SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Virginia 13-3260245
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
______________________________
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
________ ________
At April 29, 1994, there were 871,317,178 shares outstanding of the
registrant's common stock, par value $1 per share.
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as at
March 31, 1994 and December 31, 1993 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 1994 and 1993 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1993
and the Three Months Ended March 31, 1994 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1994 and 1993 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12 - 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signature 19
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
March 31, December 31,
1994 1993
--------- ------------
ASSETS
Consumer products
Cash and cash equivalents $ 209 $ 182
Receivables, net 4,769 3,982
Inventories:
Leaf tobacco 2,956 3,030
Other raw materials 1,823 1,695
Finished product 2,683 2,633
------- -------
7,462 7,358
Other current assets 1,363 1,286
------- -------
Total current assets 13,803 12,808
Property, plant and equipment, at cost 17,152 16,930
Less accumulated depreciation 6,661 6,467
------- -------
10,491 10,463
Goodwill and other intangible assets
(less accumulated amortization of
$2,876 and $2,727) 19,838 19,746
Other assets 2,454 2,529
------- -------
Total consumer products assets 46,586 45,546
Financial services and real estate
Finance assets, net 4,166 4,869
Real estate held for development and sale 482 489
Other assets 291 301
------- -------
Total financial services and
real estate assets 4,939 5,659
------- -------
TOTAL ASSETS $51,525 $51,205
======= =======
See notes to condensed consolidated financial statements.
Continued
-3-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in millions of dollars)
(Unaudited)
March 31, December 31,
1994 1993
--------- ------------
LIABILITIES
Consumer products
Short-term borrowings $ 202 $ 268
Current portion of long-term debt 1,178 1,738
Accounts payable 2,514 3,137
Accrued taxes, except income taxes 1,276 860
Accrued marketing 1,809 1,619
Other accrued liabilities 3,214 3,492
Income taxes 2,406 1,853
Dividends payable 607 572
------- -------
Total current liabilities 13,206 13,539
Long-term debt 14,730 14,358
Deferred income taxes 422 361
Accrued postretirement health care costs 2,058 2,031
Other liabilities 4,673 4,622
------- -------
Total consumer products liabilities 35,089 34,911
Financial services and real estate
Short-term borrowings 658 929
Long-term debt 878 863
Deferred income taxes 2,722 2,706
Other liabilities 163 169
------- -------
Total financial services and
real estate liabilities 4,421 4,667
------- -------
Total liabilities 39,510 39,578
Contingencies (Note 2)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
(935,320,439 shares issued) 935 935
Earnings reinvested in the business 16,230 15,718
Currency translation adjustments (607) (711)
------- -------
16,558 15,942
Less cost of treasury stock
(62,557,394 and 58,229,749 shares) 4,543 4,315
------- -------
Total stockholders' equity 12,015 11,627
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $51,525 $51,205
======= =======
See notes to condensed consolidated financial statements.
-4-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1994 1993
------- -------
Operating revenues $15,500 $15,189
Cost of sales 6,798 6,630
Excise taxes on products 2,773 2,624
------- -------
Gross profit 5,929 5,935
Marketing, administration and research costs 3,426 3,342
Amortization of goodwill 141 135
------- -------
Operating income 2,362 2,458
Interest and other debt expense, net 319 382
------- -------
Earnings before income taxes
and cumulative effect of
accounting change 2,043 2,076
Provision for income taxes 872 862
------- -------
Earnings before cumulative effect
of accounting change 1,171 1,214
Cumulative effect of change in method of
accounting for postemployment benefits
(net of income tax benefit of $297 million) (477)
------- -------
Net earnings $ 1,171 $ 737
======= =======
Weighted average number of shares 877 883
======= =======
Per share data:
Earnings before cumulative effect of
accounting change $ 1.34 $ 1.38
Cumulative effect of accounting change (.54)
------- -------
Net earnings $ 1.34 $ .84
======= =======
Dividends declared $ .69 $ .65
======= =======
See notes to condensed consolidated financial statements.
-5-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1993 and
the Three Months Ended March 31, 1994
(in millions of dollars, except per share data)
(Unaudited)
Earnings Total
Reinvested Currency Cost of Stock-
Common in the Translation Treasury holders'
Stock Business Adjustments Stock Equity
------ ---------- ----------- -------- --------
Balances, January 1, 1993 $935 $14,867 $ (34) $(3,205) $12,563
Net earnings 3,091 3,091
Exercise of stock options
and issuance of other stock
awards (51) 108 57
Cash dividends declared
$2.60 per share (2,280) (2,280)
Currency translation adjustments (677) (677)
Stock purchased (1,218) (1,218)
Net unrealized appreciation on
securities 91 91
---- ------- ----- ------- -------
Balances, December 31, 1993 935 15,718 (711) (4,315) 11,627
Net earnings 1,171 1,171
Exercise of stock options
and issuance of other stock
awards (12) 25 13
Cash dividends declared
$.69 per share (605) (605)
Currency translation adjustments 104 104
Stock purchased (253) (253)
Decrease in unrealized
appreciation on securities (42) (42)
---- ------- ----- ------- -------
Balances, March 31, 1994 $935 $16,230 $(607) $(4,543) $12,015
==== ======= ===== ======= =======
See notes to condensed consolidated financial statements.
-6-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1994 1993
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $1,135 $ 705
- Financial services and real estate 36 32
------ ------
Net earnings 1,171 737
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Cumulative effect of accounting change 774
Depreciation and amortization 398 397
Deferred income tax provision (benefit) 25 (283)
Gain on sale of business (3)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (780) (452)
Inventories (73) (155)
Accounts payable (634) (175)
Income taxes 531 432
Other working capital items 133 (274)
Other 65 95
Financial services and real estate
Deferred income tax provision 42 70
Decrease in real estate receivables 5 15
Decrease (increase) in real estate held for
development and sale 6 (13)
Other (15) (33)
------ ------
Net cash provided by operating activities 874 1,132
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (266) (351)
Purchases of businesses, net of acquired cash (25) (638)
Proceeds from sales of businesses 56 51
Other 23 46
Financial services and real estate
Investments in finance assets (48) (94)
Proceeds from other finance assets 711 395
------ ------
Net cash provided by (used in)
investing activities 451 (591)
------ ------
Net cash provided by operating and
investing activities $1,325 $ 541
------ ------
See notes to condensed consolidated financial statements.
Continued
-7-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(in millions of dollars)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1994 1993
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance of short-term borrowings $ 354 $ 1,367
Long-term debt proceeds 20 949
Long-term debt repaid (663) (462)
Financial services and real estate
Net (repayment) issuance of short-term borrowings (271) 67
Long-term debt repaid (55)
Purchase of treasury stock (177) (1,218)
Dividends paid (570) (581)
Issuance of shares 10 16
Other (3)
------- -------
Net cash provided by (used in)
financing activities (1,300) 83
Effect of exchange rate changes on cash and
cash equivalents 2 (5)
------- -------
Cash and cash equivalents:
Increase 27 619
Balance at beginning of period 182 1,021
------- -------
Balance at end of period $ 209 $ 1,640
======= =======
See notes to condensed consolidated financial statements.
-8-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
_____________________________
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's
management that all adjustments necessary for a fair statement of the interim
results presented have been reflected therein. All such adjustments were of a
normal recurring nature. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for the
entire year. First quarter results should not be considered indicative of full-
year 1994 results. See Management's Discussion and Analysis on page 12.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by reference to
the Company's annual report to stockholders for the year ended December 31,
1993.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either current or
non-current, whereas financial services and real estate assets and liabilities
are unclassified, in accordance with respective industry practices.
Note 2. Contingencies:
_______________________
There is litigation pending against the leading United States cigarette
manufacturers alleging injury resulting from cigarette smoking or exposure to
cigarette smoking. In this litigation, plaintiffs seek compensatory and, in
some cases, punitive damages. The Company and Philip Morris Incorporated ("PM
Inc."), a wholly-owned subsidiary of the Company, are defendants in some of
these cases.
In certain of these cases, individuals seek recovery for personal injuries
allegedly caused by cigarette smoking. Among the defenses raised by defendants
to certain of this litigation is preemption by the Federal Cigarette Labeling
and Advertising Act, as amended (the "Act"). On June 24, 1992, the United
States Supreme Court held that the Act, as enacted in 1965, does not preempt
common law damage claims but that the Act, as amended in 1969, preempts claims
arising after 1969 against cigarette manufacturers "based on failure to warn and
the neutralization of federally mandated warnings to the extent that those
claims rely on omissions or inclusions in advertising or promotions." The Court
also held that the 1969 Act does not preempt claims based on express warranty,
fraudulent misrepresentation or conspiracy. The Court also held that claims for
fraudulent concealment were preempted except "insofar as those claims relied on
a duty to disclose...facts through channels of communication other than
advertising or promotion." (The Court did not consider whether such common law
damage claims were valid under state law.) The Court's decision was announced
by a plurality opinion. The effect of the decision on pending and future cases
will be the subject of further proceedings in the lower federal and state
courts. Additional similar litigation could be encouraged if legislative
proposals to eliminate the federal preemption defense, pending in Congress since
1991, were enacted. It is not possible to predict whether any such legislation
will be enacted.
Continued
-9-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Developments in smoking and health litigation during and subsequent to the
first quarter of 1994 are summarized below.
In March 1994, a Florida state appellate court reversed a lower court
ruling and reinstated plaintiffs' class action allegations in a purported class
action against the leading United States cigarette manufacturers, in which
certain flight attendants, claiming to represent a class of 60,000 individuals,
alleged personal injury caused by exposure to environmental tobacco smoke
("ETS") aboard aircraft. The appellate court ordered the trial court to hold
further hearings on the class allegations. The defendants have filed a request
for review of this ruling by the full panel of judges of this appellate court.
In May 1994, an action was filed in a Florida State Court against the
leading United States tobacco manufacturers and others, including the Company,
by plaintiffs alleging injury and purporting to represent a class of all United
States citizens and residents who claim to be addicted, or who claim to be the
legal survivors of persons who were addicted, to tobacco products. Plaintiffs
cited the Florida appellate reversal discussed above in support of their
allegations of class action status.
In March 1994, an action was filed in the United States District Court for
the Eastern District of Louisiana against the leading United States cigarette
manufacturers and others, including the Company, seeking certification of a
class action on behalf of all United States residents alleging that they are
addicted, or are the legal survivors of persons who were addicted, to tobacco
products. In April 1994, a motion for intervention was filed by plaintiffs who
have never smoked but claim injury, on behalf of a purported class, from their
exposure to ETS resulting from the alleged addiction of smokers to tobacco
products. The complaints allege that the cigarette manufacturers manipulated the
levels of nicotine in their tobacco products to make such products addictive.
Also in March 1994, two cases were filed in the United States District
Court for the Southern District of California against the leading United States
cigarette manufacturers and others, including the Company, on behalf of a
purported class of persons claiming to be addicted to cigarettes and who have
been prescribed treatment through the nicotine transdermal system (known as the
"nicotine patch"). Plaintiffs assert a violation of the Racketeer Influenced
Corrupt Organizations Act and claim unspecified actual and treble damages. In
April 1994, the two cases, which are virtually identical, were combined in a
single amended complaint and plaintiffs' counsel have agreed to dismiss the
separate second-filed case.
In March 1994, an action was filed in an Alabama State Court against the
three leading United States cigarette manufacturers, including PM Inc.
Plaintiff, claiming to represent all smokers who have smoked or are smoking
cigarettes manufactured and sold by defendants in the state of Alabama, seeks
compensatory and punitive damages not to exceed $48,500 per each class member as
well as injunctive relief arising from defendants' alleged failure to disclose
additives used in their cigarettes. In April 1994, defendants removed the case
to the United States District Court for the Northern District of Alabama.
In May 1994, an action was filed in the United States District Court for
the Eastern District of Louisiana against the leading United States cigarette
manufacturers and others, including PM Inc., by plaintiffs alleging injury and
purporting to represent a class of African American or Black American residents
or domiciliaries of the United States who claim that they are addicted to
tobacco products or that they were not warned of the alleged special and unique
health risks posed to African Americans by tobacco products or that they were
not warned of the ingredients of tobacco products.
Continued
-10-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In April 1993, the Company and several of its officers were named as
defendants in the first of a number of purported shareholder class actions which
have been consolidated in the United States District Court for the Southern
District of New York. These lawsuits allege that the Company violated federal
securities laws by making false and misleading statements concerning the effects
of discount cigarettes on PM Inc.'s premium tobacco business prior to April 2,
1993, the date upon which PM Inc. announced revisions in its marketing and
pricing strategies for its premium and discount brands.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in complaints filed as purported class actions in the United
States District Courts in New York, one in the Eastern District and two in the
Southern District. In one of these cases, plaintiffs allege that defendants
violated the federal securities laws by maintaining artificially high levels of
profitability through an inventory management practice pursuant to which
defendants allegedly shipped more inventory to customers than was necessary to
satisfy market demand. In the remaining two cases, plaintiffs assert that
defendants violated federal securities laws with statements and omissions
regarding the allegedly addictive qualities of cigarettes. In each case,
plaintiffs claim to have been misled by defendants' knowing and intentional
failure to disclose material information.
The Company and PM Inc. believe, and have been so advised by counsel
handling the respective cases, that each has a number of valid defenses to all
pending litigation. All cases are, and will continue to be, vigorously defended.
Litigation is subject to many uncertainties, and it is possible that some of
these actions could be decided unfavorably. An unfavorable outcome of a pending
smoking and health case could encourage the commencement of additional similar
litigation. Recently, there have been a number of restrictive regulatory,
adverse political and other developments concerning cigarette smoking and the
tobacco industry, including the commencement of the purported class actions
referred to above. These developments generally receive widespread media
attention. The Company is not able to evaluate the effect of these developing
matters on pending litigation and the possible commencement of additional
litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending litigation.
It is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of all
pending litigation should not have a material adverse effect on the Company's
financial position.
The Company is contingently liable for payment of (Pounds)610 million notes
maturing on October 15, 1994, sold with recourse in 1989.
In March 1994, the Company and PM Inc. filed an action against American
Broadcasting Companies, Inc. and others alleging injury caused by false and
defamatory statements made by defendants on various nationally televised news
programs. Among the statements giving rise to the action is defendants' claim
that tobacco companies, including PM Inc., artificially "spike" and "fortify"
their cigarettes sold in the United States with additional nicotine. The
Company and PM Inc. seek compensatory and punitive damages totaling $10 billion.
However, litigation is subject to many uncertainties and the Company and PM Inc.
are unable to predict the outcome of this matter.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
________________________________________________________________________
Operating Results
- -----------------
For the Three Months Ended March 31,
--------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1994 1993 1994 1993
------- ------- -------- -------
Tobacco $ 6,954 $ 6,696 $1,560 $1,692
Food 7,419 7,426 880 861
Beer 1,030 974 103 93
Financial services
and real estate 97 93 54 48
Amortization of goodwill (141) (135)
Unallocated corporate
expenses (94) (101)
------- ------- ------ ------
Total $15,500 $15,189 $2,362 $2,458
======= ======= ====== ======
Operating revenues of $15.5 billion for the first quarter of 1994 increased
$311 million (2.0%) and operating income for the first quarter of 1994 decreased
$96 million (3.9%) over the comparable 1993 period. Operating income in all
operating companies increased over the comparable 1993 period, except in
domestic tobacco which decreased 24.5% from 1993 as a result of lower domestic
tobacco pricing. For the reasons discussed below, first quarter results should
not be taken as indicative of full-year 1994 results.
The effective tax rate in the first quarter of 1994 was 42.7% as compared
to 41.5% in the comparable 1993 period. The increase is primarily due to the new
federal income tax law, which became effective during the third quarter of 1993.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment
Benefits." The cumulative effect at January 1, 1993 of adopting SFAS No. 112
reduced 1993 net earnings by $477 million ($.54 per share), net of $297 million
of income tax benefits. Adoption of SFAS No. 112 did not materially reduce first
quarter 1993 earnings before cumulative effect of accounting change.
In April 1994, the Company announced that it was studying the possibility
of separating its food and tobacco businesses and that it would make an
appropriate announcement when, and if, any further disclosure is warranted.
-12-
Operating Results by Business Segment
_____________________________________
Tobacco
- -------
For the Three Months Ended March 31,
--------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1994 1993 1994 1993
------- ------- -------- -------
Domestic tobacco $2,497 $2,543 $ 769 $1,018
International tobacco 4,457 4,153 791 674
------ ------ ------ ------
Total $6,954 $6,696 $1,560 $1,692
====== ====== ====== ======
For several years, the tobacco industry has faced a number of concerns
which have affected volume, operating revenues and operating income. In the
first quarter of 1994 and subsequently, the industry, including PM Inc.,
witnessed the proliferation of many of these concerns and the emergence of new
issues. These included proposed federal regulatory controls, actual and proposed
excise tax increases, governmental and private restrictions on smoking, new and
proposed restrictions on tobacco manufacturing, marketing, advertising and
sales, increased assertions of adverse health effects associated with both
smoking and exposure to tobacco smoke and the diminishing social acceptance of
smoking. See Note 2 to the Condensed Consolidated Financial Statements for
discussion of contingencies.
Domestic tobacco. During the first quarter of 1994, domestic cigarette
industry volume (based on shipments) continued to shift from the discount
segment to the premium segment. The premium and discount segments accounted for
approximately 66% and 34%, respectively, of the domestic cigarette industry in
the first quarter of 1994, compared with 61% and 39%, respectively, in the
comparable period of 1993. The actions taken by PM Inc. in response to the
highly price sensitive market environment are discussed below.
PM Inc.'s domestic volume (based on shipments) was 49.7 billion units for
the first quarter of 1994, an increase of 12.5% over the comparable 1993 period,
primarily due to a change in distributor buying patterns. This compared with an
industry increase of 8.4%. PM Inc.'s market share for the first quarter of 1994
was 43.1%, an increase of 1.5 share points from the comparable 1993 period. In
the premium segment, volume in PM Inc.'s brands increased 24.5% in the quarter,
compared with a 17.8% increase for the industry, resulting in a market share
gain of 2.8 share points to 51.4%. The Marlboro family's volume was up 7.2
billion units (32.0%) for a 25.9% share of the total industry, as compared with
a 21.3% share in the first quarter of 1993. In the discount segment, the
Company's shipments decreased 17.7% to 10.4 billion units in the first quarter
of 1994, resulting in a decrease of 3.7 share points in this segment to 26.7%.
Since the implementation of the strategy announced on April 2, 1993 and
subsequent actions taken by PM Inc. (see page 14), Nielsen retail sales data
indicate a share gain for PM Inc. and Marlboro, growing from their low point of
41.6% and 22.0%, respectively, in March 1993 to 45.6% and 27.4%, respectively,
in March 1994. Additionally, retail share of PM Inc.'s other premium brands, as
a group, climbed to 9.1% in March 1994, up from 8.3% in August 1993, when PM
Inc. lowered their wholesale list prices. (March 1993 retail market shares have
been restated to reflect PM Inc.'s change to a more representative Nielsen
survey of retail outlets. Previously reported retail market shares for PM Inc.
and Marlboro in March 1993 were 41.7% and 22.1%, respectively.)
-13-
During the quarter, the Company's domestic tobacco operating revenues
decreased 1.8% due primarily to price decreases ($528 million), partially offset
by volume increases ($309 million) and favorable product mix ($170 million).
Operating income for the first quarter of 1994 decreased 24.5% from the
comparable 1993 period, due primarily to price decreases, net of cost decreases
($523 million) and higher marketing expenses ($98 million), partially offset by
volume increases ($204 million) and favorable product mix.
During the second quarter of 1993, PM Inc. implemented an extensive
promotional program to reduce the average retail price of Marlboro cigarettes.
This action, which represented a major shift in its domestic tobacco pricing
strategy, was intended to restore lost market share and improve long-term
profitability. The market share results of the Marlboro brand price promotion
exceeded expectations. Accordingly, during the third quarter of 1993, PM Inc.
announced certain actions designed to continue its share recovery strategy.
Specifically, PM Inc. created a two category pricing structure for its tobacco
brands, premium and discount. In the premium segment, PM Inc. converted its
Marlboro retail price promotion into an equivalent wholesale list price
reduction that applied to all its other premium brands as well. In the discount
segment, PM Inc. raised the net list price of its deep discount products. Other
discount brands are being offered at the same net list price. These strategies
effectively narrowed the price gap between PM Inc.'s premium cigarette brands
and competitors' discount products. The strategy has thus far proven successful,
with PM Inc. recording impressive share and volume gains for Marlboro and its
other premium brands since lowering prices. The overall effect of these price
changes has been lower profit margins on sales of premium brands that will not
be offset by higher volume. These lower margins are expected to continue until
such time as there are sustained improvements in the competitive environment.
As part of the U.S. federal budget passed in August 1993, Congress has
required, effective January 1, 1994, that domestic cigarette manufacturers use
at least 75% American-grown tobacco, which is more expensive than imported
tobacco, in their products. Due to the high content of American-grown tobacco
(approximately 65% in 1993) already used in PM Inc.'s products and in those
exported by PM International, this new requirement has not had, and is not
expected to have, a material adverse impact on tobacco results of operations.
Currently, the federal excise tax on cigarettes is $12 per thousand ($.24
per pack). As part of its health care reform proposal, the federal
administration has included a $37.50 per thousand ($.75 per pack) increase in
the federal excise tax effective October 1, 1994. In March 1994, the Health
Subcommittee of the Ways and Means Committee of the House of Representatives
voted to recommend to the Committee an increase of $62.50 per thousand ($1.25
per pack) in the federal excise tax on cigarettes. The matter now will go to the
full Committee for consideration. It is anticipated that the higher excise
taxes, if implemented, would result in volume declines for PM Inc. and the
cigarette industry and might cause shifts between the premium and discount
segments. In addition, legislation or other governmental action is proposed
periodically that not only would increase excise taxes but would further curtail
the advertisement and use of tobacco products.
In the first quarter of 1994, members of Congress and the Administration
proposed measures which, if adopted, would ban or severely restrict smoking in
workplaces and in buildings permitting public access, require substantial
additional health warning and product content information on cigarette packages
and in advertising, eliminate the deductibility of a portion of the cost of
tobacco advertising and authorize the United States Food and Drug Administration
to regulate tobacco as an addictive drug.
It is not possible to determine what, if any, governmental legislation or
regulations will be adopted relating to cigarettes or to smoking or to predict
the effect of such regulations upon PM Inc. However, any or all of the
foregoing, if implemented, could have an adverse impact on PM Inc.'s volume,
operating revenues and operating income, the amounts of which cannot be
determined.
-14-
International tobacco. Operating revenues for the first quarter of 1994
increased 7.3% due primarily to favorable volume/mix ($177 million), price
increases ($83 million) and higher foreign excise taxes ($73 million), partially
offset by currency movement ($58 million). Total international unit volume,
including U.S. exports, increased 14.8 billion units (12.3%) to 135.8 billion
units. Volume gains were recorded in most markets, including Germany, Japan,
Central and Eastern Europe, the Middle East, Argentina and Brazil. In Italy,
volume continued to grow, excluding the effect of an inventory replenishment in
early 1993 following a union strike. Volume declined in Turkey due to the
economic situation in that country. The Company's market share trends continued
to be positive in its major international markets, with record shares achieved
in Germany, Italy, France, Finland, the Czech Republic, Japan, Singapore,
Argentina and the Dominican Republic. Marlboro's international volume increased
6.1% to 67.8 billion units. International volume also continued to grow for the
Company's other U.S.-heritage brands, such as Virginia Slims, Parliament, L&M
and Chesterfield. Operating income for the first quarter of 1994 increased
17.4% from the comparable 1993 period, due primarily to price increases and
lower costs (aggregating $96 million) and volume/mix increases ($58 million),
partially offset by higher marketing expenses ($26 million) and currency
movement ($13 million).
Food
- ----
For the Three Months Ended March 31,
--------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1994 1993 1994 1993
------- ------- -------- -------
North American food $5,191 $5,257 $638 $621
International food 2,228 2,169 242 240
------ ------ ---- ----
Total $7,419 $7,426 $880 $861
====== ====== ==== ====
North American food. Operating revenues for the first quarter of 1994
decreased 1.3% due primarily to the impact of dispositions ($208 million),
partially offset by price increases ($83 million) and volume increases ($58
million). Excluding the dispositions of certain businesses in 1993, volume rose
slightly in the first quarter of 1994. Volume gains were recorded in cheese,
bakery, cereals, desserts, beverages, processed meats and pizza. In the
beverage business, price reductions on Kool-Aid lowered first quarter 1994
operating income but resulted in market share gains. Coffee volume declined due
to competitive pressures, but operating income was up strongly primarily on
productivity gains. Operating income for the first quarter of 1994 increased
2.7% over the comparable 1993 period, due primarily to price increases ($83
million), volume increases ($10 million) and the sale of underperforming
businesses ($10 million), partially offset by higher product costs ($87
million).
In November 1992, the U.S. Food and Drug Administration issued new labeling
requirements for food products, effective May 1994. Compliance with the new
requirements will not have a material adverse impact on the Company's results of
operations.
-15-
International food. Operating revenues for the first quarter of 1994
increased 2.7% due primarily to the impact of acquisitions ($244 million),
partially offset by currency movement ($194 million). Volume was up in the first
quarter of 1994, primarily as a result of acquisitions in the Company's
confectionery business. The Company continued to build its business in Central
Europe, achieving volume growth in both coffee and confectionery in the first
quarter of 1994. Operating income for the first quarter of 1994 increased
slightly from the comparable 1993 period, due primarily to the impact of
acquisitions ($26 million), partially offset by currency movement ($27 million).
Beer
____
Operating revenues for the first quarter of 1994 increased $56 million
(5.7%) from the comparable 1993 period. This increase was due primarily to the
acquisition of Molson Breweries U.S.A. Inc. During the second quarter of 1993,
Miller Brewing Company ("Miller") acquired a 20% equity interest in Molson
Breweries in Canada and 100% of Molson Breweries U.S.A. Unit volume (based on
shipments) increased 5.1% in the first quarter of 1994, compared with an
estimated 1.1% volume gain for the U.S. malt beverage industry. Miller's new
ice-brewed products -- Lite Ice, Icehouse and Molson Ice -- showed strong
results in the quarter. Miller Genuine Draft volume was up, as were shipments of
Miller High Life in markets where it was successfully repositioned with near-
premium pricing. Miller Lite volume was down. Operating income for the first
quarter of 1994 increased $10 million (10.8%) from the comparable 1993 period,
due primarily to productivity savings resulting from restructuring and workforce
reductions.
Periodically, legislation is proposed which would increase excise taxes and
curtail the advertisement of beer. If implemented, such legislation could result
in volume, operating revenues and operating income declines.
Financial Services and Real Estate
__________________________________
During the first quarter of 1994, operating revenues and operating income
from financial services and real estate operations increased 4.3% and 12.5%,
respectively, from the first quarter of 1993. First quarter 1994 operating
income from financial services increased 12.1%, due primarily to gains on sales
of marketable securities. Operating income from real estate operations in 1994
increased from 1993 levels, reflecting increased sales in Colorado.
Cash Provided and Used
______________________
Net Cash Provided by Operating Activities
_________________________________________
During the first quarter of 1994, cash provided by operating activities was
$874 million, compared with $1.1 billion in the first quarter of 1993. The
decrease was due primarily to more cash used for working capital items.
Net Cash Provided By Investing Activities
_________________________________________
Cash provided by investing activities for the first quarter of 1994 was
$451 million, compared with cash used in investing activities of $591 million
for the comparable 1993 period. The change reflects a $613 million decrease in
cash used for acquisitions and a $362 million increase in cash provided by net
proceeds from finance assets. Capital expenditures were $266 million in the
first quarter of 1994, of which 59% related to food operations and 35% related
to tobacco operations.
-16-
Net Cash Used in Financing Activities
_____________________________________
During the first quarter of 1994, the Company's cash used in financing
activities was $1.3 billion, compared with $83 million provided by financing
activities during the first quarter of 1993. Cash used in financing activities
for the first quarter of 1994 was used primarily for consumer products' net
repayment of long-term debt ($643 million), cash dividends paid ($570 million),
financial services' net repayment of short-term borrowings ($271 million) and
the repurchase of common stock ($177 million), partially offset by consumer
products' net issuance of short-term borrowings ($354 million).
At March 31, 1994, the Company had consumer products short-term borrowings
of $2.9 billion, $2.7 billion of which was reclassified as long-term debt based
upon the Company's intent and ability to refinance such debt under a $8 billion
revolving bank credit agreement that expires in 1998. At December 31, 1993, the
Company had consumer products short-term borrowings of $2.6 billion, $2.3
billion of which was reclassified as long-term debt. The Company expects to
continue to refinance long-term and short-term debt from time to time. The
nature and amount of the Company's long-term and short-term debt and the
proportionate amount of each can be expected to vary as a result of future
business requirements, market conditions and other factors.
At March 31, 1994, the Company's ratio of consumer products debt to total
equity was 1.34, down from 1.41 at December 31, 1993. The change reflects a
decrease in consumer products debt, as well as an increase in stockholders'
equity. The increase in stockholders' equity was due primarily to net earnings
in the first quarter of 1994 and favorable movement in the currency translation
adjustments account, partially offset by dividends declared and the repurchase
of common stock.
The Company's ratio of consumer products debt to total equity was 1.58 at
March 31, 1993. The change from March 31, 1993 to March 31, 1994 reflects lower
consumer products debt ($2.0 billion) and increased total stockholders' equity
($581 million).
Dividends paid in the first quarter of 1994 decreased 1.9% over the
comparable period of 1993, reflecting a lower number of outstanding shares of
stock due to the Company's share repurchase program. On February 23, 1994, the
Board of Directors increased the Company's regular quarterly dividend 6.2% to
$.69 per common share. The new annualized dividend rate is $2.76 per share.
During the first quarter of 1994, the Company repurchased 4.7 million
shares of its common stock at an aggregate cost of $253.2 million (average cost
of $53.87 per share). These purchases were made in accordance with the Company's
November 1991 announcement of its intention to spend up to $2 billion to
repurchase common stock in open market transactions; in May 1992, the Board of
Directors authorized an additional $3.0 billion for such purchases. Through
March 31, 1994, cumulative purchases under the program totaled 56.6 million
shares at a cost of $4.1 billion. On February 23, 1994, the Board of Directors
extended through December 30, 1994, the existing authority to repurchase the
Company's shares, which was scheduled to expire in May 1994.
Contingencies
_____________
See Note 2 to the Condensed Consolidated Financial Statements for
discussion of contingencies.
-17-
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 2. Contingencies.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 By-laws, as amended, of the Company.
12 Statement regarding computation of ratios of earnings to fixed
charges.
(b) Reports on Form 8-K. The Registrant filed no reports on Form 8-K during
the quarter for which this report is filed.
___________
-18-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
BY /s/ HANS G. STORR
Hans G. Storr, Executive Vice President and
Chief Financial Officer
DATE May 16, 1994