Tobacco Documents Online

0M W~ftj7-e. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Philip Morris Incor Exact name of registrant as specified i Vir inia 13-1607658 For Quarter Ended March 31, 1978 Commission file number 1- 194 incorporation or organization) Identification No.) State or other jurisdiction of I.R.S. Employer 100 Park Avenue, New York, New York 10017 Address of principal executive offices (Zip Code Registrant's telephone number, including area code (212) 679 - 1800 ormer name, former address and former fiscal year, if changed since last report. 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No 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 Att•9arch 31, 1978, there were 59,926,212 shares outstanding of the registrant's omnon stock, par value $1 per share.

Philip Morris Incorporated and Consolidated Subsidiaries Consolidated Balance Sheets, as at March 31, 1978 and 1977 Consolidated Statements of Earnings: For the Three Months Ended March 31, 1978 and 1977 Consolidated Statements of Changes in Financial Position - Three Months Ended March 31,, 1978 and 1977 Notes to Consolidated Financial Statements Management's Analysis of the Consolidated Statements of Earnings Exhibit A - Computation of Earnings per Common Share Item 1. Legal Proceedings Item 9. Exhibits and Reports on Form 8-K Signature Page No. 1, 2 3 4 5, 6 7 8 9 9 9 L9 c4

PART I - Financial Information Philip Morris Incorporated and Consolidated Subsidiaries Consolidated Balance Sheets (000 Omitted March 31, and cash equivalents ounts receivable, less allowances for discounts and doubtful accounts entories: Leaf tobacco Other raw materials Finished goods Work in process Housing programs under construction vestments in and advances to unconsolidated foreign subsidiaries and affiliates 1978 $ 75,026 332,138 1,256,118 143,436 350,167 35,532 94,317 1,879,570 22,585 2,309,319 227,920 70,464 operty, plant and equipment, at cost Less, Accumulated depreciation rands, trademarks, patents and goodwill ong-term receivables ther assets 1,693,442 409,696 1,283,746 222,183 67,073 41,435 $ 4,222,140 See Notes to Consolidated Financial Statements (1) 1977 47,070 310,260 1,083,092 125,855 358,769 34,553 74,821 1,677,090 21,582 2,056,002 219,158 59,648 1,355,123 340,157 1,014,966 211,594 65,047 42,434 $ 3,668,849

Philip Morris Incorporated and Consolidated Subsidiaries Consolidated Balance Sheets (000 Omitted March 31, 1978 1977 LIABILITIES: Accounts and notes payable $ 309,407 $ 396,581 Accrued liabilities 390,825 272,355 Federal and other income taxes 157,971 119,917 Dividends payable 30,737 19,463 Total current liabilities 888,940 808,316 Long-term debt 1,443,229 1,249,596 Deferred income taxes 119,519 87,449 Other liabilities 23,284 28,878 Total liabilities 2,474,972 2,174,239 STOCKHOLDERS' EQUITY: Cumulative preferred stock, par value $100 per share (77,871 shares in 1978 and 88,119 shares in 1977) 7,787 8,812 Common stock, par value $1 per share (59,928,436 shares in 1978 and 59,805,661 in 1977) 59,928 59,806 Additional paid-in capital 301,055 292,947 Earnings reinvested in the business 1,381,934 1,137,148 Treasury stock, at cost ( 3,536) ( 4,103) Total stockholders' equity 1,747,168 1,494,610 $4,222,140 $ 3,668,849 r,a ~ ~ 03 See Notes to Consolidated Financial Statements ~ ~ ~ ~ ~- (2)

Philip Morris Incorporated and Consolidated Subsidiaries Consolidated Statements of Chan es in Financial Position (000 Omitted For the Three Months Ended ~ Altf• March 31, istrar 1978 1977 essar~ Oper SOURCES OF WORKING CAPITAL: resuli From operations $ 129,337 $ 103,556 The 1977. Increase in long-term debt 13,269 2,793 puted ome tL- Other 3,990 14,187 iliat( n 48% Additions to working capital $ 146,596 $ 120,536 loca` USES OF WORKING CAPITAL: Dividends $ 30,736 $ 19,463 Expansion and modernization of property, plant and equipment 104,203 Other Working capital used 7,145 $ 142,084 Increase in working capital CHANGES IN COMPONENTS OF WORKING CAPITAL: Cash and receivables Inventories Notes and accounts currently payable Accrued liabilities and other payables Other, net $ 4,512 38,208 $ 18,210 $ 25,034 62,009 19,586 3,475 13,435 ( 81,266) ( 18,126) 2,084 5,533 $ 4,512 See Notes to Consolidated Financial Statements (4) ThrE ited S- the U, t the chaset the a, ely $: roposf regat, unt o , is orter therm pany rt in ss ac Appea ii 17 se ca accou

Philip Morris Incorporated and Consolidated Subsidiaries Consolidated Statements of Earninqs federal and foreign excise taxes shown For the Three Months Ended March 31, 000 Omitted %ting revenues (including the amounts of ~ 1,390,709 $ 1,142,617 Cost of products sold 638,882 527,077 Federal and foreign excise taxes on elow under "Cost of sales") of sales: products sold 371,838 296,160 Gross profit 379,989 319,380 keting, administration and research costs 178,478 150,475 ulty in net earnings of unconsolidated foreign subsidiaries and affiliates Operating income of operating companies 2,303 Tgorate expense 12,491 erest expense (excluding capitalized interest - of $2,599,000 in 1978 and $1,273,000 in ency translation and hedging costs, net 2,645 ( 2,047) 171,816 11,089 1977) 29,560 25,734 !her (income) deductions, net 1,944) 4,258 Earnings before income taxes 161,062 132,782 vision for federal and other income taxes 73,541 61,365 Net earnings 87,521 $ 71,417 rhings per common share (Exhibit A) $ 1.46 $ 1.19 See Notes to Consolidated Financial Statements (3)

%,iiip Morris Incorporated and Consolidated Subsidiaries Notes to Consolidated Financial Statements thpugh the Consclidated Financial Statements are unaudited, it is the opinion of the ,lntis management that all adjustments, consisting only of normal recurring accruals, ry for a fair statement of the results have been reflected therein. rating revenues and net income for any interim period are not necessarily indicative its for a full fear. e provision for income taxes as a percent of pre-tax income was 45.7% in 1978 and 46.2% The principal reasons for the difference between the provision for income taxes at the federal statutory rate and the aforementioned provisions for federal and other taxes are: (1) inclusion of equity in net earnings of unconsolidated subsidiaries and ates in pre-tax earnings; (2) investment tax credit; (3) foreign income taxed at other % and not expected to be subject to U.S. tax in the foreseeable future; and (4) state al incorne taxes, net of federal tax benefit. hree purported class actions by tobacco growers are pendin,g against the six major States cigarette manufacturers, including the Company, and others alleging violations United States antitrust laws. In these actions, it is alleged, among other things, he Company conspired with other named defendants to fix prices at which tobacco is sed from the plaintiffs and the growers allegedly represented by the plaintiffs. In two actions, the plaintiffs originally sought damages for the years 1970-1974 of approxi- $2,500,000,000 in the aggregate. In April 1976, plaintiffs in one of these cases filed osed amended complaint which would reduce the size of the purported class, so that the ate damages claimed in both actions would be approximately $400,000,000. No specific t of damages is claimed in the third action. The Company has denied any violation of s vigorously contesting the actions and has been advised by its counsel', Messrs. Arnold ter, Washington, D.C., that in their opinion the actions are not proper class actions. ermore, based on the investigation made to date, counsel is of the opinion that the ny has substantial factual and legal defenses to each of the alleged charges. The District in,one of the three actions determined that the action could not be maintained as a action. On October .11, 1977, that determination was affirmed by the United States Court peals and petition for a writ of certiorari was denied by the the Supreme Court on 17, 1978. The District Courts in the other two cases have not as yet determined whether cases may be maintained as class actions. No adjustments or provisions have been made count of the litigation. After service of subpoenas duces tecum, three employees of the Company testified before ted States Grand Jury in March, 1978 concerning the operations and record keeping of a ny waste water treatment facility. The Company does not believe the outcome of the r will have a material effect on its operations. (5)

Philip Morris Incorporated and Consolidated Subsidiaries Notes to Consolidated Financial Statements - Continued (000 Omitted Long-Term Debt: Outstanding at March 31, exclusive of amounts due within one year: March 31, 1978 1977 8 1/4% Notes, payable $6,665,000 annually from 1983 to 1996 and $6,690,000 in 1997 $ 100,000 Bank Term Loan Agreement,payable $33,000,000 in 1981 and $17,000,000 in 1982. Interest is at 7 7/8% to April 30, 1979 and 8 1/2% thereafter 50,000 Notes payable (see below) 500,000 $ 430,000 8 1/21 Notes, payable in 1985 150,000 150,000 8 7/8% Sinking Fund Debentures, payable $6,250,000 annually from 1984 to 2003 and $25,000,000 in 2004 150,000 150,000 Bank Term Loan Agreement payable in 1980. Interest is at 1/2% above the bank prime rate, but not more than an average effective rate of 7.9% per annum if outstanding to maturity 50,000 50,000 6 5/8% Sinking Fund Debentures, payable $3,500,000 annually from 1978 to 1992 and $15,500,000 in 1993 63,071 68,000 8.85% Notes, payable in 1982 50,000 50,000 4.90% Notes, payable $2,600,000 annually to 1988 and $16,000,000 in 1989 42,000 44,600 6 3/4% Loan, 100,000,000 German marks, payable from 1978 to 1987 43,902 41,667 6 1/2% Loan, 80,000,000 Swiss francs, payable 1988 42,105 31,372 Purchase money obligations 73,005 35,597 rs ~ ~ Other notes and debentures 22,407 42,920 ~ ~ Capitalized lease obligations 6,739 ~ ~ ~ 10% Subordinated Notes 55,440 t3 Total long-term debt $ 1,443,229 $1,249,596 The Company has entered into a $250,000,000 revolving credit and term loan agreement maturing in 1984, and a $250,000,000 Eurodollar revolving credit agreement maturing in 1982, both of which can be used to refinance short-term notes payable. Management intend to exercise its rights under these agreements in the event that it becomes advisable. Accordingly, at March 31, 1978, $500,000,000 of short-term notes payable have been classified as long-term debt in accordance with Financial Accounting Standards Board Statement No. 6. 1-1

Management's Analysis of the Consolidated Statements of Earnin s olidated operating revenues for the first quarter of 1978 increased $248.1 million ver the comparable 1977 quarter and $36.8 million (2.7%) over the fourth quarter of rldwide cigarettes and domestic beer contributed the majority of this increase. cigarette increases are due to unit volume gains, cigarette price increases in i^kets and favorable translation of foreign currencies. Domestic beer increases are attributable to unit volume gains in sales of beer. of sales as a percentage of revenues was approximately 72% for the first quarters of 977 and the fourth quarter of 1977. eting, administration and research costs were approximately 13% of operating revenues irst quarters of both 1978 and 1977 and 14% of operating revenues for the fourth f 1977. __=~'_n Unconsolidated Foreign Subsidiaries and Affiliates ~y in net earnings of partly-owned subsidiaries and affiliates for the first quarter was approximately $600,000 (21%) below the first quarter of 1977 primarily because of se in losses from Brazilian operations. Equity in net earnings for the first quarter tvas approximately $3.1 million (57%) below the fourth quarter of 1977 due principally volume short-falls and cost increases not offset_by price increases in certain opera- ency translation and hedging costs for the first quarter of 1978 resulted in a $2.6 oss compared with a $2 million gain for the first quarter of 1977 and a $6.3 million the fourth quarter of 1977. Losses in the first quarter of 1978 and the fourth f_1977 arose principally from a revaluation of major European currencies against the ar. azes ~-- ~- effective tax rate for the first quarters of 1978 and 1977 was 45 7% and 46 2% . . , !~~lly, and 46.6% for the fourth quarter of 1977. The decrease in the 1978 rate is `` due to an increase in.the investment tax credit. (7) ~

Part I - Exhibit A Philip Morris Incorporated and Consolidated Subsidiaries Computation of Earnings Per Share For the Three Months Ended March 31, 1978 and 1977 1978 1977 I. Earnings per common share: A. Weighted average number of_shares 59,920,751 59,803,020 B. Net income $ 87,521,000 $ 71,417,000 Less, preferred dividends $ 25,000 $ 26,000 Earnings applicable to common stock $ 87,496,000 $ 71,391,000 C. Earnings per common share (B=A) $ 1.46 $ 1.19 (S)