<PAGE> 1
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, 1995
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.
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(Exact name of registrant as specified in its charter)
Virginia 13-3260245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
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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
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At October 31, 1995, there were 834,736,904 shares outstanding of the
registrant's common stock, par value $1 per share.
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PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
<TABLE>
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as at
September 30, 1995 and December 31, 1994 3 - 4
Condensed Consolidated Statements of Earnings for the
Nine Months Ended September 30, 1995 and 1994 5
Three Months Ended September 30, 1995 and 1994 6
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1994
and the Nine Months Ended September 30, 1995 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 20 - 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 32
Item 6. Exhibits and Reports on Form 8-K. 32
Signature 33
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
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<S> <C> <C>
ASSETS
CONSUMER PRODUCTS
Cash and cash equivalents $ 878 $ 184
Receivables, net 4,945 4,382
Inventories:
Leaf tobacco 2,999 3,029
Other raw materials 1,776 1,943
Finished product 2,837 3,015
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7,612 7,987
Other current assets 1,288 1,355
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Total current assets 14,723 13,908
Property, plant and equipment, at cost 18,899 18,254
Less accumulated depreciation 7,627 7,083
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11,272 11,171
Goodwill and other intangible assets
(less accumulated amortization of
$3,777 and $3,342) 19,490 19,744
Other assets 2,795 2,633
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Total consumer products assets 48,280 47,456
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,828 4,519
Real estate held for development and sale 344 401
Other assets 238 273
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Total financial services and
real estate assets 5,410 5,193
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TOTAL ASSETS $53,690 $52,649
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</TABLE>
See notes to condensed consolidated financial statements.
Continued
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<PAGE> 4
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
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<S> <C> <C>
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 129 $ 181
Current portion of long-term debt 1,807 712
Accounts payable 2,280 3,789
Accrued taxes, except income taxes 1,319 948
Accrued marketing 2,100 2,086
Other accrued liabilities 3,312 3,216
Income taxes 1,792 1,325
Dividends payable 840 708
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Total current liabilities 13,579 12,965
Long-term debt 13,324 14,085
Deferred income taxes 355 385
Accrued postretirement health care costs 2,235 2,164
Other liabilities 5,526 5,609
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Total consumer products liabilities 35,019 35,208
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 483 604
Long-term debt 923 890
Deferred income taxes 3,241 3,010
Other liabilities 126 151
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Total financial services and
real estate liabilities 4,773 4,655
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Total liabilities 39,792 39,863
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 19,369 17,489
Currency translation adjustments 356 (47)
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20,660 18,377
Less cost of treasury stock
(99,449,826 and 82,461,374 shares) 6,762 5,591
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Total stockholders' equity 13,898 12,786
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $53,690 $52,649
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1995 1994
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Operating revenues $50,335 $48,624
Cost of sales 20,345 20,944
Excise taxes on products 9,943 8,692
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Gross profit 20,047 18,988
Marketing, administration and research costs 11,498 11,274
Amortization of goodwill 443 433
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Operating income 8,106 7,281
Interest and other debt expense, net 916 941
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Earnings before income taxes and cumulative
effect of accounting changes 7,190 6,340
Provision for income taxes 2,984 2,707
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Earnings before cumulative effect of
accounting changes 4,206 3,633
Cumulative effect of changes in method of
accounting (Note 3) (28)
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Net earnings $ 4,178 $ 3,633
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Weighted average number of shares 844 871
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Per share data:
Earnings before cumulative effect of
accounting changes $ 4.98 $ 4.17
Cumulative effect of accounting changes (0.03)
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Net earnings $ 4.95 $ 4.17
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Dividends declared $ 2.65 $ 2.205
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
--------------------------
1995 1994
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Operating revenues $16,689 $16,710
Cost of sales 6,565 7,094
Excise taxes on products 3,360 3,037
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Gross profit 6,764 6,579
Marketing, administration and research costs 3,876 3,975
Amortization of goodwill 149 147
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Operating income 2,739 2,457
Interest and other debt expense, net 290 310
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Earnings before income taxes 2,449 2,147
Provision for income taxes 1,016 917
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Net earnings $ 1,433 $ 1,230
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Weighted average number of shares 839 865
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Per share data:
Net earnings $ 1.71 $ 1.42
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Dividends declared $ 1.00 $ .825
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 7
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1994 and
the Nine Months Ended September 30, 1995
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Earnings Total
Reinvested Currency Cost of Stock-
Common in the Translation Treasury holders'
Stock Business Adjustments Stock Equity
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<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 935 $15,718 $ (711) $(4,315) $11,627
Net earnings 4,725 4,725
Exercise of stock options
and issuance of other stock
awards (217) 324 107
Cash dividends declared
($3.03 per share) (2,623) (2,623)
Currency translation adjustments 664 664
Stock purchased (1,600) (1,600)
Change in unrealized depreciation
on securities (114) (114)
------ ------- ------ ------- -------
Balances, December 31, 1994 935 17,489 (47) (5,591) 12,786
Net earnings 4,178 4,178
Exercise of stock options
and issuance of other stock
awards (55) 329 274
Cash dividends declared
($2.65 per share) (2,233) (2,233)
Redemption of stock rights (9) (9)
Currency translation adjustments 403 403
Stock purchased (1,500) (1,500)
Change in unrealized depreciation
on securities (1) (1)
------ ------- ------ ------- -------
Balances, September 30, 1995 $ 935 $19,369 $ 356 $(6,762) $13,898
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 8
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
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1995 1994
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CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 4,101 $ 3,531
- Financial services and real estate 77 102
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Net earnings 4,178 3,633
Adjustments to reconcile net earnings to
operating cash flows:
CONSUMER PRODUCTS
Cumulative effect of accounting changes 46
Depreciation and amortization 1,283 1,243
Deferred income tax provision 87 151
Gains on sales of businesses (61)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (791) (721)
Inventories 281 (80)
Accounts payable (1,364) (490)
Income taxes 465 21
Other working capital items (98) 382
Other 137 237
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 186 218
Decrease (increase) in real estate receivables 33 (45)
Decrease in real estate held for
development and sale 55 85
Other (70)
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Net cash provided by operating activities
before interest payment on zero coupon bonds 4,437 4,564
Interest payment on zero coupon bonds - financial
services and real estate (156)
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Net cash provided by operating activities 4,437 4,408
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (1,054) (1,000)
Purchases of businesses, net of acquired cash (96) (153)
Proceeds from sales of businesses 1,177 100
Other (92) (1)
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (398) (418)
Proceeds from finance assets 105 804
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Net cash used in investing activities $ (358) $(668)
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</TABLE>
See notes to condensed consolidated financial statements.
Continued
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<PAGE> 9
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1995 1994
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CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance of short-term borrowings $ 49 $ 538
Long-term debt proceeds 530 77
Long-term debt repaid (420) (1,399)
FINANCIAL SERVICES AND REAL ESTATE
Net repayment of short-term borrowings (121) (48)
Long-term debt repaid (44)
Purchase of treasury stock (1,513) (1,009)
Dividends paid (2,101) (1,774)
Issuance of shares 208 40
Stock rights redemption (9)
Other (16) (5)
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Net cash used in financing activities (3,393) (3,624)
Effect of exchange rate changes on cash and
cash equivalents 8 56
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Cash and cash equivalents:
Increase during period 694 172
Balance at beginning of period 184 182
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Balance at end of period $ 878 $ 354
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 10
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(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. Neither third quarter nor nine month results should be
considered indicative of full-year results.
These statements should be read in conjunction with the consolidated
financial statements and related notes which appear in the Company's annual
report to stockholders and which are incorporated by reference into the
Company's annual report on Form 10-K for the year ended December 31, 1994.
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.
Derivative financial instruments:
Derivative financial instruments are used by the Company to manage its foreign
currency and interest rate exposures. Realized and unrealized gains and losses
on foreign currency swaps that are effective as hedges of net assets in
foreign subsidiaries are offset against the foreign exchange gains or losses in
a component of stockholders' equity. The interest differential to be paid or
received under the currency and related interest rate swap agreements is
recognized over the life of the related debt and is included in interest and
other debt expense, net. Unrealized gains and losses on forward contracts that
are effective as hedges of assets, liabilities and commitments are deferred and
are recognized in income as the related transaction is realized.
Note 2. Contingencies:
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Legal proceedings covering a wide range of matters are pending in various
U.S. and foreign jurisdictions against the Company and its subsidiaries,
including Philip Morris Incorporated ("PM Inc."), a wholly-owned subsidiary of
the Company. In certain of the proceedings pending against PM Inc. and, in some
cases, the Company, plaintiffs allege injury resulting from cigarette smoking or
exposure to cigarette smoking and seek compensatory and, in some cases, punitive
damages.
Continued
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<PAGE> 11
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Among the defenses raised by defendants to certain of the litigation in
which individuals seek recovery for personal injuries allegedly caused by
cigarette smoking is preemption by the Federal Cigarette Labeling and
Advertising Act, as amended (the "Act"). In June 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 pending litigation are summarized below.
SMOKING AND HEALTH LITIGATION
-----------------------------
In 1991, a purported class action was filed against the leading United
States cigarette manufacturers, in which certain flight attendants, claiming to
represent a class of approximately 60,000 individuals, alleged personal injury
caused by exposure to environmental tobacco smoke ("ETS") aboard aircraft.
Broin, et al. v. Philip Morris Incorporated, et al., Circuit of the Eleventh
Judicial Circuit in and for Dade County Florida, Case No. 91-49738-CA-20. In
December 1994, the trial court certified a class consisting of "all non-smoking
flight attendants who are or have been employed by airlines based in the United
States and are suffering from diseases and disorders caused by their exposure to
second hand cigarette smoke in airline cabins." Defendants have appealed the
class certification decision and order to the Florida Third District Court of
Appeals.
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 certain
smokers, certain former smokers and their heirs. Engle, et al. v. R.J. Reynolds
Tobacco Company, et al., Circuit Court of the Eleventh Judicial Circuit in and
for Dade County, Florida, Case No. 94-08273-CA-20. 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 have appealed the class certification decision and order to the
Florida Third District Court of Appeals. Oral argument on the appeal was held on
September 27, 1995 at which time the court took the matter under advisement.
Continued
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<PAGE> 12
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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. Two lawsuits are presently pending relating to the statute: (1) In June
1994, PM Inc. and others filed suit in Florida state court challenging the
constitutionality of the statute. Associated Industries of Florida, Inc., et al.
v. State of Florida Agency for Health Care Administration, et al., Circuit Court
of the Second Judicial Circuit in and for Leon County, Florida, Case No.
94-3128. In June 1995, the Court declared certain parts of the statute to be
unconstitutional and declared other parts to be constitutional. The Court also
declared that the agency charged with enforcing the statute was
unconstitutional. In July, the State of Florida appealed the ruling and PM Inc.
then cross-appealed. On August 17, 1995, the Florida Supreme Court accepted the
appeal. The Florida Supreme Court heard oral arguments on the appeal on November
6, 1995 and took the matter under advisement; (2) In February 1995, the State of
Florida filed an action against the tobacco industry under the statute,
attempting to recover certain Medicaid costs and seeking certain injunctive
relief, the funding of certain programs and the disgorging of profits from the
sale of cigarettes in Florida. The State of Florida, et al. v. The American
Tobacco Company, et al., Circuit Court of the Fifteenth Judicial Circuit in and
for Palm Beach County, Florida, Case No. CL 95 1466 AO. This action had been
stayed by the trial court pending further order of the court. On October 6,
1995, the court partially lifted the stay and permitted plaintiffs to file a
motion seeking permission to take discovery. In addition to these two lawsuits,
during the second quarter of 1995, legislation repealing the statute was passed
by the Florida legislature and vetoed by the Governor of Florida after the
legislature had adjourned. At its next session, the legislature may consider
overriding the veto.
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
purported 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. Castano, et al. v. The American Tobacco Company Inc., et al.,
United States District Court, Eastern District of Louisiana, Case No. 94-1044.
Plaintiffs allege that the cigarette manufacturers concealed information
regarding the addictive nature of nicotine and manipulated the levels of
nicotine in their tobacco products to make such products addictive. Plaintiffs'
motion for class certification was heard in December 1994, and in February 1995,
the court conditionally certified the class for certain issues relating to
allegations of fraud, breach of warranty, intentional tort, negligence, strict
liability, consumer protection and punitive damages. However, the court declined
to certify a class on the issues of injury in fact, causation, reliance,
compensatory damages, certain affirmative defenses and on plaintiffs' claim for
medical monitoring. Defendants, including the Company, asked the District Court
to certify its class certification decision for immediate appeal to the United
States Court of Appeals for the Fifth Circuit. The Court granted that request
and the Fifth Circuit has agreed to hear the appeal.
Continued
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<PAGE> 13
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In March 1994, an action was filed in an Alabama state court against three
leading United States cigarette manufacturers, including PM Inc. Lacey, et al.
v. Lorillard Tobacco Company, Inc., et al., Circuit Court of Fayette County,
Alabama, Case No. CV-94-024. Plaintiff, claiming to represent all smokers who
have smoked or are smoking cigarettes 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. A motion to
stay the proceeding was granted in June 1994.
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 diseases allegedly caused by cigarette smoking. Moore v. The American
Tobacco Company, et al., Chancery Court of Jackson County, Mississippi, Case No.
94-1429. Plaintiff also seeks punitive damages and an injunction barring
defendants from selling or encouraging the sale of cigarettes to minors. In
February 1995, the Court granted the plaintiff's motion to strike certain of
defendants' challenges to the sufficiency of the complaint. The court
subsequently denied defendants' motion for partial summary judgment, which
asserted that the Attorney General lacked the authority to bring those claims
seeking Medicaid reimbursement. In July 1995, plaintiffs filed a motion seeking
to preclude defendants, including PM Inc., from asserting their "set off"
defenses which seek reduction or elimination of damages based on benefits
arising to the state through the sale of cigarettes. That motion is presently
pending.
In August 1994, an action was filed in Minnesota state court against the
leading United States cigarette manufacturers and others 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 diseases allegedly caused by cigarette smoking. Minnesota, et al. v.
Philip Morris Incorporated, et al., Minnesota District Court, Second Judicial
District, County of Ramsey, Case No. C1-94-8565. Plaintiffs' asserted causes of
action include negligent performance of a voluntary undertaking, violation of
Minnesota antitrust laws, violation of consumer protection statutes,
restitution, and conspiracy. Plaintiffs also seek injunctive relief, as well as
treble damages for the alleged antitrust violations. In August 1995, defendants
requested that the Minnesota Supreme Court determine whether Blue Cross/Blue
Shield of Minnesota has standing to bring a direct cause of action against
defendants to recover alleged increased health care costs. In September 1995,
the Supreme Court accepted review of this matter.
Continued
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<PAGE> 14
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 diseases allegedly caused by cigarette smoking. McGraw v. The
American Tobacco Company, et al., Circuit Court of Kanawha County, West
Virginia, Case No. 94-1707. 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. In December 1994, defendants filed a motion to dismiss,
claiming that the Attorney General did not have standing to assert certain
counts in the complaint, and separate motions to dismiss the antitrust and
consumer fraud counts of the complaint. In addition, the non-manufacturing
defendants, including the Company, have moved to dismiss based upon the absence
of personal jurisdiction. In May 1995, the Court dismissed eight of ten counts
of the complaint for lack of standing and in October 1995, the court issued a
final order entering judgment on behalf of defendants as to those eight counts.
The Court did not rule on the antitrust and consumer fraud counts. In
October 1995, the court granted defendants' motion to prohibit prosecution of
this case pursuant to a contingent fee agreement with private counsel ruling
that the Attorney General lacked the authority to enter into such an agreement.
The Commonwealth of Massachusetts has enacted legislation specifically
authorizing lawsuits similar to those described in the preceding three
paragraphs. To date, no such lawsuit has been filed.
In February 1995, Rothman's, Benson & Hedges, Inc. (in which the Company,
through subsidiaries, owns a 40% interest) was served with a statement of claim
commencing a purported class action in the Ontario Court of Justice, Toronto,
Canada, against Imperial Tobacco Limited, RJR-MacDonald Inc., and Rothman's,
Benson & Hedges. LeTourneau v. Rothman's, et al., Ontario Court of Justice,
Toronto, Canada. Court File No. 95-CU-82186. The lawsuit seeks damages in the
amount of $1,000,000 and punitive and exemplary damages on behalf of each
plaintiff, and an order requiring the funding of rehabilitation centers. The
plaintiffs seek certification of a class of persons who have suffered loss as a
result of their alleged nicotine addiction and their estates and persons with
related Family Law Act claims. The defendants have requested a more particular
statement of claim prior to delivering their statement of defense. In July 1995,
the court granted Mr. LeTourneau's motion to withdraw as a class representative
and two new class representatives have been substituted.
In July 1995, a purported class action on behalf of all Brazilian smokers
and former smokers was filed in State Court in Sao Paulo, Brazil, naming Philip
Morris Marketing, S.A. ("PM Marketing") as a co-defendant. The Smoker Health
Defense Association, et al. v. Souza Cruz, S.A. and Philip Morris Marketing,
S.A., 19th Lower Civil Court of the Central Courts of the Judiciary District of
Sao Paulo, Brazil. The plaintiffs allege that the defendants failed to warn that
smoking is "addictive" and engaged in misleading advertising. The plaintiff has
obtained an ex-parte order reversing the burden of proof and placing the burden
on defendants. PM Marketing has appealed the order and has denied all material
allegations in the complaint.
Continued
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<PAGE> 15
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
OTHER TOBACCO RELATED LITIGATION
--------------------------------
In June 1995, a complaint was filed in the United States District Court
for the District of Maryland naming PM Inc. as the sole defendant. Sacks, et al.
v. Philip Morris Inc., United States District Court, District of Maryland, Case
No. WMN-95-1840. The lawsuit seeks certification of a class consisting of "all
persons and estates injured as a result of the defendant's alleged failure to
manufacture a fire safe cigarette since 1987." Plaintiffs allege in their
complaint that PM Inc. intentionally withheld and suppressed material
information relating to technology to produce a cigarette less likely to cause
fires and failed to design and sell its cigarettes using the alleged technology.
Causes of action are asserted based on federal and state consumer protection
statutes, strict liability, negligence and breach of implied warranties.
Compensatory and punitive damages are sought. On September 11, 1995, PM Inc.
filed a motion to dismiss the complaint based on plaintiffs' failure to state a
claim.
In May 1995, PM Inc. announced a recall of certain of its products and in
June and July four purported class actions relating to the recall were filed,
one in New Jersey, one in Texas and two in Louisiana. Netherland, et al. v.
Philip Morris USA, et al., United States District Court, Western District of
Louisiana, Monroe Division, Case No. CV95-1249-M; Sansone, et al. v. Hoechst
Celanese Corporation, et al., Superior Court of New Jersey, Hudson County,
Case No. HUD-L-4342-95; Tijerina, et al. v. Philip Morris, Inc., et al.,
United States District Court, Northern District of Texas, Amarillo Division,
Case No. 2-95-CV-120; and Walton, et al. v. Philip Morris, Inc., United States
District Court, Middle District of Louisiana, Case No. 95-693. The actions
alleged, among other things, that PM Inc. sold defective products that caused
injury to the plaintiffs. In the Louisiana cases, PM Inc. has removed the
cases to federal court. In the Sansone action in New Jersey, PM Inc., in
July 1995, filed an answer denying the material allegations of the complaint
and filed a motion to dismiss portions of the plaintiffs' complaint. In
September 1995, a consent order was entered with the court dismissing all of
the plaintiffs' claims except strict liability. In the Walton action in
Louisiana, plaintiff voluntarily dismissed the case in November 1995.
In September 1995, the plaintiffs in the Tijerina action (referenced
above), filed a second amended complaint to change the scope of the complaint to
allege that PM Inc., has, for many years, knowingly manufactured filtered
products that are defective because they contain "defective filters". The second
amended complaint also names two additional plaintiffs. The second amended
complaint also purports to be brought on behalf of a class of all persons who
have used filtered products manufactured by PM Inc. and who have suffered
adverse health effects. Tijerina, et al. v. Philip Morris, Inc., et al., United
States District Court, Northern District of Texas, Amarillo Division, Case No.
2-95-CV-120. Plaintiffs allege that the filters in these products contain
hazardous chemicals, that cellulose acetate fibers break away from the filters
and are inhaled and ingested by the consumer when the filtered products are used
and that the tobacco in these products contains harmful pesticide residues.
Plaintiffs further allege that they relied on PM Inc.'s false and fraudulent
misrepresentations, made through advertising, regarding the safety of the use of
the filters.
Continued
-15-
<PAGE> 16
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
OTHER LITIGATION
----------------
In April 1993, the Company and certain 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. San Leandro Emergency Medical Group Profit Sharing Plan, et al. v.
Philip Morris Companies Inc., et al., United States District Court for the
Southern District of New York, Case No. 93 Civ. 2131. 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 December 1994, defendants' motion to dismiss, heard by the court in
November 1993, was granted and the case was dismissed. Plaintiffs' appeal was
argued before the United States Court of Appeals for the Second Circuit on
September 12, 1995. The matter is currently pending before that court. (Case No.
95-7516.)
In April 1994, the Company, PM Inc. and certain officers and directors
were named as defendants in a complaint filed as a purported class action in the
United States District Court in the Eastern District of New York. Lawrence, et
al. v. Philip Morris Companies Inc., et al., United States District Court,
Eastern District of New York, Case No. 94 Civ. 1494 (JG). 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 December 1994, a motion to dismiss by
defendants was denied. Defendants have filed an answer denying the material
allegations of the complaint. In August 1995, the court granted plaintiffs'
motion for class certification, certifying this action as a class action on
behalf of all persons (other than persons associated with defendants) who
purchased common stock of the Company during the period July 10, 1991 through
April 1, 1993, inclusive, and who held such stock at the close of business on
April 1, 1993. In October 1995, the Company moved to amend the court's class
certification order to permit the Company to take an interlocutory appeal from
that order to the United States Court of Appeals for the Second Circuit. Oral
argument on that motion has been scheduled for December 1, 1995.
In April 1994, the Company, PM Inc. and certain officers and directors
were named as defendants in several purported class actions that have been
consolidated in the United States District Court in the Southern District of New
York. Kurzweil, et al. v. Philip Morris Companies Inc., et al., United States
District Court for the Southern District of New York, Case Nos. 94 Civ. 2373
(MBM) and 94 Civ 2546 (MBM) and State Board of Administration of Florida, et al.
v. Philip Morris Companies Inc., et al., United States District Court for the
Southern District of New York, Case No. 94 Civ. 6399 (MBM). In those cases,
plaintiffs assert that defendants violated federal securities laws by, among
other things, making allegedly false and misleading statements 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. On September 11, 1995, the court granted defendants'
motion to dismiss the two complaints in their entirety. The court granted the
plaintiff in the State Board action leave to replead one of its claims.
Continued
-16-
<PAGE> 17
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In March 1995, an antitrust action was filed in California state court
against four leading United States cereal manufacturers, including the Post
Division of Kraft Foods, Inc., by plaintiffs purporting to represent all
California residents who purchased defendants' cereal products for consumption
during the four years preceding the date upon which the complaint was filed.
McIver v. General Mills, Inc., et al., Superior Court of the State of
California, County of Santa Barbara, Case No. 206666. Plaintiffs seek treble
damages and the return of profits resulting from the defendants' alleged
conspiracy to fix and raise prices of cereal products sold to California
consumers. In April 1995, a second purported class action similar to the earlier
action was filed in the same court. In August 1995, the two cases were
consolidated. In September 1995, the court granted defendants' motions for
summary judgment.
In August 1995, a shareholder derivative action was filed purportedly on
behalf of the Company and against certain current and former officers and
directors. Friedland, et al. v. Geoffrey C. Bible, et al., Supreme Court of the
State of New York, County of New York, Index No. 118987/95. The plaintiffs
allege that the individual defendants breached their fiduciary duties and
engaged in intentional misconduct, gross negligence, gross mismanagement and
waste by allegedly failing to properly disclose or supervise conduct allegedly
undertaken by the Company or its agents regarding the health effects of
cigarettes, the alleged addictiveness of cigarettes, and the alleged
manipulation of the nicotine content of cigarettes. In September 1995, the
Company and the individual defendants filed a motion to dismiss. In November
1995, the parties filed with the court a joint stipulation in support of
dismissal and a proposed order of dismissal without prejudice.
Each of the Company and its subsidiaries believes, and each has been so
advised by counsel handling the respective cases, that it has a number of valid
defenses to all pending litigation. All such cases are, and will continue to be,
vigorously defended. It is not possible to predict the outcome of this
litigation. 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. There have also 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 and
Medicaid 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.
Continued
-17-
<PAGE> 18
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In March, 1994, the Company and PM Inc. filed an action in the Circuit
Court for the City of Richmond, Virginia against American Broadcasting
Companies, Inc.("ABC") and others alleging injury caused by false and defamatory
statements made by defendants on various nationally televised news programs.
Philip Morris Companies Inc., et al. v. American Broadcasting Companies, et al.,
Circuit Court for the City of Richmond, Virginia, Case No. 760CL94X00816-00.
Among the statements giving rise to the action was 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. sought compensatory and punitive damages totaling $10 billion. On August
21, 1995, ABC and PM Inc. and the Company settled this libel suit upon ABC
agreeing to publicly apologize to PM Inc. and the Company and pay their legal
fees, out-of-pocket expenses and litigation costs. On August 22, 1995, the case
was dismissed.
Note 3. New Accounting Standards:
- ---------------------------------
Postretirement Benefits Other Than Pensions - Non-U.S. Plans
- ------------------------------------------------------------
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," for its non-U.S. retiree benefit
plans. Under SFAS No. 106, the Company is required to accrue the estimated
cost of retiree benefit payments, other than pensions, during employees' active
service periods. The Company previously expensed the cost of these benefits,
which are principally health care, as claims were incurred.
Consistent with the transition methodology for U.S. plans adopted in 1991,
the Company has recognized this change in accounting on the immediate
recognition basis. The cumulative effects as of January 1, 1995 of adopting
SFAS No. 106 for non-U.S. plans were an increase in other assets of $14
million, an increase in accrued postretirement health care costs of $35 million
and a decrease in 1995 net earnings of $21 million ($.02 per share). However,
application of SFAS No. 106 during the nine months ended September 30, 1995 did
not materially reduce 1995 net earnings before cumulative effect of accounting
changes.
Health care benefits for non-U.S. plans, outside Canada, are provided
generally through local government plans. The Company's Canadian subsidiary
provides health care and other benefits to its retired employees, their covered
dependents and beneficiaries. Generally, employees who have attained age 55
and who have rendered 10 years of service are eligible for these benefits.
Continued
-18-
<PAGE> 19
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company's non-U.S. postretirement health care plans currently are not
funded. The status of the non-U.S. plans at January 1, 1995 was as follows (in
millions):
Actuarial present value of accumulated
postretirement benefit obligation:
<TABLE>
<S> <C>
Retirees $17
Fully eligible active plan participants 6
Other active plan participants 12
---
Accrued postretirement health care costs $35
===
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 15% in 1995, gradually declining to 5% by
the year 2005 and remaining at that level thereafter. The assumed dental care
trend rate was 5%. A one-percentage-point increase in the assumed health care
cost trend rate for each year would increase the accumulated postretirement
benefit obligation as of January 1, 1995 and net postretirement health care
cost by approximately 13% and 15%, respectively.
The assumed discount rate used in determining the accumulated
postretirement benefit obligation for the Canadian plans was 9.75%.
Contributions Received and Contributions Made
- ---------------------------------------------
Effective January 1, 1995, the Company adopted SFAS No. 116, "Accounting
for Contributions Received and Contributions Made." This Statement requires the
Company to recognize an unconditional promise to make a contribution as an
expense in the period the promise is made. The Company had previously expensed
contributions when payment was made.
The cumulative effect at January 1, 1995 of adopting SFAS No. 116 reduced
1995 net earnings by $7 million ($.01 per share), net of $4 million of income
tax benefits. However, application of SFAS No. 116 during the nine months
ended September 30, 1995 did not materially reduce 1995 net earnings before
cumulative effect of accounting changes.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
- -----------------------------------------------------------------------
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of," which must be adopted by the Company by January 1,
1996. The Company is currently evaluating SFAS No. 121 and has not yet
estimated the impact of adoption, if any.
Note 4. Capital Stock
- ----------------------
On March 1, 1995, the Board of Directors authorized the redemption of the
Company's Stock Purchase Rights. The rights were redeemed on April 10, 1995,
by payment of $.01 per common share to stockholders of record on March 15,
1995.
-19-
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- ------------------------------------------------------------------------
Operating Results
- -----------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------------------
Operating Revenues Operating Income
-------------------- ---------------------
(in millions)
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tobacco $24,704 $21,820 $5,523 $4,769
Food 21,950 23,082 2,834 2,716
Beer 3,396 3,372 398 368
Financial services
and real estate 285 350 120 160
Amortization of goodwill (443) (433)
Unallocated corporate
expenses (326) (299)
------- ------- ------ ------
Total $50,335 $48,624 $8,106 $7,281
======= ======= ====== ======
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------
Operating Revenues Operating Income
------------------ --------------------
(in millions)
1995 1994 1995 1994
---- ---- ---- ----
Tobacco $ 8,433 $ 7,677 $1,921 $1,663
Food 7,001 7,793 921 887
Beer 1,163 1,140 119 111
Financial services
and real estate 92 100 39 48
Amortization of goodwill (149) (147)
Unallocated corporate
expenses (112) (105)
------- ------- ------ ------
Total $16,689 $16,710 $2,739 $2,457
======= ======= ====== ======
</TABLE>
-20-
<PAGE> 21
Operating revenues of $50.3 billion for the first nine months of 1995
increased $1.7 billion (3.5%) and operating income increased $825 million
(11.3%) over the comparable 1994 period. Excluding the results of divested food
businesses discussed in Food - Business Environment below, operating revenues
and operating income for the first nine months of 1995 increased 9.4% and 12.4%,
respectively, over the comparable 1994 period. Operating revenues of $16.7
billion for the third quarter of 1995 decreased $21 million (0.1%) and operating
income increased $282 million (11.5%) over the comparable 1994 period. Excluding
the results of divested food businesses discussed in Food - Business Environment
below, operating revenues and operating income for the third quarter of 1995
increased 6.7% and 12.7%, respectively, over the comparable 1994 period.
Operating Results by Business Segment
- -------------------------------------
Tobacco
- -------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------------------
Operating Revenues Operating Income
---------------------- ------------------
(in millions)
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic tobacco $ 8,504 $ 8,327 $2,797 $2,490
International tobacco 16,200 13,493 2,726 2,279
------- ------- ------ ------
Total $24,704 $21,820 $5,523 $4,769
======= ======= ====== ======
</TABLE>
BUSINESS ENVIRONMENT. The tobacco industry, including PM Inc., has faced,
and continues to face, a number of issues which have affected or which may
affect volume, operating revenues and operating income. These include proposed
federal regulatory controls (including, as discussed below, the publication of
proposed regulations by the United States Food and Drug Administration (the
"FDA") which purport to regulate tobacco products as "drugs" or medical
"devices"), actual and proposed excise tax increases, federal, state and local
governmental and private restrictions on smoking (including additional
restrictions imposed by airlines), new and proposed restrictions on tobacco
manufacturing, marketing, advertising and sales, new and proposed regulations to
ban or severely restrict smoking in workplaces and in buildings permitting
public access, to require substantial additional health warning and product
content information on cigarette packages and in advertising, and to eliminate
the tax deductibility of a portion of the cost of tobacco advertising, increased
assertions of adverse health effects associated with both smoking and exposure
to environmental tobacco smoke (and legislation or other governmental action
seeking to ascribe to the industry responsibility and liability therefor), the
diminishing social acceptance of smoking, and private plaintiff class action
litigation as well as actions by states seeking Medicaid reimbursement (see Note
2 to the Condensed Consolidated Financial Statements included herein).
In June 1995, PM Inc. entered into a consent decree with the Department of
Justice pursuant to which it agreed to reposition its brand advertising at
professional football, basketball and hockey arenas so as not to be exposed to
prominent television coverage.
-21-
<PAGE> 22
In June 1995, PM Inc. announced that it has voluntarily undertaken a
program to limit minors' access to cigarettes. Elements of the program include
discontinuing free cigarette sampling to consumers in the United States, placing
a notice on cigarette cartons and packs for sale in the U.S. stating "Underage
Sale Prohibited," taking measures to encourage retailer compliance with minimum
age laws, and independent auditing of the program.
In August 1995, President Clinton announced and the FDA initiated a
rule-making proceeding purportedly designed to prevent minors from smoking. In
the proposal, the FDA asserted that it has jurisdiction over nicotine as a
"drug" and over cigarettes as a medical "device" (a nicotine delivery system)
under the provisions of the Food, Drug and Cosmetic Act. The proposal includes
severe restrictions on the distribution, marketing and advertising of
cigarettes. The period for public comment on the proposal expires on January 2,
1996. The FDA's assertion of jurisdiction, if not reversed by judicial or
legislative action, could lead to more expansive FDA-imposed restrictions on
cigarette operations than those set forth in the current proposed regulations.
PM Inc., four other domestic cigarette manufacturers and an advertising firm
have sued the FDA, seeking a judicial declaration that the FDA has no authority
to regulate cigarettes and asking the court to issue an injunction requiring the
FDA to withdraw its proposed regulations. Similar suits have been filed against
the FDA by manufacturers of smokeless tobacco products, by operators of retail
stores and by advertising firms.
It is not possible to determine the outcome of the FDA regulatory
initiative announced by President Clinton, the related litigation, or what, if
any, other legislation or regulations will be adopted relating to cigarettes
or to smoking. However, any or all of the foregoing could have an adverse
impact on PM Inc.'s volume, operating revenues and operating income, the
extent of which cannot be determined.
In June 1995, PM Inc. received a grand jury subpoena from the U.S.
Attorney for the Southern District of New York requesting various documents. The
subpoena was served following publication of an article in The New York Times
that made allegations about PM Inc. documents and supposedly secret research
relating to nicotine. Although PM Inc. believes the allegations in the article
are without merit, the outcome of the investigation, which is in its early
stages, cannot be predicted.
In October 1995, PM Inc. received a Civil Investigative Demand ("CID")
from the Antitrust Division of the U.S. Department of Justice relating to the
subject matter of two previous CID's received by PM Inc. in January and June
1994. The CID's require PM Inc. to produce documents and respond to
interrogatories relating to the possibility of "joint activity to restrain
competition in the manufacture and sale of cigarettes, including joint activity
to limit or restrict research and development or product innovation." Certain
present and former employees of PM Inc. have been deposed or have received CID's
noticing their depositions in connection with the subject matter of the
investigation. Although PM Inc. does not believe any such activity has taken
place, it is unable to predict the outcome of this investigation.
In addition to the foregoing, there is litigation pending against the
Company and its subsidiaries which is discussed in Note 2 to the Condensed
Consolidated Financial Statements. The Company's position with regard to this
litigation is set forth therein.
-22-
<PAGE> 23
DOMESTIC TOBACCO. During the first nine months of 1995, PM Inc.'s
operating revenues increased 2.1% from the comparable 1994 period, due primarily
to price increases ($103 million) and improved product mix ($64 million).
Operating income for the first nine months of 1995 increased 12.3% from the
comparable 1994 period, due primarily to price increases ($103 million), lower
marketing, administration and research costs ($115 million), lower cost of sales
($118 million) and improved product mix ($60 million), partially offset by a
charge taken in the second quarter of 1995 for a product recall ($100 million).
The premium and discount segments (based on shipments) accounted for
approximately 69.7% and 30.3%, respectively, of domestic cigarette industry
volume in the first nine months of 1995, which represents a shift towards the
premium segment when compared with approximately 67.4% for the premium segment
and 32.6% for the discount segment in the first nine months of 1994.
PM Inc.'s domestic volume (based on shipments) for the first nine months
of 1995 was 164.7 billion units, even with the first nine months of 1994,
compared with an industry decline of 2.6% over the comparable period.
PM Inc.'s market share (based on shipments) for the first nine months of
1995 was 45.8%, an increase of 1.2 share points from the comparable period of
1994. In the premium segment, volume in PM Inc.'s brands increased 2.3%,
compared with an 0.8% increase for the industry, resulting in a premium segment
share of 54.2%, an increase of 0.8 share points from the first nine months of
1994. The Marlboro family's volume was up 4.1 billion units (4.0%) for a 29.7%
share of the total industry, an increase of 1.9 share points from the first nine
months of 1994. In the discount segment, PM Inc.'s shipments decreased 9.6% to
28.8 billion units in the first nine months of 1995 compared with an industry
decline of 9.6%, resulting in unchanged market share in this segment of 26.4%.
Retail sales data (compiled by the A.C. Nielsen Company), a more accurate
reflection of consumer buying habits than shipment data, indicate PM Inc. and
Marlboro market shares of 47.1% and 30.4%, respectively, in the first nine
months of 1995, compared with 46.1% and 28.3%, respectively, in the first nine
months of 1994. The market share for PM Inc.'s other premium brands as a group
was 8.9% in the first nine months of 1995, down slightly from the first nine
months of 1994. In the discount segment, Basic increased its segment share 1.1
points to 15.5% in the first nine months of 1995.
PM Inc. cannot predict change or rates of change in the relative sizes of
the premium and discount segments or in PM Inc.'s shipments, market share (based
on shipments) or retail market share.
On May 4, 1995, a major competitor of PM Inc. increased the average price
of its domestic brands by $1.50 per thousand. PM Inc. also raised the price of
its domestic brands by $1.50 per thousand, effective with shipments of May 9,
1995.
INTERNATIONAL TOBACCO. During the first nine months of 1995, Philip Morris
International's ("PMI") tobacco operating revenues increased 20.1% due primarily
to higher foreign excise taxes ($1.3 billion), currency movement ($651 million),
higher volume/mix ($603 million) and price increases ($186 million). Operating
income increased 19.6% due primarily to higher volume/mix ($292 million), price
increases ($186 million) and currency movement ($190 million), partially offset
by higher marketing, administration and research costs.
Total international unit volume grew 55.8 billion units (13.7%) to 463.8
billion units. Volume advanced in most major markets, including significant
gains in Germany, Italy, Spain, Central and Eastern Europe, Turkey, the Middle
East, Japan and Korea. In the growing American blend segment, PMI's portfolio of
U.S.-heritage and international brands together gained 17.2% in volume during
the first nine months of 1995.
-23-
<PAGE> 24
PMI continued to improve its market share in most of its major
international markets with significant increases in Germany, Italy, Spain,
Holland, Belgium, the Czech and Slovak Republics, Turkey, Japan, Korea, Hong
Kong, Singapore and Argentina.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------------------
Operating Revenues Operating Income
------------------- ----------------
(in millions)
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic tobacco $2,928 $2,906 $ 972 $ 863
International tobacco 5,505 4,771 949 800
------ ------ ------ ------
Total $8,433 $7,677 $1,921 $1,663
====== ====== ====== ======
</TABLE>
DOMESTIC TOBACCO. During the third quarter of 1995, PM Inc.'s operating
revenues increased 0.8% from the comparable 1994 period, due primarily to price
increases ($59 million) and improved product mix ($13 million), partially offset
by lower volume ($52 million). Operating income increased 12.6% due primarily to
price increases ($59 million), lower marketing, administration and research
costs ($43 million), lower fixed manufacturing cost ($23 million)and improved
product mix ($12 million), partially offset by lower volume ($32 million).
The premium and discount segments (based on shipments) accounted for
approximately 69.8% and 30.2%, respectively, of domestic cigarette industry
volume in the third quarter of 1995, which represents a shift towards the
premium segment when compared with approximately 67.7% for the premium segment
and 32.3% for the discount segment in the third quarter of 1994.
PM Inc.'s domestic volume (based on shipments) was 56.1 billion units for
the third quarter of 1995, a decrease of 1.8% from the comparable period of
1994, compared with a 3.4% decline in total industry shipments. This decrease
was due, in part, to wholesalers having moved their early-July purchases to the
end of June to accommodate the weekend timing of the July 4th holiday, thus
shifting what would have been third quarter unit sales to the second quarter.
The decrease was also due to wholesalers reducing their inventories during the
quarter and to one less shipping day in the third quarter of 1995 compared with
the third quarter of 1994. Due to these timing shifts in shipments, PM Inc.
management believes that retail data, discussed in the second paragraph below,
is more representative of PM Inc.'s third quarter market share performance
relative to the third quarter of 1994.
PM Inc.'s market share (based on shipments) for the third quarter of 1995
was 45.6%, an increase of 0.7 share points from the third quarter of 1994. In
the premium segment, volume in PM Inc.'s brands decreased 0.7% from the third
quarter of 1994, compared with a 0.5% decrease for the industry, resulting in a
premium share of 53.8%, a loss of 0.1 share points from the third quarter of
1994. The Marlboro family's volume was up 0.3% for a 29.7% share of the total
industry, compared with a 28.5% share in the third quarter of 1994. In the
discount segment, PM Inc.'s shipments decreased 6.9% to 9.9 billion units in the
third quarter of 1995, compared with an industry decrease of 9.7%, resulting in
an increase of 0.8 share points in this segment, from the third quarter of 1994,
to 26.6%.
-24-
<PAGE> 25
Retail sales data (compiled by the A.C. Nielsen Company) a more accurate
reflection of consumer buying habits than shipment data, indicate PM Inc. and
Marlboro had market shares of 47.1% and 30.6%, respectively, in the third
quarter of 1995 as compared with 46.3% and 29.1%, respectively, in the third
quarter of 1994. As a group, PM Inc.'s other premium brands had an 8.9% share in
the third quarter of 1995, up slightly from the third quarter of 1994. In the
discount segment, Basic increased its segment share 1.4 points to 15.8% in the
third quarter of 1995.
PM Inc. cannot predict change or rates of change in the relative sizes of
the premium and discount segments or in PM Inc.'s shipments, market share (based
on shipments) or retail market share.
INTERNATIONAL TOBACCO. During the third quarter of 1995, PMI's
international tobacco operating revenues increased 15.4% due primarily to higher
foreign excise taxes ($341 million), higher volume/mix ($144 million), currency
movement ($205 million) and price increases ($52 million). Operating income
increased 18.6% due primarily to price increases ($52 million), higher
volume/mix ($49 million) and currency movement ($93 million), partially offset
by higher marketing, administration and research costs.
Total international unit volume increased 17.5 billion units (12.2%) to
161.3 billion units. Volume grew in most major markets, including significant
gains in Germany, Italy, Spain, Central and Eastern Europe, Turkey, the Middle
East, Japan and Korea. Although product mix improved, volume was down in France
reflecting the impact of an August 1, tax-driven price increase which adversely
affected industry volume. In the growing American blend segment, PMI's portfolio
of U.S.-heritage and international brands together gained 13.5% in volume during
the quarter.
PMI continued to improve its market share in most of its major
international markets, with significant increases in Germany, Italy, Spain,
Holland, Belgium, the Czech and Slovak Republics, Turkey, Japan, Korea, Hong
Kong, Singapore and Argentina.
Food
- ----
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
-------------------------------------------------------
Operating Revenues Operating Income
------------------- -------------------
(in millions)
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
North American food $13,913 $15,952 $2,022 $1,960
International food 8,037 7,130 812 756
------- ------- ------ ------
Total $21,950 $23,082 $2,834 $2,716
======= ======= ====== ======
</TABLE>
-25-
<PAGE> 26
BUSINESS ENVIRONMENT. Several steps have been taken to build the value of
the premium brands, reduce costs and increase profitability in the Company's
food businesses. Effective January 1995, the North American food business was
reorganized to fully integrate the operations of the former Kraft USA and
General Foods USA. The combined organization, named Kraft Foods, Inc., has begun
to streamline operations and improve effectiveness and customer response.
Similarly, European food operations continue to be integrated into one entity,
Kraft Jacobs Suchard.
In addition to the above steps, certain domestic food businesses have been
sold as part of a broad strategy to rebalance the Company's branded food
portfolio for enhanced growth and profitability. These include The All American
Gourmet Company, maker of frozen meals and side dishes, which was divested in
the fourth quarter of 1994 and several businesses in 1995, as discussed below.
During the first quarter of 1995, Kraft Foods, Inc. sold the distribution
business of Kraft Foodservice for $728 million. Also, during the third quarter
of 1995, Kraft Foods, Inc. sold its specialty oils, marshmallow and caramels
businesses for $343 million. The divested businesses had operating revenues of
approximately $4.4 billion for the year ended December 31, 1994, net of sales to
Kraft Foodservice by Kraft Foods, Inc.'s remaining businesses. The divestiture
of these businesses resulted in no material net gain or loss during the first
nine months of 1995.
Subsequent to the third quarter, Kraft Foods, Inc. sold its bakery
businesses and its North American margarine business for approximately $1.0
billion. These businesses had operating revenues of approximately $1.5 billion
for the year ended December 31, 1994. The sales are expected to result in gains
in the fourth quarter of 1995. Consistent with the previously announced decision
to divest nonstrategic businesses, the Company is evaluating actions to be taken
in the fourth quarter regarding its worldwide food operations. It is possible
that these actions would include asset write-downs of businesses to be sold or
facilities to be closed. The net impact of these actions and gains on sales of
businesses is not expected to be material.
The 1995 divestitures are not expected to have a material effect on the
Company's future results of operations and are expected to improve the operating
profit margin of North American food operations.
During the second half of 1994 and into the first quarter of 1995, both
the North American and International food businesses were affected by higher
coffee prices due to higher green coffee bean costs, resulting from frosts in
Brazil in the second quarter of 1994. Late in the fourth quarter of 1994, green
coffee bean costs moderated slightly, due primarily to a larger Brazilian crop
than originally anticipated and sharply lower consumption. They remained stable
through the first quarter of 1995. During the second quarter of 1995, bean costs
decreased significantly as consumption declined further, but rose in the third
quarter in response to an agreement among coffee producing nations to restrict
exports.
NORTH AMERICAN FOOD. During the first nine months of 1995, operating
revenues decreased 12.8% due primarily to the impact of divestitures ($2.5
billion), partially offset by price increases ($291 million) and volume
increases ($224 million). Operating income increased 3.2% over the comparable
1994 period, due primarily to volume increases ($113 million) and price
increases, net of cost increases ($47 million), partially offset by higher
marketing, administration and research costs ($37 million) and the impact of
divestitures ($70 million).
-26-
<PAGE> 27
Kraft Foods, Inc. sold substantially all of the distribution business of
Kraft Foodservice in February 1995; its specialty oils, marshmallow and caramels
businesses in the third quarter of 1995 and all of the frozen dinners business
of The All American Gourmet Company in the fourth quarter of 1994. Excluding
these divestitures, North American food operating revenues and operating income
increased 4.1% and 7.0%, respectively, in the first nine months of 1995, versus
the comparable period of 1994.
Volume grew in beverages, on the strength of ready-to-drink fruit juices;
cheese, led by growth in the process and natural cheese segments; processed
meats, driven by lunch combinations and slice packs; ready-to-eat and packaged
desserts, due to enhanced marketing efforts and the introduction of line
extensions and frozen pizza, helped by geographic expansion and new product
introductions. Volume decreased in cereals, due to a general slowdown in
industry sales and heightened competition; and in pourable and spoonable salad
dressings, due to declines in industry sales. Coffee volume was down, reflecting
higher prices due to higher green bean costs in the first half of the year. In
Canada, volume decreased due primarily to the strategic decision to exit several
low-margin product lines. Market shares were higher in the majority of North
American food's top categories.
INTERNATIONAL FOOD. Operating revenues for the first nine months of 1995
increased 12.7% over the comparable 1994 period, due primarily to currency
movement ($584 million), price increases ($474 million) and the impact of
acquisitions ($96 million), partially offset by volume decreases ($245 million).
Operating income increased 7.4% over the comparable 1994 period, due primarily
to price increases, net of higher costs ($39 million) and lower marketing,
administration and research costs ($105 million), partially offset by lower
volume ($93 million).
Overall volume declined in the first nine months of 1995. In Western
Europe, volume declined due to market softness and intense competition across
all core categories. In Central and Eastern Europe, volume increased in
confectionery products, while the Asia/Pacific region recorded increases in
cheese and grocery, partially offset by decreases in coffee volumes. In Latin
America, total volume was higher in the first nine months of 1995, driven by
powdered soft drinks in Argentina and Brazil and higher ice cream volume in
Brazil, partially offset by lower ice cream volume in Argentina.
During the first nine months of 1995, a Scandinavian cereal operation and
an equity interest in an Italian grocery operation were sold at gains. In
addition, a lower-of-cost-or-market charge was recorded for coffee inventories
and a write-down was recorded for assets in facilities to be closed. The net
impact of these items was not material to operating income.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------------------
Operating Revenues Operating Income
--------------------- ----------------
(in millions)
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
North American food $4,366 $5,293 $ 635 $ 618
International food 2,635 2,500 286 269
------ ------ ------ ------
Total $7,001 $7,793 $ 921 $ 887
====== ====== ====== ======
</TABLE>
-27-
<PAGE> 28
NORTH AMERICAN FOOD. Operating revenues decreased 17.5% due primarily to
the impact of divestitures ($1.1 billion), partially offset by volume increases
($84 million), price increases ($31 million) and improved product mix ($17
million). Operating income increased 2.8% over the comparable 1994 period, due
primarily to improved product mix ($39 million), volume increases ($9 million),
and lower marketing, administration and research expense ($37 million),
partially offset by cost increases, net of price increases ($42 million) and the
impact of divestitures ($25 million).
Excluding the divestitures discussed above, North American food operating
revenues and operating income increased 3.2% and 7.3%, respectively, in the
third quarter of 1995, versus the comparable period of 1994.
Volume grew in most key categories including coffee, reflecting lower
prices due to lower green bean costs in the third quarter of 1995 compared with
the third quarter of 1994; beverages, on the strength of ready-to-drink fruit
juices; processed meats, driven by the continued success of lunch combinations
and product introductions; desserts, on the strength of ready-to-eat desserts
and product introductions in the dry packaged desserts and yogurt categories;
frozen pizza, helped by new product introductions; cheese due to growth in
process cheese slices and grated cheese; and Canadian operations. Volume
decreased in spoonable salad dressings and tablespreads due to declines in
industry sales and in cereals due to a general slowdown in the industry and
heightened competition.
INTERNATIONAL FOOD. Operating revenues for the third quarter of 1995
increased 5.4% over the comparable 1994 period, due primarily to currency
movement ($111 million), price increases ($76 million) and the impact of
acquisitions ($10 million), partially offset by lower volume ($60 million).
Operating income increased 6.3% over the comparable 1994 period, due primarily
to lower marketing, administration and research costs ($68 million), partially
offset by cost increases, net of price increases (netting to $39 million) and
lower volume ($10 million).
Overall volume was down in the third quarter of 1995 compared with the
third quarter of 1994. In Western Europe, volume declined primarily due to
continuing softness in coffee markets (particularly Germany), the impact of an
unusually hot summer on confectionery sales and intense price competition in the
cheese and grocery categories. In Germany, Kraft Foods' largest international
coffee market, recent data indicate that coffee consumption appears to be
recovering from the effect of previously higher prices resulting from higher
green bean costs. Volume grew in the developing markets of Central and Eastern
Europe, Asia and Latin America. In Central and Eastern Europe, confectionery
volume grew in Bulgaria, Romania and Lithuania. In the Asia/Pacific region,
volume advanced in cheese and grocery, particularly the Philippines. In Latin
America, total volume was higher in the third quarter, driven by powdered soft
drinks in Argentina and Brazil and higher ice cream volume in Brazil, partially
offset by lower ice cream volume in Argentina.
During the third quarter of 1995, a Scandinavian cereal operation was sold
at a gain. In addition, a write-down was recorded for assets in facilities to be
closed. The net impact of these items was not material to operating income.
-28-
<PAGE> 29
Beer
- ----
NINE MONTHS ENDED SEPTEMBER 30
Operating revenues for the first nine months of 1995 increased $24 million
(0.7%) from the comparable 1994 period, due to price/mix improvements ($25
million), partially offset by volume decreases. Operating income increased $30
million (8.2%) over the comparable 1994 period due to price/mix improvements and
lower costs (aggregating $57 million), partially offset by higher marketing,
administration and research costs ($25 million) and volume decreases.
Shipment volume decreased 0.1%. Domestic shipments were 1.0% lower,
reflecting the current softness in the domestic beer industry, but were
partially offset by growth in Miller's international sales. Shipments of
premium-priced beers rose 2.0% to account for 81.9% of shipments in the first
nine months of 1995, compared with 80.3% in the comparable period of 1994.
Premium brand growth was led by the initial success of Red Dog and increased
shipments of Miller Lite, reflecting enhanced advertising and marketing.
Shipments of Miller Genuine Draft and ice beers were down versus prior year.
QUARTER ENDED SEPTEMBER 30
Operating revenues for the third quarter of 1995 increased $23 million
(2.0%) from the comparable 1994 period. This increase was due primarily to
volume increases ($10 million) and price/mix improvements ($12 million).
Operating income increased $8 million (7.2%) from the comparable 1994 period,
due primarily to volume increases ($4 million), price/mix improvements and lower
costs (aggregating $18 million, including cost savings of $5 million from the
closing of a brewery), partially offset by higher marketing, administration and
research costs ($13 million).
Shipment volume increased 0.9%, reflecting the solid performance of the
Company's premium brand portfolio and higher international sales. Shipments of
premium-priced beers rose 2.6% to account for 83.0% of Miller's shipments in the
third quarter of 1995, up from 81.6% in the comparable 1994 period. Red Dog
shipments continued to grow in the quarter and Miller Lite shipments increased
0.8%, benefiting from enhanced marketing and advertising. Compared with prior
year, shipments of Miller Genuine Draft were up slightly in the quarter, but
shipments of ice beers were down.
Financial Services and Real Estate
- ----------------------------------
NINE MONTHS ENDED SEPTEMBER 30
For the first nine months of 1995, operating revenues from financial
services and real estate operations decreased 18.6% and operating income
decreased 25.0% from the first nine months of 1994. Lower financial services
operating income reflects the timing of residual gains arising from Philip
Morris Capital Corporation's ("PMCC") leveraged lease portfolio and gains
recognized in the first half of 1994 related to the sale of PMCC's marketable
securities portfolio. Operating income from real estate operations increased
from 1994 levels, due primarily to improved land sale margins in California and
Colorado.
-29-
<PAGE> 30
QUARTER ENDED SEPTEMBER 30
During the third quarter of 1995, operating revenues from financial
services and real estate operations decreased 8.0% and operating income
decreased 18.8% from the third quarter of 1994. Lower financial services
operating income reflects the timing of residual gains arising from PMCC's
leveraged lease portfolio. Operating income from real estate operations in 1995
increased slightly from 1994 levels, due primarily to improved land sale margins
in California and Colorado.
Cash Provided and Used
- ----------------------
Net Cash Provided by Operating Activities
- -----------------------------------------
During the first nine months of 1995, cash provided by operating
activities was $4.4 billion, slightly above the first nine months of 1994, due
primarily to higher 1995 earnings offset by higher cash used for working
capital.
Net Cash Used in Investing Activities
- -------------------------------------
Cash used in investing activities for the first nine months of 1995 was
$358 million, compared with $668 million for the comparable 1994 period. The
change is due primarily to a $1.1 billion increase in net cash received from
sales/purchases of businesses, partially offset by a $679 million change in cash
used for net investment in finance assets. The change in cash used for net
investment in finance assets is due primarily to $804 million of cash received
in the 1994 sale of PMCC's marketable securities portfolio. Capital expenditures
for the first nine months of 1995 rose 5.4% to $1.1 billion, of which 54%
related to food operations and 34% related to tobacco operations.
During the first nine months of 1995, the Company sold its Kraft
Foodservice distribution business, specialty oils business, caramel and
marshmallow business and two European grocery businesses for proceeds of $1.2
billion. In October 1995, the Company sold its bakery and North American
margarine businesses for proceeds of approximately $1.0 billion.
Net Cash Used in Financing Activities
- -------------------------------------
During the first nine months of 1995, the Company's net cash used in
financing activities was $3.4 billion, compared with $3.6 billion during the
first nine months of 1994. The change reflects lower repayment of debt,
partially offset by a 50% increase in cash used for stock repurchases and an
18.4% increase in dividends paid.
At September 30, 1995, the Company had consumer products short-term
borrowings of $2.7 billion, $2.6 billion of which was reclassified as long-term
debt based upon the Company's intent and ability to refinance such debt under
its revolving bank credit agreements. In October 1995, the Company entered into
a new $8 billion revolving credit agreement that expires in 2000, replacing a
prior $8 billion revolving credit agreement that was scheduled to expire in
1998. At December 31, 1994, the Company had consumer products short-term
borrowings of $2.7 billion, $2.5 billion of which was reclassified as long-term
debt. 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.
-30-
<PAGE> 31
At September 30, 1995, the Company's ratio of consumer products debt to
equity was 1.10, down from 1.17 at December 31, 1994. The change reflects an
increase in stockholders' equity, due primarily to net earnings in the first
nine months of 1995 and favorable movement in the currency translation
adjustment ($403 million), partially offset by dividends declared and stock
repurchases.
Dividends paid in the first nine months of 1995 increased 18.4% over the
comparable period of 1994, reflecting a higher annual dividend rate, partially
offset by a lower number of outstanding shares of stock. On August 30, 1995, the
Board of Directors declared a quarterly dividend of $1.00 per share (paid
October 10), a 21.2% increase, resulting in an annualized dividend rate of $4.00
per share.
During the third quarter of 1995, the Company repurchased 7.1 million
shares of its common stock at an aggregate cost of $537 million. These purchases
were made in accordance with the Company's August 1994 announcement of its
intention to spend up to $6 billion to repurchase common stock in open market
transactions over three years. The program began in October 1994. Through
September 30, 1995 cumulative purchases under the program totaled 28.9 million
shares at a cost of $1.9 billion.
Cash and cash equivalents at September 30, 1995 were $878 million,
compared with $184 million at December 31, 1994. The difference reflects timing
of cash disbursements and cash receipts (including proceeds from the sale of
businesses). In October 1995, the Company received proceeds of approximately
$1.0 billion from the sales of its bakery and North American margarine
businesses, paid its quarterly dividend at the new annualized rate of $4.00 per
share and continued to repurchase common stock.
Contingencies
- -------------
See Note 2 to the Condensed Consolidated Financial Statements.
-31-
<PAGE> 32
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 2, "Contingencies," of the Notes to the
Condensed Consolidated Financial Statements included in Part I, Item 1
of this report, and to "Tobacco - Business Environment," of the
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Part I, Item 2 of this Report.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits
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.
- -----------
-32-
<PAGE> 33
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 13, 1995
-33-
<PAGE> 34
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges (continued)
(dollars in millions)
---------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1995 September 30, 1995
------------------ ------------------
<S> <C> <C>
Earnings before income taxes $7,190 $2,449
Add (Deduct):
Equity in net earnings of less than 50% owned
affiliates (166) (50)
Dividends from less than 50% owned
affiliates 153 29
Fixed charges 1,158 371
Interest amortization, net of capitalization 2 -
------ ------
Earnings available for fixed charges $8,337 $2,799
====== ======
Fixed charges:
Interest incurred:
Consumer products $ 990 $ 316
Financial services and real estate 62 20
------ ------
1,052 336
Portion of rent expense deemed to represent
interest factor 106 35
------ ------
Fixed charges $1,158 $ 371
====== ======
Ratio of earnings to fixed charges 7.2 7.5
====== ======
</TABLE>
<PAGE> 2
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(dollars in millions)
---------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings before
income taxes and
cumulative effect
of accounting changes $ 8,216 $ 6,196 $ 8,608 $ 6,971 $ 6,311
Add (Deduct):
Equity in net earnings of
less than 50% owned
affiliates (184) (164) (107) (95) (90)
Dividends from less than
50% owned affiliates 165 151 125 72 71
Fixed charges 1,537 1,716 1,736 1,899 1,941
Interest capitalized, net
of amortization (1) (13) (3) (11) -
------- ------- ------- ------- -------
Earnings available for
fixed charges $ 9,733 $ 7,886 $10,359 $ 8,836 $ 8,233
======= ======= ======= ======= =======
Fixed charges:
Interest incurred:
Consumer products $ 1,317 $ 1,502 $ 1,525 $ 1,711 $ 1,754
Financial services and
real estate 78 87 95 83 93
------- ------- ------- ------- -------
1,395 1,589 1,620 1,794 1,847
Portion of rent expense
deemed to represent
interest factor 142 127 116 105 94
------- ------- ------- ------- -------
Fixed charges $ 1,537 $ 1,716 $ 1,736 $ 1,899 $ 1,941
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges 6.3 4.6 6.0 4.7 4.2
======= ======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 878
<SECURITIES> 0
<RECEIVABLES> 5,116
<ALLOWANCES> 171
<INVENTORY> 7,612
<CURRENT-ASSETS> 14,723
<PP&E> 18,899
<DEPRECIATION> 7,627
<TOTAL-ASSETS> 53,690
<CURRENT-LIABILITIES> 13,579
<BONDS> 14,247
<COMMON> 935
0
0
<OTHER-SE> 12,963
<TOTAL-LIABILITY-AND-EQUITY> 53,690
<SALES> 50,335
<TOTAL-REVENUES> 50,335
<CGS> 30,288
<TOTAL-COSTS> 30,288
<OTHER-EXPENSES> 11,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 916
<INCOME-PRETAX> 7,190
<INCOME-TAX> 2,984
<INCOME-CONTINUING> 4,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (28)
<NET-INCOME> 4,178
<EPS-PRIMARY> 4.95
<EPS-DILUTED> 4.95
</TABLE>
