										Weighted-average
										remaining
Employee and director						Weighted-average				contractual term				Aggregate intrinsic
stock options		Shares (millions)				exercise price				(yrs.)				value (millions)
Outstanding, beginning of period			27			$	41
Granted			7				51
Exercised			(7	)			41
Forfeitures and expirations			—				—
Outstanding, end of period			27			$	44				6.2			$	263
Exercisable, end of period			21			$	42				5.3			$	246

Year-to-date period ended September 30, 2006:

										Weighted-average
										remaining
Employee and director						Weighted-average				contractual term				Aggregate intrinsic
stock options		Shares (millions)				exercise price				(yrs.)				value (millions)
Outstanding, beginning of period			29			$	38
Granted			8				45
Exercised			(8	)			36
Forfeitures and expirations			(1	)			42
Outstanding, end of period			28			$	41				6.3			$	252
Exercisable, end of period			21			$	39				5.4			$	229

The weighted-average fair value of options granted was $7.27 per share for the year-to-date period ended September 29, 2007 and $6.96 per share for the year-to-date period ended September 30, 2006. The total intrinsic value of options exercised was $75 million for the year-to-date period ended September 29, 2007 and $89 million for the year-to-date period ended September 30, 2006.

Other stock-based awards

During the periods presented, other stock-based awards consisted principally of executive performance shares granted under the Company’s 2003 Long-Term Incentive Plan.

In the first quarter of 2007, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock on the vesting date, provided cumulative three-year cash flow targets are achieved. The 2007 target grant currently corresponds to approximately 206,000 shares, with a grant-date fair value of approximately $46 per share. The actual number of shares issued on the vesting date could range from zero to 200% of target, depending on actual performance achieved. For information on similar performance share awards in 2005 and 2006, refer to page 44 of the Company’s 2006 Annual Report on Form 10-K. Based on the market price of the Company’s common stock at September 29, 2007, the maximum future value that could be awarded to employees on the vesting date is (in millions): 2005 award-$30; 2006 award-$28; and 2007 award-$23.

Note 9 Employee benefits

The Company sponsors a number of U.S. and foreign pension, other postretirement and postemployment plans to provide various benefits for its employees. These plans are described on pages 44 to 48 of the Company’s 2006 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

Pension

		Quarter ended								Year-to-date period ended
(millions)		September 29, 2007				September 30, 2006				September 29, 2007				September 30, 2006
Service cost		$	23			$	23			$	71			$	69
Interest cost			47				43				139				127
Expected return on plan assets			(71	)			(63	)			(209	)			(188	)
Amortization of unrecognized prior service cost			5				4				10				10
Recognized net loss			16				19				48				58
Total pension expense — Company plans		$	20			$	26			$	59			$	76
Other nonpension postretirement
		Quarter ended								Year-to-date period ended
(millions)		September 29, 2007				September 30, 2006				September 29, 2007				September 30, 2006
Service cost		$	6			$	4			$	14			$	13
Interest cost			17				17				51				49
Expected return on plan assets			(15	)			(14	)			(45	)			(43	)
Amortization of unrecognized prior service cost			(2	)			—				(2	)			(2	)
Recognized net loss			6				7				18				23
Postretirement benefit expense		$	12			$	14			$	36			$	40
Postemployment
		Quarter ended								Year-to-date period ended
(millions)		September 29, 2007				September 30, 2006				September 29, 2007				September 30, 2006
Service cost		$	2			$	1			$	4			$	3
Interest cost			—				1				2				2
Recognized net loss			1				1				2				3
Postemployment benefit expense		$	3			$	3			$	8			$	8

Management currently plans to contribute approximately $33 million to its defined benefit pension plans and $15 million to its retiree health and welfare benefit plans during 2007, for a total of $48 million. During 2006, the Company contributed approximately $86 million to defined benefit pension plans and $13 million to retiree health and welfare benefit plans, for a total of $99 million. Plan funding strategies are periodically modified to reflect management’s current evaluation of tax deductibility, market conditions, and competing investment alternatives.

Note 10 Income taxes

Effective income tax rate

The consolidated effective income tax rate was approximately 27% for the quarter and 28% for the year-to-date period ended September 29, 2007, as compared to approximately 32% for both the comparable quarter and year-to-date periods of 2006. The third quarter 2007 effective income tax rate was lower than the prior-period rate due primarily to statutory rate reductions, as discussed in the following paragraph. The year-to-date 2007 effective income tax rate also benefited from the reversal of a foreign tax liability of $40 million, which was triggered by the implementation of an international restructuring initiative in the first quarter of 2007.

In July 2007, the government of the United Kingdom enacted a statutory rate reduction of two percentage points, applicable from April 1, 2008. In August 2007, the government of Germany enacted a federal statutory income tax rate reduction of ten percentage points effective in 2008, partially offset by the effect of other German tax law changes. Accordingly, during the third quarter of 2007, the Company reduced its net deferred income tax liabilities in these jurisdictions to reflect the lower rates, resulting in a decrease to consolidated income tax expense of $17 million.

Uncertain tax positions

The Company adopted Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN No. 48) as of the beginning of its 2007 fiscal year. This interpretation clarifies what criteria must be met prior to recognition of the financial statement benefit, in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” of a position taken in a tax return.

Prior to adopting FIN No. 48, the Company’s policy was to establish reserves that reflected the probable outcome of known tax contingencies. Favorable resolution was recognized as a reduction to the effective income tax rate in the period of resolution. As compared to a contingency approach, FIN No. 48 is based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, FIN No. 48 permits a company to recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The tax position must be derecognized when it is no longer more likely than not of being sustained. The initial application of FIN No. 48 resulted in a net decrease to the Company’s consolidated accrued income tax and related interest liabilities of approximately $2 million, with an offsetting increase to retained earnings.

The Company files income taxes in the U.S. federal jurisdiction, and in various state, local, and foreign jurisdictions. For the past several years, the Company’s annual provision for U.S. federal income taxes has represented approximately 70% of the Company’s consolidated income tax provision. With limited exceptions, the Company is no longer subject to U.S. federal examinations by the Internal Revenue Service (IRS) for years prior to 2004. During the first quarter of 2007, the IRS commenced an examination of the Company’s 2004 and 2005 U.S. federal income tax returns, which is anticipated to be completed during the second half of 2008. The Company is also under examination for income and non-income tax filings in various state and foreign jurisdictions, most notably: 1) a U.S.-Canadian transfer pricing issue pending international arbitration (“Competent Authority”) with a related advanced pricing agreement for years 1997-2008; and 2) an on-going examination of 2002-2004 U.K. income tax filings, with an examination of the 2005 filing, which began in July 2007.

As of September 29, 2007, the Company has classified approximately $34 million of unrecognized tax benefits as a current liability, representing several individually insignificant income tax positions under examination in various jurisdictions. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the aforementioned current liability balance expected to be settled within one year, offset by approximately $26 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year-to-date period ended September 29, 2007. Approximately $149 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table due to the decrease in U.S. federal income taxes which would occur upon recognition of the state tax benefits included therein.

(millions)
Balance at December 31, 2006		$	143
Tax positions related to current year:
Additions			24
Reductions			—
Tax positions related to prior years:
Additions			13
Reductions			(8	)
Settlements			—
Lapses in statutes of limitation			—
Balance at September 29, 2007		$	172

The current portion of the Company’s unrecognized tax benefits is presented in the balance sheet within accrued income taxes and the amount expected to be settled after one year is recorded in other noncurrent liabilities.

The Company classifies income tax-related interest and penalties as interest expense and selling, general, and administrative expense, respectively. For the year-to-date period ended September 29, 2007, the Company recognized $7 million of tax-related interest and penalties and had approximately $27 million accrued at September 29, 2007.

Subsequent events

In addition to the aforementioned statutory rate reductions enacted in the Company’s fiscal third quarter, on October 1, 2007, the government of Mexico enacted a tax reform package. Beginning in 2008, corporate entities will pay the higher of traditional income tax (generally imposed at a rate of 28%) or a new corporate flat tax, which is phased in at a rate of 16.5% in 2008 to 17.5% by 2010. Under the new flat tax, allowable deductions, such as interest expense, are limited. Management is currently studying the impact of the Mexican tax law reform on the Company’s Latin American operations; however, we believe this tax reform could result in a slight increase in our consolidated effective income tax rate, beginning in 2008.

Note 11 Operating segments

Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. The Company currently manages its operations in four geographic operating segments, comprised of North America and the three International operating segments of Europe, Latin America, and Asia Pacific. Prior to 2007, the Asia Pacific operating segment included Australia and Asian markets. Beginning in 2007, this segment also includes South Africa, which was formerly a part of Europe. Prior-year periods have been restated.

		Quarter ended								Year-to-date period ended
(millions)		September 29,				September 30,				September 29,				September 30,
(Results are unaudited)		2007				2006				2007				2006
Net sales
North America		$	1,960			$	1,887			$	5,942			$	5,611
Europe			604				542				1,801				1,570
Latin America			270				236				752				676
Asia Pacific (a)			170				158				487				466
Consolidated		$	3,004			$	2,823			$	8,982			$	8,323
Segment operating profit
North America		$	333			$	342			$	1,059			$	1,021
Europe			110				104				345				285
Latin America			66				64				168				177
Asia Pacific (a)			18				23				65				72
Corporate			(35	)			(46	)			(128	)			(134	)
Consolidated		$	492			$	487			$	1,509			$	1,421

Note 12 Supplemental cash flow data

(millions)		Year-to-date period ended
Changes in operating assets and liabilities		September 29, 2007				September 30, 2006
Trade receivables		$	(210	)		$	(188	)
Inventories			(11	)			(39	)
Accounts payable			103				33
Accrued income taxes			22				39
Accrued interest expense			47				49
Accrued and prepaid advertising, promotion and trade allowances			95				73
Accrued salaries and wages			(42	)			(21	)
Exit plan-related reserves (a)			(3	)			(9	)
All other current assets and liabilities (b)			68				(9	)
		$	69			$	(72	)

KELLOGG COMPANY

PART I — FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of operations

Overview

Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. We currently manage our operations in four geographic operating segments, comprised of North America and the three International operating segments of Europe, Latin America, and Asia Pacific. Prior to 2007, the Asia Pacific operating segment included Australia and Asian markets. Beginning in 2007, this segment also includes South Africa, which was formerly a part of Europe. Prior-year periods have been restated.

We currently expect our full-year 2007 internal net sales to increase by mid single-digits. (Our measure of internal growth rates excludes the impact of currency, and if applicable, acquisitions, dispositions, and shipping day differences.) Based on year-to-date results, we believe this targeted growth will be fairly broad-based, with our North America, European, and Latin American operating segments all delivering strong sales performance this year. Primarily as a result of lower-than-expected income tax expense for the full year, we have chosen to reinvest in incremental cost-reduction initiatives, which is expected to adversely impact our full-year operating profit growth by one to two percentage points. Accordingly, we currently believe our full-year 2007 internal operating profit growth will increase by low single-digits; this forecasted performance is expected to reflect double-digit growth in advertising investment and an inflation-driven decline in gross margin of approximately 50 basis points. Our net interest expense for 2007 is currently expected to be approximately even with 2006 results and our consolidated effective income tax rate is currently projected to be approximately three percentage points lower than the 2006 rate of 32%. These two factors are expected to provide leverage for purposes of achieving our target of high single-digit growth in 2007 diluted net earnings per share. Lastly, we expect our cash flow performance to remain strong and are currently targeting a level of approximately one billion dollars for 2007.

For the year-to-date period ended September 29, 2007, we reported consolidated net sales growth of 8% with internal growth of 6%. Consolidated operating profit increased 6% on internal growth of 3%. Diluted net earnings per share grew 12%, from $2.06 for the year-to-date period of 2006 to $2.31 in the current year-to-date period. Similarly, for the third quarter of 2007, we reported consolidated net sales growth of 6% with internal growth of 4%. Consolidated operating profit grew 1% on a reported basis and declined 2% on an internal basis. This decline was principally attributable to our discretionary investment in cost-reduction initiatives, which reduced third quarter operating profit growth by nearly five percentage points. Diluted net earnings per share grew 9%, from $.70 in the third quarter of 2006 to $.76 in the current period. For the quarter, our earnings growth outpaced operating profit performance primarily due to a five percentage point decline in our consolidated effective income tax rate, versus the prior-year period.

Net sales and operating profit

The following table provides an analysis of net sales and operating profit performance for the third quarter of 2007 versus 2006:

		North								Latin				Asia								Consoli-
(dollars in millions)		America				Europe				America				Pacific (a)				Corporate				dated
2007 net sales		$	1,960			$	604			$	270			$	170			$	—			$	3,004
2006 net sales		$	1,887			$	542			$	236			$	158			$	—			$	2,823
% change — 2007 vs. 2006:
Volume (tonnage) (b)			-0.3	%			0.1	%			9.6	%			0.2	%			—				0.7	%
Pricing/mix			3.5	%			3.3	%			2.7	%			-1.2	%			—				3.1	%
Subtotal — internal business			3.2	%			3.4	%			12.3	%			-1.0	%			—				3.8	%
Foreign currency impact			0.7	%			8.2	%			1.9	%			8.1	%			—				2.6	%
Total change			3.9	%			11.6	%			14.2	%			7.1	%			—				6.4	%
		North								Latin				Asia								Consoli-
(dollars in millions)		America				Europe				America				Pacific (a)				Corporate				dated
2007 operating profit		$	333			$	110			$	66			$	18			$	(35	)		$	492
2006 operating profit		$	342			$	104			$	64			$	23			$	(46	)		$	487
% change - 2007 vs. 2006:
Internal business			-3.6	%			-1.7	%			1.3	%			-26.0	%			21.9	%			-1.9	%
Foreign currency impact			0.8	%			7.5	%			1.7	%			6.7	%			0.0	%			2.7	%
Total change			-2.8	%			5.8	%			3.0	%			-19.3	%			21.9	%			0.8	%

Despite a difficult comparison with 8% reported growth in the prior-year quarter, our solid consolidated net sales performance for the third quarter of 2007 reflects the continuation of broad-based successful innovation, brand-building (advertising and consumer promotion) investment, and in-store execution.

For the quarter, our North America operating segment reported internal net sales growth of 3%, with the retail snacks product group (wholesome snacks, cookies, crackers, toaster pastries, fruit snacks) contributing at a rate of 5% and the frozen and specialty (food service, vending, convenience, drug stores, custom manufacturing) channels product group contributing at a rate of 6%.

As discussed in the section herein entitled “Exit or disposal plans,” we have implemented a plan to reorganize our direct store-door delivery (DSD) operations in the southeastern United States in order to increase efficiency across our nationwide network. During this period, we successfully accelerated this plan, which we believe has better positioned our North America retail snacks business for strong growth in the future. Despite temporary disruption from DSD reorganization activities, our North America retail snacks product group achieved mid single-digit sales growth for the third quarter of 2007. Based on the success of this plan, we will also convert certain Kashi and fruit snack products to DSD distribution, effective January 2008, which we expect to result in some level of sales disruption during the fourth quarter of 2007 and the first quarter of 2008.

Internal sales for our North America retail cereal product group were approximately even with the prior-year period, even though we experienced solid growth in U.S. consumer consumption and Canadian sales of our products. Accordingly, we believe our current-period sales performance primarily reflects the normalization of U.S. retail cereal trade inventory levels, as compared to temporarily-elevated levels in the third quarter of 2006. During this period, we have remained on track with our sustainable innovation and brand-building investment strategies, which we believe has helped to sustain consumer consumption growth at expected levels. Based on this consumption growth and the continuation of normal trade inventory levels, we currently expect strong growth in North America retail cereal sales for the fourth quarter of 2007.

Our International operating segments collectively reported internal net sales growth of approximately 5% with leading dollar contributions from our UK, Italy, Mexico, and Venezuela business units. During the period, we continued to achieve strong sales growth of both cereal and snack products in our Latin America operating segment, due primarily to successful innovation and marketing strategies. Our European sales performance was adversely impacted by a voluntary product recall in the UK; nevertheless, this operating segment achieved low single-digit sales growth for the quarter and maintained its year-to-date internal sales growth at the mid single-digit level. The internal sales decline in our Asia Pacific operating segment (which represents only about 5% of our consolidated results) was attributable to continuing weak performance in our Australian business due to competitive pressures, which offset double-digit sales growth in our Asian and S. Africa markets.

For the quarter, our consolidated operating profit grew 1% on a reported basis and declined 2% on an internal basis. As further discussed in the section herein entitled “Exit or disposal plans,” this decline was principally attributable to a year-over-year increase in exit plan-related charges of $21 million. This discretionary investment in cost-reduction initiatives, which is consistent with our reinvestment strategy, reduced third quarter operating profit growth by nearly five percentage points. These operating profit results also reflect double-digit growth in advertising investment and an inflation-driven 40 basis point reduction in gross margin, as further discussed in the next section entitled “Margin performance.”

For the quarter, the allocation of the net increment amount of exit plan-related charges among operating segments reduced North America operating profit by $23 million and increased Europe operating profit by $2 million. The allocation within consolidated operating profit resulted in a favorable year-over-year impact on cost of goods sold of $7 million and an unfavorable impact on selling, general, and administrative expense of $28 million.

Taking into account these year-over-year segment shifts in exit plan-related charges, the operating profit results for our North America segment mirrored the consolidated performance. In Europe, the internal operating profit decline was primarily attributable to the aforementioned product recall and a significant increase in advertising expenditures as a percentage of sales; nevertheless, internal operating profit increased 11% on a year-to-date basis. As previously predicted, our Latin America operating segment continued to be impacted by corn price inflation and other cost factors, but managed to achieve a small increase in internal operating profit for the quarter. Our internal Asia Pacific operating profit declined by the equivalent of $6 million, largely related to the sales decline in that segment, significant investment in brand-building, and costs associated with operational efficiency initiatives in Australia. Although we do expect some stabilization in Asia Pacific and continued recovery in Latin America during the remainder of the year, we do not currently believe these segments’ full-year 2007 operating profit will exceed the 2006 level.

The following table provides an analysis of net sales and operating profit performance for the year-to-date periods of 2007 versus 2006. On a year-to-date basis, incremental exit plan-related charges were $44 million and were allocated to segments as follows (in millions): North America-$34; Europe-$10. The allocation of the net incremental amount within operating profit resulted in a favorable year-over-year impact on cost of goods sold of $22 million and an unfavorable impact on selling, general, and administrative expense of $66 million. Our year-to-date North America operating profit also included a charge of $5 million related to a lease residual value guarantee. Our year-to-date corporate operating profit included intangible impairment losses of $7 million. Refer to Notes 6 and 2, respectively, within Notes to Consolidated Financial Statements for further information on these charges.

		North								Latin				Asia								Consoli-
(dollars in millions)		America				Europe				America				Pacific (a)				Corporate				dated
2007 net sales		$	5,942			$	1,801			$	752			$	487			$	—			$	8,982
2006 net sales		$	5,611			$	1,570			$	676			$	466			$	—			$	8,323
% change - 2007 vs. 2006:
Volume (tonnage) (b)			1.4	%			2.2	%			8.2	%			-1.9	%			—				2.0	%
Pricing/mix			4.2	%			3.4	%			1.4	%			.8	%			—				3.6	%
Subtotal — internal business			5.6	%			5.6	%			9.6	%			-1.1	%			—				5.6	%
Foreign currency impact			.3	%			9.1	%			1.6	%			5.5	%			—				2.3	%
Total change			5.9	%			14.7	%			11.2	%			4.4	%			—				7.9	%
		North								Latin				Asia								Consoli-
(dollars in millions)		America				Europe				America				Pacific (a)				Corporate				dated
2007 operating profit		$	1,059			$	345			$	168			$	65			$	(128	)		$	1,509
2006 operating profit		$	1,021			$	285			$	177			$	72			$	(134	)		$	1,421
% change - 2007 vs. 2006:
Internal business			3.4	%			11.2	%			-6.6	%			-15.3	%			3.9	%			3.4	%
Foreign currency impact			.3	%			10.0	%			1.5	%			5.4	%			—				2.7	%
Total change			3.7	%			21.2	%			-5.1	%			-9.9	%			3.9	%			6.1	%

Margin performance

Margin performance for the third quarter and year-to-date periods of 2007 versus 2006 is presented in the following table:

										Change
										vs. prior
Quarter		2007				2006				year (pts.)
Gross margin (a)			44.7	%			45.1	%			-0.4
SGA% (b)			-28.3	%			-27.8	%			-0.5
Operating margin			16.4	%			17.3	%			-0.9

Year-to-date		2007				2006				Change
Gross margin (a)			44.3	%			44.5	%			-0.2
SGA% (b)			-27.5	%			-27.4	%			-0.1
Operating margin			16.8	%			17.1	%			-0.3

As illustrated in the preceding tables, our consolidated gross margin declined versus the prior-year periods, principally due to significant, continuing commodity, fuel, and energy price inflation. Partially mitigating factors primarily included savings from cost-reduction initiatives and price/mix improvements. For the periods presented, our SGA% was adversely impacted by incremental exit plan-related charges, which more than offset a favorable impact on gross margin and resulted in a net unfavorable exit plan-related impact on operating margin of 70 basis points for the quarter and 50 basis points for the year-to-date period.