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 September 30, 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 October 31, 1994, there were 859,394,687 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
September 30, 1994 and December 31, 1993 3 - 4
Condensed Consolidated Statements of Earnings for the
Nine Months Ended September 30, 1994 and 1993 5
Three Months Ended September 30, 1994 and 1993 6
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1993
and the Nine Months Ended September 30, 1994 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15 - 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 25
Item 6. Exhibits and Reports on Form 8-K. 25
Signature 26
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
September 30, December 31,
1994 1993
------------- ------------
ASSETS
CONSUMER PRODUCTS
Cash and cash equivalents $ 354 $ 182
Receivables, net 4,852 3,982
Inventories:
Leaf tobacco 2,692 3,030
Other raw materials 2,107 1,695
Finished product 2,909 2,633
------- -------
7,708 7,358
Other current assets 1,326 1,286
------- -------
Total current assets 14,240 12,808
Property, plant and equipment, at cost 18,017 16,930
Less accumulated depreciation 7,152 6,467
------- -------
10,865 10,463
Goodwill and other intangible assets
(less accumulated amortization of
$3,209 and $2,727) 19,909 19,746
Other assets 2,636 2,529
------- -------
Total consumer products assets 47,650 45,546
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,516 4,869
Real estate held for development and sale 403 489
Other assets 313 301
------- -------
Total financial services and
real estate assets 5,232 5,659
------- -------
TOTAL ASSETS $52,882 $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)
September 30, December 31,
1994 1993
------------- ------------
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 125 $ 268
Current portion of long-term debt 757 1,738
Accounts payable 2,719 3,137
Accrued taxes, except income taxes 1,263 860
Accrued marketing 2,291 1,619
Other accrued liabilities 3,280 3,492
Income taxes 1,872 1,853
Dividends payable 717 572
------- -------
Total current liabilities 13,024 13,539
Long-term debt 14,850 14,358
Deferred income taxes 495 361
Accrued postretirement health care costs 2,105 2,031
Other liabilities 4,841 4,622
------- -------
Total consumer products liabilities 35,315 34,911
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 881 929
Long-term debt 707 863
Deferred income taxes 2,899 2,706
Other liabilities 141 169
------- -------
Total financial services and
real estate liabilities 4,628 4,667
------- -------
Total liabilities 39,943 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 17,175 15,718
Currency translation adjustments (71) (711)
------- -------
18,039 15,942
Less cost of treasury stock
(74,135,297 and 58,229,749 shares) 5,100 4,315
------- -------
Total stockholders' equity 12,939 11,627
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $52,882 $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 Nine Months Ended
September 30,
-------------------------
1994 1993
------- -------
Operating revenues $48,624 $46,187
Cost of sales 20,944 20,167
Excise taxes on products 8,692 7,882
------- -------
Gross profit 18,988 18,138
Marketing, administration and research costs 11,274 11,088
Amortization of goodwill 433 419
------- -------
Operating income 7,281 6,631
Interest and other debt expense, net 941 1,068
------- -------
Earnings before income taxes and cumulative
effect of accounting change 6,340 5,563
Provision for income taxes 2,707 2,334
------- -------
Earnings before cumulative effect of
accounting change 3,633 3,229
Cumulative effect of change in method of
accounting for postemployment benefits
(net of income tax benefit of $297 million) (477)
------- -------
Net earnings $ 3,633 $ 2,752
======= =======
Weighted average number of shares 871 879
======= =======
Per share data:
Earnings before cumulative effect of
accounting change $ 4.17 $ 3.68
Cumulative effect of accounting change (.54)
------- -------
Net earnings $ 4.17 $ 3.14
======= =======
Dividends declared $ 2.205 $ 1.95
======= =======
See notes to condensed consolidated financial statements.
-5-
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
September 30,
--------------------------
1994 1993
------- -------
Operating revenues $16,710 $15,209
Cost of sales 7,094 6,658
Excise taxes on products 3,037 2,625
------- -------
Gross profit 6,579 5,926
Marketing, administration and research costs 3,975 3,734
Amortization of goodwill 147 138
------- -------
Operating income 2,457 2,054
Interest and other debt expense, net 310 343
------- -------
Earnings before income taxes 2,147 1,711
Provision for income taxes 917 744
------- -------
Net earnings $ 1,230 $ 967
======= =======
Weighted average number of shares 865 877
======= =======
Per share data:
Net earnings $ 1.42 $ 1.11
======= =======
Dividends declared $ .825 $ .65
======= =======
See notes to condensed consolidated financial statements.
-6-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1993 and
the Nine Months Ended September 30, 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 3,633 3,633
Exercise of stock options
and issuance of other stock
awards (217) 286 69
Cash dividends declared
$2.205 per share (1,919) (1,919)
Currency translation adjustments 640 640
Stock purchased (1,071) (1,071)
Decrease in unrealized
appreciation on securities (40) (40)
------ ------- ----- ------- -------
Balances, September 30, 1994 $ 935 $17,175 $ (71) $(5,100) $12,939
====== ======= ===== ======= =======
See notes to condensed consolidated financial statements.
-7-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1994 1993
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings - Consumer products $ 3,531 $ 2,678
- Financial services and real estate 102 74
------- -------
Net earnings 3,633 2,752
Adjustments to reconcile net earnings to
operating cash flows:
CONSUMER PRODUCTS
Cumulative effect of accounting change 774
Depreciation and amortization 1,243 1,197
Deferred income tax provision 151 (119)
Gains on sales of businesses (5)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (721) (471)
Inventories (80) 92
Accounts payable (490) 70
Income taxes 21 60
Other working capital items 382 (252)
Other 237 236
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 218 332
(Increase) decrease in real estate receivables (45) 60
Decrease (increase) in real estate held for
development and sale 85 (26)
Other (70) (67)
------- -------
Net cash provided by operating activities
before interest payment on zero coupon bonds 4,564 4,633
Interest payment on zero coupon bonds - financial
services and real estate (156)
------- -------
Net cash provided by operating activities 4,408 4,633
------- -------
CASH USED IN INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (1,000) (1,124)
Purchases of businesses, net of acquired cash (153) (2,628)
Proceeds from sales of businesses 100 55
Other (1) (8)
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (418) (513)
Proceeds from finance assets 804 572
------- -------
Net cash used in investing activities $ (668) $(3,646)
------- -------
See notes to condensed consolidated financial statements.
Continued
-8-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1994 1993
-------- --------
CASH USED IN FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance of short-term borrowings $ 538 $ 2,201
Long-term debt proceeds 77 1,000
Long-term debt repaid (1,399) (1,656)
FINANCIAL SERVICES AND REAL ESTATE
Net (repayment) issuance of short-term borrowings (48) 75
Long-term debt repaid (44) (290)
Purchase of treasury stock (1,009) (1,218)
Dividends paid (1,774) (1,723)
Issuance of shares 40 28
Other (5) (37)
------- -------
Net cash used in financing activities (3,624) (1,620)
Effect of exchange rate changes on cash and
cash equivalents 56 (33)
------- -------
Cash and cash equivalents:
Increase (decrease) during period 172 (666)
Balance at beginning of period 182 1,021
------- -------
Balance at end of period $ 354 $ 355
======= =======
See notes to condensed consolidated financial statements.
-9-
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. See Management's Discussion and Analysis on page 15.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by reference in
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.
Certain developments in smoking and health litigation during 1994 are
summarized below.
Continued
-10-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 action allegations. The defendants filed a request for review of
this ruling by the full panel of the appellate court. The request was denied.
In October 1994, defendants asked the Florida Supreme Court to review the March
appellate court decision. Concurrently, plaintiffs have served notice of a
hearing in the trial court for late November 1994 attempting to secure class
certification.
In May 1994, an action was filed in a Florida state court against the
leading United States tobacco manufacturers and others by plaintiffs alleging
injury and purporting to represent a class of certain smokers, certain former
smokers and their heirs. Plaintiffs cited the Florida appellate reversal
discussed above in support of their allegations of class action status.
Subsequently, the Company was voluntarily dismissed from this action, which
otherwise continues against the tobacco manufacturers, including PM Inc. In
October 1994, the trial court granted plaintiffs' motion for class
certification. The class, as certified, comprises "all United States citizens
and residents and their survivors who have...suffered, presently suffer, or who
have died from diseases and medical conditions caused by their addiction to
cigarettes that contain nicotine." Defendants, including PM Inc., will file a
notice of appeal in the Florida Third District Court of Appeals.
In May 1994, the State of Florida enacted a statute which purports to
abolish affirmative defenses in actions brought by the state seeking
reimbursement of Medicaid costs. The statute purports in such actions to adopt
a market share liability theory, to permit the introduction of statistical
evidence to prove causation, and to allow the state not to identify the
individual Medicaid recipients who received the benefits at issue in such
action. In June 1994, PM Inc. and others filed suit in Florida state court
challenging the constitutionality of the statute.
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 who allege that they are
addicted, or are the legal survivors of persons who were addicted, to tobacco
products. Plaintiffs allege that the cigarette manufacturers manipulated the
levels of nicotine in their tobacco products to make such products addictive.
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. This
motion was denied in June 1994. Plaintiffs' motion for class certification is
scheduled for hearing in December 1994.
Continued
-11-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 asserted violations of the Racketeer Influenced Corrupt
Organizations Act ("RICO") and claimed 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 agreed to dismiss the separate
second-filed case. In July 1994, defendants filed a motion to dismiss the
complaint on the grounds that the complaint fails to state a claim.
Subsequently, the Company was dismissed from this action by stipulation of the
parties; the action continued against the tobacco manufacturers, including PM
Inc. In September 1994, the United States District Court granted defendants'
motion to dismiss the complaint with prejudice. Plaintiffs have filed a notice
of appeal.
In June 1994, a case was 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 injured as a result of an alleged addiction to
cigarettes or by the alleged exposure to "second-hand" smoke. Plaintiff asserts
causes of action for fraud and deceit, negligent misrepresentation, violation of
consumer protection statutes, breach of express warranty, breach of implied
warranty, intentional infliction of emotional distress, negligence, strict
liability, and nuisance, and also seeks injunctive and declaratory relief.
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. The
plaintiff subsequently filed a motion to remand to an Alabama state court. The
motion to remand has not been ruled upon.
In May 1994, an action was filed in Mississippi state court against the
leading United States cigarette manufacturers and others, including the Company,
by the Attorney General of Mississippi seeking reimbursement of Medicaid and
other expenditures by the State of Mississippi claimed to have been made to
treat smoking-related diseases. Plaintiff also seeks an injunction barring
defendants from selling or encouraging the sale of cigarettes to minors. In
June 1994, defendants removed the case to the United States District Court for
the Southern District of Mississippi. In that same month, plaintiff moved to
remand the case back to state court. Plaintiff's motion was granted on August
17, 1994 and the case remanded to state Chancery Court. In September 1994, the
plaintiff moved to strike defendants' challenges to the sufficiency of the
complaint and the subject matter jurisdiction of the Chancery Court. Also in
September 1994, defendants moved to transfer the case from the Chancery Court to
the Circuit Court. In October 1994, defendants moved for judgment on the
pleadings. All three motions are presently pending.
Continued
-12-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In August 1994, an action was filed in Minnesota state court against the
leading United States cigarette manufacturers and others, including the Company,
by the Attorney General of Minnesota and Blue Cross and Blue Shield of Minnesota
seeking reimbursement of Medicaid and other expenditures by the plaintiffs
claimed to have been made to treat smoking-related diseases. Plaintiffs assert
causes of action of negligent performance of a voluntary undertaking, violation
of Minnesota antitrust laws, violation of consumer protection statutes,
restitution, and conspiracy. Various motions are pending.
In September 1994, an action was filed in West Virginia state court against
the leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of West Virginia seeking reimbursement of
Medicaid and other expenditures by the State of West Virginia claimed to have
been made to treat smoking-related diseases. Plaintiff asserts causes of action
for restitution, public nuisance, negligent performance of a voluntary
undertaking, fraud, conspiracy and concert of action, aiding and abetting,
violation of consumer protection statutes, and violation of the West Virginia
Antitrust Act. Plaintiff also seeks an injunction barring defendants from
selling or encouraging the sale of cigarettes to minors.
The Commonwealth of Massachusetts has enacted legislation specifically
authorizing lawsuits similar to that described in the preceding paragraphs.
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 the Eastern District, 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 two cases in the Southern District described
above, and in an additional purported class action filed in September in the
Southern District against the Company and certain of its directors, 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.
Continued
-13-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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.
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.
Litigation is subject to many uncertainties and the Company and PM Inc. are
unable to predict the outcome of this matter. Pretrial discovery continues.
-14-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
________________________________________________________________________
Operating Results
_________________
For the Nine Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ -----------------
(in millions)
1994 1993 1994 1993
------- ------- ------ ------
Tobacco $21,820 $19,965 $4,769 $4,249
Food 23,082 22,712 2,716 2,609
Beer 3,372 3,255 368 326
Financial services
and real estate 350 255 160 161
Amortization of goodwill (433) (419)
Unallocated corporate
expenses (299) (295)
------- ------- ------ ------
Total $48,624 $46,187 $7,281 $6,631
======= ======= ====== ======
For the Three Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ -----------------
(in millions)
1994 1993 1994 1993
------- ------- ------ ------
Tobacco $ 7,677 $ 6,551 $1,663 $1,294
Food 7,793 7,466 887 821
Beer 1,140 1,111 111 94
Financial services
and real estate 100 81 48 68
Amortization of goodwill (147) (138)
Unallocated corporate
expenses (105) (85)
------- ------- ------ ------
Total $16,710 $15,209 $2,457 $2,054
======= ======= ====== ======
Operating revenues of $48.6 billion for the first nine months of 1994
increased $2.4 billion (5.3%) and operating income increased $650 million (9.8%)
over the comparable 1993 period. Operating revenues of $16.7 billion for the
third quarter of 1994 increased $1.5 billion (9.9%) and operating income
increased $403 million (19.6%) over the comparable 1993 period. In the third
quarter of 1994, operating income in all consumer product business segments
increased over the comparable 1993 period.
-15-
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 the
first nine months of 1993 earnings before cumulative effect of accounting
change.
Operating Results by Business Segment
_____________________________________
Tobacco
_______
For the Nine Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ -----------------
(in millions)
1994 1993 1994 1993
------- ------- ------ ------
Domestic tobacco $ 8,327 $ 7,755 $2,490 $2,320
International tobacco 13,493 12,210 2,279 1,929
------- ------- ------ ------
Total $21,820 $19,965 $4,769 $4,249
======= ======= ====== ======
For several years, the tobacco industry, including PM Inc., has faced a
number of issues which have affected volume, operating revenues and operating
income. In the first nine months of 1994 and subsequently, these concerns
proliferated and new issues emerged. 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 legislation or
other governmental action seeking to assess the industry with liability
therefor) and the diminishing social acceptance of smoking. See Note 2 to
Condensed Consolidated Financial Statements.
Currently, the federal excise tax on cigarettes is $12 per thousand ($.24 per
pack). In the first nine months of this year, the legislative health care
debate produced numerous proposals for increasing the federal excise tax on
tobacco, ranging from increases of $1.75 per pack down to $.45 per pack.
Legislation in the Senate and in the House of Representatives contained
provisions which were identical and which, if enacted, would have resulted in an
increase of $.45 per pack, to be phased in over a five year period commencing
August 1, 1995. Congress adjourned without taking action on these proposals.
It is anticipated that higher excise taxes, if implemented, could result in
volume declines for PM Inc. and the cigarette industry and might cause shifts
between the premium and discount segments.
Legislation or other governmental action is proposed periodically that not
only would increase excise taxes but also would curtail further the
advertisement and use of tobacco products. During the first nine months 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 tax 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.
-16-
It is not possible to determine what, if any, governmental legislation or
regulations will be adopted relating to cigarettes or to smoking. 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.
DOMESTIC TOBACCO. During the first nine months of 1994, domestic cigarette
industry volume (based on shipments) shifted from the discount segment to the
premium segment. The premium and discount segments accounted for approximately
67% and 33%, respectively, of the domestic cigarette industry in the first nine
months of 1994, compared with 62% and 38%, respectively, in the comparable
period of 1993. Actions taken by PM Inc. in 1993 in response to the highly
price sensitive market environment are discussed below.
PM Inc.'s domestic volume (based on shipments) was 164.7 billion units for
the first nine months of 1994, an increase of 14.5% over the comparable 1993
period, reflecting the success of PM Inc.'s new pricing strategy and its
marketing and promotional programs. This compared with an industry increase of
8.2%. PM Inc.'s market share for the first nine months of 1994 was 44.6%, an
increase of 2.5 share points from the comparable 1993 period. In the premium
segment, volume in PM Inc.'s brands increased 25.8% in the first nine months of
1994, compared with a 16.9% increase for the industry, resulting in a category
share gain of 3.8 share points to 53.3%. The Marlboro family's volume was up
24.2 billion units (30.8%) for a 27.8% share of the total industry, as compared
with a 23.0% share in the first nine months of 1993. In the discount segment,
PM Inc.'s shipments decreased 16.6% to 31.9 billion units in the first nine
months of 1994, compared with an industry decrease of 6.2%, resulting in a
decrease of 3.3 share points in this segment to 26.5%. (See below for a
discussion of volume changes in the third quarter of 1994.)
Since the implementation of the strategy announced on April 2, 1993 and
subsequent actions taken by PM Inc. (see below), Nielsen retail sales data
indicate share gains for PM Inc. and Marlboro, growing from their low point of
41.6% and 22.0%, respectively, in March 1993 to 46.2% and 29.3%, respectively,
in September 1994. Additionally, retail share of PM Inc.'s other premium
brands, as a group, climbed to 8.8% in September 1994, up from 8.3% in August
1993, when PM Inc. lowered their wholesale list prices. (March 1993 retail
market shares were restated in the first quarter of 1994 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.)
During the first nine months of 1994, the Company's domestic tobacco
operating revenues increased 7.4% due primarily to volume increases ($1.1
billion) and favorable product mix ($506 million), partially offset by price
decreases ($1.1 billion). Operating income for the first nine months of 1994
increased 7.3% from the comparable 1993 period, due primarily to volume
increases ($733 million) and favorable product mix, and lower marketing,
administration and research costs ($46 million), partially offset by price
decreases ($1.1 billion).
-17-
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. Its
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
proved successful, with PM Inc. recording share and volume gains for Marlboro
and its other premium brands since lowering prices.
INTERNATIONAL TOBACCO. Operating revenues increased 10.5% due primarily to
favorable volume/mix ($588 million), higher foreign excise taxes ($539 million)
and price increases ($174 million), partially offset by currency movement ($19
million). Total international unit volume increased 56 billion units (15.8%) to
408 billion units. Volume advanced in most markets, including Germany, Italy,
France, Spain, Holland, Belgium, Central and Eastern Europe, the Middle East,
Hong Kong, Japan, Korea, Argentina and Brazil. Volume declined in Turkey as
poor economic conditions persisted. The Company's market share advanced in most
of its major international markets with record shares achieved in Germany,
Italy, France, Spain, Holland, Belgium, Switzerland, Finland, Japan, Korea,
Hong Kong, Singapore, Argentina and Brazil. International volume continued to
grow for Marlboro and the Company's other U.S. heritage brands. Operating
income increased 18.1% due primarily to volume/mix increases ($287 million) and
price increases and lower costs (aggregating $247 million), partially offset by
higher marketing expenses ($122 million) and currency movement ($56 million).
For the Three Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ -----------------
(in millions)
1994 1993 1994 1993
------ ------ ------ ------
Domestic tobacco $2,906 $2,488 $ 863 $ 616
International tobacco 4,771 4,063 800 678
------ ------ ------ ------
Total $7,677 $6,551 $1,663 $1,294
====== ====== ====== ======
-18-
DOMESTIC TOBACCO. During the third quarter of 1994, domestic cigarette
industry volume (based on shipments) shifted from the discount segment to the
premium segment. The premium and discount segments accounted for approximately
68% and 32%, respectively, of the domestic cigarette industry in the third
quarter of 1994, compared with 66% and 34%, respectively, in the comparable
period of 1993.
PM Inc.'s domestic volume (based on shipments) was 57.1 billion units for the
third quarter of 1994, an increase of 9.6% over the comparable 1993 period,
compared with an industry increase of 5.3%. PM Inc.'s volume increase reflects
the success of PM Inc.'s new pricing strategy and its marketing and promotional
programs. PM Inc.'s market share was 44.9%, up 1.8 share points from the
comparable 1993 period. In the premium segment, volume in PM Inc.'s brands
increased 13.5% in the quarter, compared with a 7.4% increase for the industry,
resulting in a category share gain of 2.9 share points to 53.9%. The Marlboro
family's volume was up 5.3 billion units (17.2%) for a 28.6% share of the total
industry, as compared with a 25.7% share in the third quarter of 1993. In the
discount segment, PM Inc.'s shipments decreased 4.9% to 10.6 billion units,
compared with an industry increase of 1.3%, resulting in a loss of 1.6 share
points in this segment to 25.8%.
PM Inc.'s domestic tobacco operating revenues increased 16.8% due primarily
to volume increases ($238 million), price increases ($115 million) and favorable
product mix ($54 million). Operating income increased 40.1% from the comparable
1993 period, due primarily to volume increases ($140 million), price increases
($89 million) and favorable product mix, partially offset by higher marketing,
administration and research costs ($33 million).
INTERNATIONAL TOBACCO. Operating revenues increased 17.4% due primarily to
higher foreign excise taxes ($349 million), favorable volume/mix ($227 million),
currency movement ($83 million) and price increases ($48 million). Total
international unit volume increased 23 billion units (19.0%) to 144 billion
units. Volume advanced in most markets, including Germany, Italy, France, Spain,
Holland, Belgium, Central and Eastern Europe, the Middle East, Hong Kong, Korea
and Argentina. Volume declined in Turkey as poor economic conditions persisted.
The Company's market share advanced in most of its major international markets,
with record shares achieved in Germany, Italy, France, Spain, Holland, Belgium,
Switzerland, Finland, Japan, Korea, Hong Kong, Singapore, Argentina and Brazil.
International volume continued to grow for Marlboro and the Company's other U.S.
heritage brands. Operating income increased 18.0% due primarily to price
increases and lower costs (aggregating $84 million) and volume/mix increases
($78 million), partially offset by higher marketing expenses ($43 million).
-19-
Food
____
For the Nine Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ -----------------
(in millions)
1994 1993 1994 1993
------- ------- ------ ------
North American food $15,952 $15,887 $1,960 $1,864
International food 7,130 6,825 756 745
------- ------- ------ ------
Total $23,082 $22,712 $2,716 $2,609
======= ======= ====== ======
During the first nine months of 1994, NORTH AMERICAN FOOD operating revenues
increased 0.4% due to volume increases ($399 million) and price increases, due
primarily to rising commodity costs ($303 million), partially offset by the
impact of dispositions, net of acquisitions ($562 million) and currency movement
($75 million). Volume rose from increases in cheese; in cereals and processed
meats due primarily to new products and line extensions; in frozen pizza due to
geographic expansion and category growth; and in foodservice and Canadian
operations. Volume declined in commodity oil products, dinners and enhancers
(rice products, stuffing mixes and syrups) and coffee (reflecting category
contraction from higher pricing due to increased green bean costs). Operating
income increased 5.2% over the comparable 1993 period, due primarily to volume
increases ($146 million) and price increases, net of cost increases ($100
million), partially offset by higher marketing, administration and research
costs ($158 million).
In October 1994, the Company announced an agreement to sell The All American
Gourmet Company (frozen dinners business) to H. J. Heinz Company. Separately,
the Company announced that it is in negotiations which may result in the sale of
its Kraft Foodservice distribution business.
In May 1994, new labeling requirements for food products, issued by the U.S.
Food and Drug Administration, became effective. Compliance with the new
requirements has not had, and is not expected to have, a material adverse impact
on domestic food results of operations.
Operating revenues for INTERNATIONAL FOOD increased 4.5% due primarily to
acquisitions ($284 million) and price increases, partially offset by currency
movement ($232 million). Volume grew in coffee, due partly to acquisitions, but
also because the trade stepped up their purchases in anticipation of price
increases due to higher green bean costs. Confectionery volume increased,
supported by new product launches. Grocery volume was down in several European
markets due to intense price competition, partially offset by increases in the
Asia/Pacific region due to improved results from key brands. Operating income
increased 1.5% from the 1993 period, due primarily to acquisitions ($30 million)
and price increases, partially offset by higher marketing, administration and
research costs ($57 million) and currency movement ($49 million).
-20-
For the Three Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ -----------------
(in millions)
1994 1993 1994 1993
------ ------ ------ ------
North American food $5,293 $5,261 $ 618 $ 581
International food 2,500 2,205 269 240
------ ------ ----- -----
Total $7,793 $7,466 $ 887 $ 821
====== ====== ===== =====
During the third quarter of 1994, NORTH AMERICAN FOOD operating revenues
increased 0.6% due to price increases ($117 million, due in part to higher
coffee prices reflecting high green bean costs in the third quarter) and volume
increases ($87 million), partially offset by the impact of dispositions, net of
acquisitions ($149 million) and currency movement ($23 million). Volume
increased in cheese; in cereals and processed meats due primarily to new product
introductions and line extensions; and in frozen pizza due to geographic
expansion and category growth. Volume declined in coffee (reflecting category
contraction from higher prices), beverages and commodity oils. Operating income
increased 6.4% over the comparable 1993 period, due primarily to price
increases, net of cost increases ($88 million) and volume increases ($24
million), partially offset by higher marketing, administration and research
costs ($73 million).
Operating revenues for INTERNATIONAL FOOD increased 13.4% due primarily to
price increases ($175 million), currency movement ($90 million), volume
increases ($16 million) and acquisitions ($13 million). Coffee volume rose in
Europe, partly due to acquisitions, but also because the trade stepped up their
purchases in anticipation of price increases due to higher green bean costs.
Confectionery volume was down, due primarily to hotter-than-normal weather in
Europe this summer, partially offset by new product launches. Cheese volume in
Europe and grocery volume in the Asia/Pacific region advanced due to
acquisitions and improved results from key brands. Operating income increased
12.1% from the 1993 period, due primarily to price increases, net of cost
increases ($77 million), partially offset by higher marketing expenses ($52
million).
Beer
____
NINE MONTHS ENDED SEPTEMBER 30
Operating revenues for the first nine months of 1994 increased $117 million
(3.6%) from the comparable 1993 period. This increase was due to the
acquisition of Molson Breweries U.S.A. Inc. in the second quarter of 1993 ($71
million), price/mix increases ($61 million) and volume increases ($41 million),
partially offset by the disposition of distributorships ($56 million). Unit
volume (based on shipments) increased 2.9% in the first nine months of 1994
reflecting strong growth in premium brands (7.8%), partially offset by a
decrease in budget brands. Premium brand growth was led by ice-brewed product
introductions. Miller Lite volume declined, but volume for the Lite brand
family grew due to the introduction of Lite Ice. Operating income increased $42
million (12.9%) over the comparable 1993 period, due primarily to price/mix
increases ($33 million) and higher volume ($18 million), partially offset by the
disposition of distributorships ($8 million).
-21-
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.
QUARTER ENDED SEPTEMBER 30
Operating revenues for the third quarter of 1994 increased $29 million (2.6%)
from the comparable 1993 period. This increase was due to volume increases ($30
million) and price/mix increases ($22 million), partially offset by the
disposition of distributorships ($23 million). Unit volume (based on shipments)
increased 2.8% reflecting the strong performance of the Company's premium brand
portfolio, which had volume increases of 7.7% for the quarter. Premium growth
was led by sales of Miller's new ice-brewed products and volume increases for
brands imported by Molson Breweries U.S.A. Inc. Partially offsetting this
increase was a volume decline for the Company's budget brands. Overall volume
for the Lite brand family was higher on the success of Lite Ice, partially
offset by a modest decline in Miller Lite. Operating income increased $17
million (18.1%) from the comparable 1993 period, due primarily to volume
increases ($13 million) and price/mix increases ($12 million), partially offset
by the disposition of distributorships ($7 million).
Financial Services and Real Estate
__________________________________
NINE MONTHS ENDED SEPTEMBER 30
For the first nine months of 1994, operating revenues from financial services
and real estate operations increased 37.3% and operating income decreased 0.6%
from the first nine months of 1993. Operating revenues from financial services
decreased 14.1% from the comparable 1993 period, due primarily to lower finance
asset investment levels, reflecting the sale of the Company's stock and bond
portfolio in the first quarter. The proceeds from the sales were not
reinvested, but used for a $475 million dividend to Philip Morris Companies Inc.
Operating income from financial services decreased 18.8% due primarily to high
third quarter 1993 income recorded after the Company revalued its leveraged
lease portfolio to account for the new federal income tax rate and lower 1994
finance asset investment income. Operating income from real estate operations
increased from 1993 levels, due primarily to higher residential land sales in
Southern California and Colorado.
QUARTER ENDED SEPTEMBER 30
During the third quarter of 1994, operating revenues from financial services
and real estate operations increased 23.5% and operating income decreased 29.4%
from the third quarter of 1993. Operating revenues from financial services
decreased 20.0% due primarily to lower finance asset investment levels versus
1993. Operating income from financial services decreased 48.6% due primarily to
high third quarter 1993 income recorded after the Company revalued its leveraged
lease portfolio to account for the new federal income tax rate and lower 1994
finance asset investment income. Operating income from real estate operations
in 1994 increased from 1993 levels, due primarily to higher residential land
sales in Southern California and Colorado.
-22-
Cash Provided and Used
______________________
Net Cash Provided by Operating Activities
_________________________________________
During the first nine months of 1994, cash provided by operating activities
was $4.4 billion, compared with $4.6 billion in the first nine months of 1993.
The decrease was due primarily to more cash used for working capital items in
1994 and payment of accreted interest on matured zero coupon bonds, partially
offset by higher earnings.
Free cash flow is a measure of excess cash generated by a company and is
available for debt repayment, share repurchase and acquisitions. The Company
defines free cash flow as cash provided by operating activities less capital
expenditures, dividends paid to stockholders and net investments in finance
assets. For the first nine months of 1994, consolidated free cash flow totaled
$2.0 billion, as compared to $1.8 billion in the comparable 1993 period. The
increase was due primarily to lower net investments in finance assets and higher
earnings, partially offset by more cash used for working capital items in 1994
and repayment of accreted interest on matured zero coupon bonds.
Net Cash Used in Investing Activities
_____________________________________
Cash used in investing activities for the first nine months of 1994 was $668
million, compared with $3.6 billion for the comparable 1993 period. The
decrease reflects a $2.5 billion decrease in cash used for acquisitions, net of
dispositions, as well as a $327 million increase in net proceeds from finance
assets. Capital expenditures were $1.0 billion in the first nine months of
1994, of which 60% related to food operations and 31% related to tobacco
operations.
During the first nine months of 1993, the Company acquired Freia Marabou a.s,
Scandinavia's leading confectionery company, at a cost of approximately $1.3
billion, a North American ready-to-eat cereal business at a cost of $454 million
and Terry's Group in the United Kingdom for $295 million. In addition, the
Company acquired a 20% equity interest in Molson Breweries in Canada and 100% of
Molson Breweries U.S.A. Inc., at a cost of $295 million. The Company also
increased its investment in tobacco operations in Central and Eastern Europe.
Net Cash Used in Financing Activities
_____________________________________
During the first nine months of 1994, the Company's net cash used in
financing activities was $3.6 billion, compared with $1.6 billion during the
first nine months of 1993. The change reflects a $490 million net issuance of
short-term borrowings in 1994 compared with $2.3 billion in the 1993 period, as
well as a $1.4 billion net repayment of long-term debt in 1994 compared with
$946 million in the 1993 period. Cash used in financing activities for the
first nine months of 1994 also reflects dividends paid ($1.8 billion) and the
purchase of common stock ($1.0 billion).
The Company may 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.
-23-
At September 30, 1994, the Company's ratio of consumer products debt to
equity ratio was 1.22, down from 1.41 at December 31, 1993. The change reflects
an increase in stockholders' equity which was due primarily to net earnings in
the first nine months of 1994 and favorable movement in the currency translation
adjustment ($640 million), partially offset by dividends declared and purchases
of common stock.
Dividends paid in the first nine months of 1994 increased 3.0% over the
comparable period of 1993, reflecting a 6.2% increase in the annual dividend
rate to $2.76 per share from $2.60 per share, partially offset by a lower number
of outstanding shares of stock. On August 31, 1994, the Board of Directors
increased the Company's quarterly dividend by 19.6% (payable October 11),
representing an annualized dividend rate of $3.30 per share.
During the first nine months of 1994, the Company repurchased 19.9 million
shares of its common stock at an aggregate cost of $1.1 billion; 7.5 million
shares were repurchased in the third quarter of 1994. 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 billion for such
purchases. Through September 30, 1994, cumulative purchases under the program
totaled 71.8 million shares at a cost of $4.9 billion. On August 31, 1994, the
Board of Directors authorized a new three-year share repurchase program worth $6
billion. The new program took effect on October 27, 1994, after the balance of
the previous repurchase program had been used.
Contingencies
_____________
See Note 2 to the Condensed Consolidated Financial Statements.
-24-
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.
27 Financial Data Schedule.
(b) Reports on Form 8-K. Registrant filed no reports on Form 8-K during
the quarter for which this report is filed.
___________
-25-
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 November 14, 1994
-26-