PHILIP MORRIS - "MARLBORO FRIDAY

"

This case was prepared by Professor Keith Ward, as a basis for class discussion.

Overview On 2 April 1993 Philip Morris staggered the business world by announcing a significant price discounting promotion across the USA of the world's most valuable brand, Marlboro cigarettes . On 20 July 1993, this promotion was turned into a permanent price reduction, which was extended across all Philip Morris' full revenue tobacco brands in the USA .

C Copyright Keith Ward, February 1995. All rights reserved.

This move, now generally referred to as 'Marlboro Friday', is likely to go down in history as one of the most dramatic strategic brand management decisions ever taken .

Market Backgroun d The USA cigarette market had for a long time been the world's most profitable market in which Philip Morris (PM) held a dominant share (42 .3% in 1992) . RJR Nabisco Holdings Corporation, through its R J Reynolds (RJR) business, had just under, 30%, with the remainder spread across a number of other companies . '
Although very large (507 billion units in 1992) and highly profitable, the industry had several major problems . First, consumption was declining in volume terms at an average rate of 3% a year. Second, the industry was facing an increasingly hostile business environment with restrictions on marketing, aggressive antismoking legislation at both Federal and State levels, and the threat of a significant increase in excise duty (the excise system in the USA is a specific per unit duty which, by international standards, is set at a low level) to pay for the Clintons' health care programme .

http://legacy.library.ucsf.edu/tid/fiq34a99/pdf

50 per carton (ie over one third of the FR selling price) by January 1993 . Interestingly. with its growth expected to continue strongly. Some of these ELP products were launched as generics or retailer own labels. PM managed. there had been a very marked change in the segmentation of the market during the late 1980s and early 1990s . For example. Eastern Europe. Brown & Williamson. due to the growth in the overall VFM segment.proportion of total promotional spending switched from brand oriented media campaigns focused on building brand loyalty to price promotion activity . The large real price increases on FR brands had meant that the price gap between VFM and FR had grown to over $7 . This changed the market quite considerably as the number of LPBs increased and more ELPs were developed as brands in their own right . continued to report increasing profits . primarily through Marlboro. although the VFM category had originally been introduced by smaller competitors attempting to steal share.Fbitip Morris . 2 http://legacy. These export opportunities had enabled USA based manufacturers to reinvest and even to increase productive capacity. in particular.ucsf. This switch was most notable in some of the smaller competitors (American Brands. Some of these overseas opportunities faced increasing medium term challenges. despite a declining domestic market . whereas the original VFM category had been created through the launch of Low Price Branded (LPB) products . and Liggett) while PM and RJR continued to market heavily their FR brands . both PM and RJR aggressively entered this new category and by the end of 1992 PM had taken a 27% share. As the sector grew. thus.edu/tid/fiq34a99/pdf . In the early 1980s the market had been dominated by full revenue (FR) brands. but this had changed with the dramatic growth of value for money (VFM) products which created initially 2 price points in the industry . RJR launched a number of brand extensions such as Winston Select. the USA industry had been able to take advantage of increasing export markets due to the opening up of previously closed markets (Japan. Not surprisingly. and most significant. the profit margins on these new LPB and ELP categories were substantially lower than those generated from FR brands . the industry and PM. Globally the most rapidly growing cigarette brands are US International Brands."Marlboro Friday " Third. to a record 49% . with RJR at 33 . These increasing prices on FR brands led to even greater opportunities for price segmentation in the market and resulted in the launch of Extra Low Price (ELP) cigarettes at prices even lower than the initial VFM products . to increase their share of the FR market segment. albeit at lower margins . this initial growth in VFM products did not lead to reduced overall profitability as the major players implemented aggressive real price increases on their FR brands . and hence take advantage of significant economies of scale. in fact.2% of the total market. the former Soviet Union and China) and the global trend towards American tobacco blended cigarettes . not least from the continuing GATT negotiations . The overall shares of the major players in the industry did not change dramatically during this period. Fourth. Marketing Support As the VFM segment continued to grow.2% . this increasing share still represented a net decline in sales . an increasing . most notably Marlboro . during this period. GPC (originally standing for Generic Products Corporation) developed into the third largest brand in the overall market behind Marlboro and RJR's Winston . however. By 1992 the combined VFM sector comprised 30.library.

9 bn] . However strong organic cash flow. in Japan to around 12%. however the brand still held a 35% share of the FR segment and ended 1992 with 24 . Indeed for the third consecutive year. Michael Miles.ucsf.5% lower . The growth of the other divisions within the PM group had been rapid and had involved several major acquisitions. the key objective is to maximise shareholder value and this had been translated into a 20% pa growth rate for earnings per share . General Foods (1985). etc .7 bn of sales and $2 bn in operating income . the group had sales revenues of $59 .9 bn (its eps growth rate had exceeded 20% pa over the preceding 15 years) . the North American domestic tobacco business contributed $12 bn in sales revenues and over $5 bn in operating income [the international tobacco operations represented a further $13 .Philip Morris . Cigarette volume sales totalled 421 . An interesting consequence of this was that. Competitor Analyse s RJR Nabiso Holdings Corporation (RJR) RJR had been subject to the highly publicised leveraged buy-out in 1989 by Kohlberg Kravis Roberts & Co (KKR).2 billion units and the group increased market shares around the world .1 bn from which it generated net income of $4 . total group operating income was $10 . in Argentina to over 50%. we invested approximately $1I billion in world-wide marketing activities" . To ensure that every one of our brands is a leader in its category. Approximately 26% of these 1992 international sales consisted of US exports. When necessary. A key strategy in accomplishing this mission is by building and then protecting the company's brand franchises . for the first time. although both their shipments to retailers and ofltake from retailers were down more than the industry in total. had not come from the tobacco side of the business . Kraft (1988) and Jacobs Suchard AG (1990) had made PM into one of the largest food products groups in the world with sales revenues of $29 bn and operating income of over $3 . some disposals and financial restructuring had reduced the total outstanding debt to around $1 4 3 http://legacy."Marlboro Friday " Corporate and Competitive Strategies of Philip Morri s Its overall corporate mission is "to be the most successful consumer packaged goods company in the world" . The international tobacco operations continued to grow well and set new records .2 bn .6%.4% of the total market . contributing $3 .library. PM (USA) accounted for over "half the USA cigarette industry's profits".edu/tid/fiq34a99/pdf . which had left the group with a massive debt burden . we maintained our market position by adjusting our prices and expanding our discount alternatives . our brands are our most important assets . the new Chairman and Chief Executive Officer of the group. shipments were down 5 . "Many of our products faced intensified price competition in 1992 . The commitment to a branded products strategy is illustrated by the following statements from their 1992 published financial statements : "After our people. In financial terms. with retail sales volume 2 . in Western Europe to over 25%. Thus for Marlboro. " The domestic tobacco business was clearly the profit driver of the group and PM (USA) was the industry leader for the ninth consecutive year in 1992 .8 billion to the USA balance of payments . Of these group totals. In 1992.

recruited Lou Gerstner as its new Chairman and Chief Executive Officer . announced plans to raise S 1 . on 2 March 1993. One of its branding problems was that it did not own the international rights to its main USA brand franchise (eg Pall Mall and Lucky Strike) . concentrated heavily in the VFM segment (including Private Label) but was still consistently losing market share . Rothschild and Packer) . by contrast.library. American Tobacco (7% market share) had been under pressure on its FR brands and had concentrated on its lower price segment as well as going into the private label (Retailers Brand) business .ucsf. Also IBM. As part of its response BAT had demerged its UK retailing interests (Argos). Lorillard (7%) was also a USA focused tobacco company which had to date not entered the VFM segment. Liggett (3%) had.Philip Morris . American Brands. instead concentrating its support on Newport (its main brand). this would have represented around 25% of the food companies' equity . 4 http://legacy. set up by Messrs Goldsmith. Thus the group now consisted of world-wide tobacco businesses and financial services interests which were primarily focused in the UK (Allied Dunbar and Eagle Star) and the USA (Farmers Insurance) . Lorillard and Ligget t American Brands is a large diversified group with major tobacco interests in the USA (through American Tobacco) and the UK (through Gallaghers) . BAT Industries had itself. RJR had. its paper business (Wiggins Teape Appleton) and sold its US retailing division . Gerstner had been running RJR since the buy-out and had been widely credited as being the key manager behind the successful post-buy-out strategy to date .edu/tid/fiq34a99/pdf . The group had returned to the New York Stock Exchange in 1991 but with KKR still owning over 50% and its share price had oscillated from $5 to over S12 before falling back to S9 at the end of 1992 . B & W (with around 12% share of the USA market) had been very successful in building share in the VFM segment but some of its FR brands had been under pressure ."Marnwro Friday " bn. Also an interesting aspect of the tobacco industry is that B & W did not own the brand Lucky Strike in the USA although this brand was being used as BATs main US International Brand around the world .5 bn from the issue of new shares pegged to the performance of its foods division (ie'smoke free' shares) . Brown & Williamson Tobacco Corporation (B & W) A wholly owned subsidiary of BAT Industries and hence driven by BAT's stated mission to be the 'premier tobacco company in the world' . early in 1993. in 1989. The cash inflow would obviously have helped to reduce further the outstanding debt and have provided funds for future international investments. been the target of an attempted leveraged buy-out by a special purpose vehicle (Hoylake. The business had in the late 1980s been bought out of Grand Metropolitan and it was widely rumoured that the parent company was in financial difficulties .

given the predominance of highly priced Marlboro in its product mix. it causes it to be grown by providing technical assistance to farmers and processing the green leaf itself . PM always concentrates on its value share in a market.Philip Morris . (BAT tends to quote its share in volume rather than value terms .] This high share represented a dramatic rate of growth in very recent years and followed a very aggressive marketing campaign by Marlboro. While it does not itself grow tobacco. Another strategic difference is that. On a world scale BAT Industries ranks as a major competitor but it has achieved this using a very different competitive strategy .library.) This strategy is not too surprising given that. BAT did not sell cigarettes in its own domestic market (ie the UK) . rather than its volume share . For example. This aggressive campaign coincided with the incredible fall in inflation in the country and the corresponding substantial growth in real GDP and US dollar equivalent disposable incomes . In December 1992. In other words. running at over $1 per pack [Marlboro retailing at around $2 .edu/tid/fiq34a99/pdf . etc .3% in the USA and this brand franchise had formed the basis of PM's remarkably successful international growth strategy . Oregon where for 4 weeks the price of Marlboro was discounted by 40 cents per pack (being approximately a 20% price reduction) .20 with ELPs at around Si] . producing cigarette paper and packaging materials. Marlboro Frida y In 1989 Marlboro achieved an overall market share of 26 . Conversely. Parts of BAT are vertically integrated in other ways as well. It sees itself as a cigarette manufacturer and buys in the necessary raw materials . PM initiated a test market in Portland. Indeed Souza Cruz has a very substantial tobacco leaf exporting business . due to its historical creation. The price differentials were. BAT Industries has developed a strong world-wide tobacco business through a large number of nationally and regionally based companies. in some stores. PM can be regarded as a USA based multi-national business which applies its very successful competitive strategy consistently in a growing number of international markets . 5 http://legacy.4%) . it was stated above that PM achieved in 1992 over 50% share in the cigarette market in Argentina . [Not surprisingly. PM attacked when the market was attractive for their main product offering .ucsf. Philip Morris buys its tobacco leaf from brokers (although it does have a close relationship with one main broker) and does not try to be vertically integrated . particularly in the major cities within Argentina . However the increasing share of the VFM segment and the aggressive price increases applied to Marlboro had resulted in declines in overall share (1992 .15 to $2 .24 . such as Souza Cruz in Brazil which has around 80% of the Brazilian cigarette market . in several major markets (again Brazil is a good example)."Atari aro Friday " Strategic Issue s This brief comparative analysis of the key USA tobacco companies hides a number of important differences between PM and its main competitors . selling both to other group companies and to tobacco leaf brokers (hence ultimately selling leaf to competitors) . despite producing a high priced brand where consistency of quality is of critical importance . the switching impact on net profitability was becoming dramatic . Thus although PM was gaining share in this VFM segment. Over the test period Marlboro regained market share while elsewhere it continued to decline . BAT is heavily involved in tobacco leaf operations .

on premium brands and would extend the Marlboro's Adventure Team promotions . 6 http://legacy."Marllwro Friday " By March 1993 Marlboro share was down to 22 . for the foreseeable future. The much lower original profitability of the VFM sector made it impossible for a similar price decrease and the PM price move retained some profitability even at the ELP level .library. RJR very rapidly made a similar price reduction on its leading brand.1 % and on 2 April PIvl implemented the Portland promotion nationwide . This was a clear attempt to move the market to a two tier pricing structure with a single differential of around 30 cents per pack . while moving its mid-range brands down to this new level . Winston. On 20 July PM announced that it was permanently reducing the price of its FR brands by 40 cents per pack .ucsf.edu/tid/fiq34a99/pdf . PM also adjusted the prices of its VFM products by slightly increasing the prices (by around 6 cents) of its cheapest products. as did several other competitors . The strategy certainly increased the share of Marlboro and by June it was back to around a 25% market share .Philip Morris . In addition PM announced that they would forego any price increases. Much of this increased share appeared to come from consumers returning to Marlboro from the cheaper products as the VFM actually declined during this period .

9 % 14 .7% 23 .131 $ 5. 106. and the 1990 acquisition of Jacobs Suchard AG .606 1.927 1990 $51.6% 20.608 1992-1987 16 .72 7 1992-197 7 17 .006 4 .946 3 .014 3.1Mrilip Morris . The net impact of these items was an increase to net earnings of $152 million.071 6.08 5 8.458 3.83 2.540 3 .17 7 62 2 $31.946 198 8 $31. the Company sold its equity investment in Rothmans International p.08 7 77 4 684 Total operating revenues Operating Companies Income Domestic tobacco International tobacco North American food International food Beer Financial services and real estate 1.083 260 220 10.0% 42 .2% 26 .910 - 8.7% (15 . except per share data) 1992 Operating revenues Earnings before cumulative effect of accounting change $59.7% 26 .24 3 .939 1991 $56. for a pretax gain of S455 million .185 '2.589 3 .3% 10.35 4 .451) S 8.2% $11.3% 28 .169 3.7% 23 .16 per share . 33 .273 2.984 8.474 2 .730 - 7.063 (348) (125 ) (193) (670) S 3.007 1. Inc .080 $ 3 . Total return to stockholders includes stock appreciation and dividends .731) S 5.694 2.131 4. or S.79 9 3.45 3 .960 891 301 179 664 285 197 369 226 173 16 5 190 163 - Operating companies income Gain on sale of Rothmans International p ."Alarlbnru Friday" APPENDIX 1 (in millions of dollars.5% 25 .071 10 . resulting in a cumulative effect of accounting change that increased net earnings by 5273 million .c.723 3.91 10 .1 % 12 . the Company adopted the method of accounting for income races prescribed by SFAS No .5% 67 . In 1989 .064 Nei earnings Earnings per share before cumulative effect o f accounting change 4.2% 20 .4 % 28 .971 5 6.194 7. In addition.018 2.4 % 29 .394 1 .library.49 1 accounting change Net earnings per share Dividends declared per share Operating Revenue s Domestic tobacco International tobacco North American food International food Beer Financial services and real estate 13.45 2 .8% 64 .934 4 .635)_ $ 6.4% 24 .4% 20 .18 2.080 2.ucsf.4% 21 .540 1989 $44.251 20.6 % 20 .0 1 13 .750 8.5 % In 1988 .7% 30 .29 per share. the Company acquired Kraft .667 20.edu/tid/fiq34a99/pdf .1 % (455) (499) (448) (334) (336) (1.150 455 (179) (385) (252) (1.1 % 26 .09 9 3 .27 3 $ 3 .9% (15 . net (521) (380) (1. http://legacy.5 1 1 .7% 25 .769 2.010 3 .1% 43 .2% 20 . Restructurings of food operations Amortization of goodwill Unallocated corporate expenses Interest and other debt expense.l .774 1.2% 21 .55 16 .458 $ 4 . primarily for the cost of combining Kraft and General Foods . Consolidated results of the Company include the operating results of Kraft . or 5.25 41 .9% 9.976 430 $59.375 18.5% Earnings before income taxes and cumulativ e effect of accounting change Compounded Average Annual Growth Rate Operating revenues Net earnings Net earnings per share Total return to stockholders See notes to the consolidated financial statements regarding the 1991 adoption of SFAS No .325 12.1)% 23 .0% $10 .1)% 10.720 20 .244 8.8% 22 . the 1991 restructuring of food operations. Inc .18 1 . the Company charged S179 million .c .058 5.206 1.534 460 $51.33 7 2 .370 3 .83 1 .056 384 $56.342 516 $44.169 $ 4 .1% 20 . since its acquisition . 96.651) _ (1.311 1992-1982 17 .623 3 .6 % S 8.2 2 Net earnings per share Dividends declared per share Percent Increase Over Prior Yea r Operating revenues Earnings before cumulative effect of accounting change Net earnings Earnings per share before cumulative effect o f 5 . In 1988.8% $ 9 .6 % 19 .l .0% $12.25 1 .939 5 .

the Company provided for restructuring charges for its food operations of $348 million .457 5. or 1 .751 38.879 6.337 2 . the Company sold its equity investment in Rothmans International p.928 2. for a pretax gain of $455 million .311 12 .000 13 929 157.562 938 9.289 1.530 7. except per share data) 1992 $ 59.25 3.927 $ 2. Inc. ne t (consumer products) Inventories (consumer products) Total assets Total long-term debt Total debt-consumer products -financial services and real estate Tc deferred income taxes 50.044 3.612 2.785 (921) 3.771 3. 106.44 2 1.384 14. Inc .273 United States export sales Cost of sales Federal excise taxes on products Foreign excise taxes on products Operating income Interest and other debt expense.669 4. In 1988 .000 25'/2-20Vs 25th 11 92 4 155.25 927 $ 1. the Company charged $179 million.81 2 16.edu/tid/fiq34a99/pdf .269 1.024 60 8 8.5% S 12 . the Company adopted the method of accounting for income taxes prescribed by SFAS No.29 2.3% $ 6 .430 2.458 1990 $ 51 .732 S 1 .182 1. primarily for the cost of combining Kraft and General Foods.080 S 1988 31.0 1 932 1.39 7 67 0 effect of accounting change Pretax profit margin 6. In 1988 . 8 http://legacy.3% 6. 4. and the 1990 acquisition of Jacobs Suchard AG .18 273 2.91 925 $ 1.6% 3. In 1989 .573 963 10.45 5 .000 See notes to the consolidated financial statements regarding the 1991 adoption of SFAS No.140 3.608 14 . The net impact of these items was an increase to net earnings of SI52 million.635 21.731 13.131 1991 $ 56.000 811/4 . ne t (consumer products) Earnings before income taxes and cumulativ e 3. Consolidated results of the Company include the operating results of Kraft .0% S 14 .18 3 .7% S 13 .014 14.947 40 .560 2.Selected Financial Data- Fifteen-Year Review Summary of Operations : Operating revenues tin millions of dollars.863 25.90 9.939 $ 3.563 43 .978 5.12 7 3.5 1 accounting change Per share cumulative effect of accounting change Net earnings per share Dividends declared per share Weighted average shares (millions) Capital expenditures (consumer products) Depreciation (consumer products) 1 .006 4 .451 8.687 7. resulting in a cumulative effect of accounting change that increased net earnings by $273 million.059 1.946 3 .83 2.540 3 .75 5 4.868' 2.ucsf.611 1.35 906 $ 1. the Company acquired Kraft.971 12 .571 39.512 58 .112 2.248 Stockholders equity Common dividends declared as a % of net earnings Book value per common share Market price of common share.604 7.45 2 .83 3 .789 1. plant and equipment.559 Property.67 9 40 .540 $ 2.157 10.064 Cumulative effect of accounting change r :arnings Earnings per share before cumulative effect of 4.939 5 . the 1991 restructuring of food operations.481/4 801/4 19 920 166.608 6.3 1 86%-691k 77'/s Price/earnings ratio at year-end Number of common shares outstandin g at year-end (millions) Number of employees 14 893 161.high/low Closing price of common share at year-end 12. 96 .72 7 11 .29 per share.445 47.083 1 .887 1.3% 5.169 1989 $ 44.663 2.565 2.library.22 . since its acquisition .60 11.99) 3 .16 per share .651 24.355 876 9. In addition.159 .213 15.121 17.583 16.l.153 46.061 2.946 1.31 7.24 ( .416 8.07 12.504 1.946 1 1.64 8 5.288 1.538 1.569 16.246 755 8.38 4 36.96 0 16.946 7.528 14.058 11 .3% S 10 .c.000 52-36 511/4 45'/2-25 41 s/a 14 926 168. or 5 .797 26.082 2.551 14.803 1 .55 925 $ 1.934 2.622 1.9% Provision for income taxes Earnings before cumulative effect of accounting change $ 3. In 1988 .5% 3.

03 9-63A $ 2 .756 3.ucsf.90 782 782 .650 $ 25.78 660 660 .147 6.566 436 907 4.842 1.1 3 .edu/tid/fiq34a99/pdf .827 18.499 2.448 2.50 959 $ 347 .63 3 42 4 12.6% $ 3 .000 72.599 9.005 $ 918 .776 2.075 2.4 2 .20 997 $ 751 .91 904 904 .842 1.180 3.665 1.728 83 627 3.105 1.1% $ 521 9.84 6-35/s 53% $ 2 .592 1.547 244 1.169 1.837 36.822 834 702 $ 8.6% 2.502 $ 1.836 21.655 40 .823 5.55 1.9% 7.6% $ 7 .000 3.635 5.737 38 .840 230 1.632 1.5% 3.080 1.887 944 1.178 211 3.709 2.31 889 889 .684 341 4.library.94 1 .723 4.141 2.355 • 6.000 9 998 8 996 10 99 4 113.66 .519 6.000 68.102 925 $ 13.804 3 455 3.887 3.21 $ 5 .990 646 3.154 3.9% $ 398 11 .1% $ 706 11 .000 60.55 508 508 .542 1.21 I0%-7%/% 10% 11 971 $ 4 .51 .889 1.653 6.007 72.880 2.608 2.378 1.353 1.471 30 . .598 2.610 1.840 2 .30 1.64 8112-51h 7'h 9 1 .675 1.90 .041 1.2 % $ 33 7 $ 1.381 250 4.908 276 1.886 S 9.78 .235 6.331 11.6% $ 390 10.435 5.".000 72.43 981 $ 298 .098 $ 743 1.1 3 966 $ 566 951 954 $ 718 S 678 564 514 6.800 1 327 2.193 $ 16.22 67/a-51/4 6'/e 9 1.389 3.000 111.765 2.664 .478 1.344 3.55 1 .000 68.834 9.379 2.6% 12.532 1.214 105 1.1% 2.122 3.857 1.13 4 96 1 70 3 3.077 5.31h 4i/e 11 8 955 114. 41/4.11 5 30 .4 2 .256 970 $ 11.582 6.237 367 5.239 2.527 5.478 1 .9% $ 3 .037 1.653 9.583 178 2.922 9.4 .663 38.94 .66 549 549 .008 $ 566 .180 1.1% 10.720 978 $ 10.Philip Morri%.411 4.044 1.62 .6% 11 .233 4.311 2.983 1.51 409 409 .507 9 234 2.96 11 %-9 $ .901 2.55 .48 41h-3T/s 4'h $ 2 .365 7 150 2.096 190 906 88 3 13 7 74 6 12.014 294 4.093 46 .085 3.000 65.437 19.25 999 $ 1.482 983 6.908 2.035 2.6% 39 .049 1.79 .183 2.91 .303 1.255 1 .3% 2.00 0 9 http://legacy.16 996 $ 629 .94 31''/s-18'/a IM-1 1 21% 18 $ 4 .712 8.1arihorn Friday" a 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 $ 27.362 2.255 1. 1 .36 1.034 40 .144 205 939 1.766 5.000 11 11 947 951 9 10 1.499 7.253 1.8% 3.054 141 825 4.9% $ 420 9.312 232 1 .003 • 2.158 923 $ 14.287 S 1.31 ' 1 .549 2.8% 14 .537 772 2.234 37 .806 133 2.303 521 $ 6.019 .

523 18.139 2.297 4 .758 .edu/tid/fiq34a99/pdf .622 3.538 TOTAL ASSETS $50.785 7. 4.856 2.182 and $1.021 $ 126 4. at cost: Land and land improvements 747 72 5 Buildings and building equipment .ucsf.014 $47.$ 1. net 4.249 1.795 Finished product 2.530 9.717 42.790 1.906 12.Philip Morris • 'Martborn Friday " Consolidated Balance Sheets at December 31 .21 0 Machinery and equipment 10. except per share data) 1992 199 1 Consumer product s Cash and cash equivalents Receivables.33 5 10.94 6 Goodwill and other intangible assets (less accumulated amortization of $2. ne t Inventories: .18.84 6 Financial services and real estat e Finance assets.23 2 16.063 9.28 1 Less accumulated depreciation 5.512 15.68 2 Total consumer products assets 44.147 4. plant and equipment.384 (51 O See notes to consolidated financial statements .12 1 Leaf tobacco 3.982 ' 5.73 8 7.445 Other current assets 953 902 Total current assets 13.62 4 1.library.59 4 Properly. C ) W N http://legacy.84 7 Real estate held for development and sale 489 47 1 Other assets 186 22 0 Total financial services and real estate assets 5.673) Other assets 1. Asset s (in millions of dollars.91 2 Other raw materials 1.453 4 .11 4 Construction in progress 1.

461 S 51 4 1.401 1.edu/tid/fiq34a99/pdf .854 3.824 13.810 583 13.268 915 781 895 Other come taxes Dividends payable Total current liabilities Long-term debt 1.51 2 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50.974 1 .014 $47. par value $1 .205 93 5 12.820 1.176 2.library.563.198 shares) 179 4.344 Short-term borrowings Long-term debt Deferred income taxes 758 1.320.263 13.743 Other liabilities Total financial services and real estate liabilities Total liabilities Contingencies (Note 14 ) Stockholders' Equit y Common stock.451 174 3.439 shares issued) Earnings reinvested in the business Currency translation adjustments Less cost of treasury stock (42.396 Taxes.563 12.42 6 91 4 Total stockholders equity 12.355 2.420 Deferred income taxes Accrued postretirement health care costs Other liabilities Total consumer products liabilities Financial services and real estate 701 1.348 1.603 486 11.187 81 8 793 1.300 37.ucsf.51 5 31.00 per share (935.872 935 14.528 34.384 http://legacy.514 2.867 (34) 15.254 and 15.963 1.469.785 33.151 73 1 1.t'bitip Atorru • "\birtboro Friday" 1992 Liabilities Consumer product s Short-term borrowings Current portion of long-term debt Accounts payable Accrued liabilities: Marketing 199 1 S 1.03 8 453 13.995 3. except income taxes Employment costs 1.768 3.407 1.

45 S 4 .24 S 3.edu/tid/fiq34a99/pdf .ucsf.006 $ 3.651 6. "Marlboro Friday ' Consolidated Statements of Earnings for the years ended December 31 : (in millions of dolla rs . except per share data) 1992 1991 1990 Operating revenues Cost of sales Excise taxes on products Gross profit Marketing.itip Morris . net $59.059 1.433 521 10.Pt.84 6 22.library.erest and other debt expense.635 6. 12 .83 $ 3 .612 8.45 $ 5 .43 0 6.99) S' 3.082 :9.77 1 3.16 9 24.Operating income .25 .131 26.89 3 11.54 0 3 5 .939 (921) _ $ 3.927 19 .54 0 Earnings before income taxes and cumulativ e effect of accounting change Provision for income taxes Earnings before cumulative effect of accounting change Cumulative effect of change in method o f accounting for postretirement benefits other than pension s (net of income tax benefit of $572 million) Net earnings Per share data: Earnings before cumulative effect of accounting change $-4.971' 3.83 Cumulative effect of accounting change Net earnings (.044 3.452 13.31 1 2.013 13.669 4._e notes to consolidated financial statements .458 25.49 9 44 8 7.608 3.622 1.036 24.939 $56. administration and research costs Amortization of goodwill .1~ http://legacy.394 $51.451 8.331 499 8.946 1.

799 .666 ) $ 71 9 Financial services and real estat e investments in finance assets Proceeds from other finance assets Other Net cash used in investing activities Net cash provided by operating and investing activities See notes to consolidated financial statements.ucsf. net Inventories Accounts payable Income taxes Other working capital items Other Financial services and real estate Cumulative effect of accounting change Deferred income tax provision Decrease in real estate receivables Increase in real estate held for development and sale Other Net cash provided by operating activities Cash Provided By (Used In) Investing Activitie s Consumer product s Purchase of Jacobs Suchard AG.140 4.355) 24 6 (523 ) 11 1 (17 ) (4.889 117 3.36 7 Deferred income tax provision (benefit) Gains on sales of businesses Restructuring charges Cumulative effect of accounting change Cash effects of changes.562) 9 (936) 308 (2.945 (3.882 357 58 (57) 11 6.939 1991 $ 2.Philip Morris •'Ntnrlhoro Frid .259 27 7 32 (41 ) (54 ) 5.48 7 (139) (468) 395 443 (212) 140 6 108 (104 ) (57) (304) (421) 368 30 331 (249) (699) 100 16 8 56 2 37 8 446 68 (22) (13) 6. (in millionsordollars) 1992 $ 4.54 0 Cash Provided By (Used In) Operating Activitie s Net earnings-Consumer products -Financial services and real estate Net earnings Adjustments to reconcile net earnings to operating cash flows : Consumer product s Depreciation and amortization 1.116 ) (171 ) 159 (1.542 1.944) $ 3.006 199 0 $ 3.edu/tid/fiq34a99/pdf . net of acquired cash of $825 Purchase of other businesses. 13 http://legacy.314) S 3.n• ' Consolidated Statements of Cash Flows for the years ended December 31 .400 140 3.577) 775 (2.938 (162) 29 (1. net of acquired cash Proceeds from sales of investments and businesses Capital expenditures Other 137 (162) (715) (5) 45 5 1.573) (98) (1. net of the effects from acquired and divested companies : Receivables.38 5 (727) 255 (1.497 1.library.

449) (2.129) 3. (703) (1.776 ) 91 (182 ) (221 ) (1.717 S 1.362 $ 70 $ 2.027 14 http://legacy.Philp Morris .850 (1.library.229 $ 1.026) (17) 895 126 $ 1.ucsf.562 (1.028) 115 $(4.351 ) 80 Net (repayment) issuance of short-term borrowings Long-term debt proceeds Long-term debt repaid Purchase of treasury stock Dividends paid Issuance of shares Net cash used in financing activities Effect of exchange rate changes on'cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (3.edu/tid/fiq34a99/pdf .51 1 $ 100 $ 2.678) 119 S (994 ) 3.832 (2.(3.130) (60) 58 5 (208) (2.465 $ 76 $ 2.945) (20) (20) 146 S 126 (791 ) 100 28 11 8 $ 14 6 Cash and cash equivalents at end of year Cash paid : Interest-Consumer products -Financial services and real estate Income taxes $ 1."Marlboro Friday" 1992 Cash Provided By (Used In) Financing Activitie s Consumer products Net repayment of short-term borrowings Long-term debt proceeds Long-term debt repaid Financial services and real estat e 1991 1990 $ (683) 3.486) 94 (12) .021 .

ucsf.600 23 .20 6 1.971 10 .976 430 59.251 28.185 2.edu/tid/fiq34a99/pdf .31 1 24 .589 12.694 2.46% 28 5 19 7 8.73 0 1.77 % Interest Other Net Income Growth IS http://legacy.952 1.006 3.Philip Morris .64 8 Beer Financial Services 260 212 10.910 1.131 35.37% 301 179 9.53 4 46 0 51.178 $10.118 4."Marllmro Friday" PHILIP MORRIS HISTORICAL INCOME STATEMEN T 1922 Sales Domestic Tobacco International Tobacco Food 1991 1990 0 $12.39 4 2.27 6 Cost of Sales Operating Income Domestic Tobacco International Tobacco Food 5.720 26.08 5 Beer Financial Services 3.169 31.018 3.056 384 56.63 5 78 4 6.667 29.048 $11.370 10.774 1.962 4.451 901 8.library.288 6.277 4.010 13.651 1.458 34.