Altria Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Altria’s principal businesses are U.S. smokeable tobacco, smokeless tobacco and wine; it also holds investments in ABI, JUUL and Cronos.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenues | $25.110 billion | $25.364 billion |
| Gross profit | $12.711 billion | $12.254 billion |
| Operating income | $10.326 billion | $9.115 billion |
| Net earnings (loss) attributable to Altria | $(1.293) billion | $6.963 billion |
| Diluted EPS | $(0.70) | $3.68 |
| Operating cash flow | $7.837 billion | $8.391 billion |
| Capital expenditures | $246 million | $238 million |
| Total debt at year-end | $28.042 billion | $25.746 billion |
Net revenue declined 1.0%; operating income increased 13.3%. Gross margin was approximately 50.6% of net revenues, compared with 48.3% in 2018. The reported net loss primarily reflects an $8.6 billion pre-tax impairment of the JUUL investment and a $1.442 billion loss on Cronos-related financial instruments. Altria reported 2019 adjusted diluted EPS of $4.22.
Fourth-quarter 2019 net revenues were $6.007 billion and net loss attributable to Altria was $1.809 billion, or diluted loss per share of $1.00. The quarter included a $4.1 billion pre-tax JUUL impairment charge.
Segments and changes versus prior year
- Smokeable products: Revenue was $21.996 billion, down 1.3%; operating companies income rose 7.1% to $9.009 billion. Cigarette shipments fell 7.3% to 101.8 billion units, and cigarette retail share declined to 49.7% from 50.2%.
- Smokeless products: Revenue increased 4.6% to $2.367 billion and operating companies income increased 10.4% to $1.580 billion, while reported shipment volume declined 3.1% to 807.0 million units. Results include Helix’s on! oral nicotine pouches.
- Wine: Revenue was essentially unchanged at $689 million; operating companies reported a $3 million loss versus $50 million income in 2018. Altria fully impaired $74 million of wine-segment goodwill amid slower premium-wine growth and higher inventory.
Operating cash flow declined 6.6%, reflecting, among other items, lower ABI dividends and higher interest payments. Cash and cash equivalents were $2.117 billion. Current assets of $4.824 billion were below current liabilities of $8.174 billion; management cited operating cash flow and access to borrowing markets as sources for funding working-capital needs.
Debt, liquidity and capital returns
- Altria issued $16.265 billion of long-term notes in 2019, used in part to repay $12.8 billion of 2018 term-loan borrowings and to fund Cronos and other needs. Long-term debt was fixed-rate; weighted-average coupon was approximately 4.2% at year-end.
- A $3.0 billion revolving credit facility was undrawn at year-end; Altria reported compliance with its covenants and an 8.2-to-1 EBITDA-to-interest ratio against a 4.0-to-1 minimum.
- Cash dividends paid were $6.069 billion. The quarterly dividend was raised 5% to $0.84 per share; the annualized rate was $3.36. Management’s target payout ratio is approximately 80% of adjusted diluted EPS, subject to board discretion.
- The $1.0 billion July 2019 share-repurchase program had approximately $500 million remaining at year-end. Moody’s rated long-term debt A3 with a negative outlook; S&P and Fitch each rated it BBB with stable outlooks.
Outlook, commentary and key risks
- For 2020, management forecast adjusted diluted EPS growth of 4%–7% over the 2019 adjusted base of $4.22, and an adjusted effective tax rate of 23.5%–24.5%. Guidance excludes certain potentially significant and variable items. Planned investment includes IQOS commercialization and expanding on! manufacturing and U.S. distribution.
- Altria expected adjusted U.S. cigarette industry volume to decline 4%–6% in 2020 and discontinued its multi-year industry-volume decline forecast, citing volatility across tobacco categories and adult-consumer shifts.
- JUUL’s carrying value fell to $4.205 billion after the $8.6 billion impairment. The investment remains exposed to regulatory actions, litigation, consumer sentiment, competition, financing and pending antitrust review; conversion of Altria’s non-voting shares remained subject to FTC clearance.
- Altria’s 10.1% ABI investment had a $18.1 billion carrying value versus $16.1 billion fair value at year-end. Management judged the decline temporary and recorded no impairment; a further decline could result in a material charge.
- Material ongoing exposures include tobacco-product litigation, FDA regulation and product-application deadlines, excise taxes, changing consumer preferences, distributor concentration and possible future impairment of investments or goodwill. Management said it could not estimate possible losses for most pending tobacco cases and recorded no general provision for them; specified accrued litigation liabilities totaled $14 million at year-end.
Important facts for investors to verify
- Whether JUUL’s business, regulatory position, financing and litigation support the $4.205 billion carrying value, and whether antitrust clearance is obtained.
- Whether ABI’s fair value recovers relative to its carrying value and how ABI dividends and currency movements affect Altria’s cash flow.
- Whether core tobacco pricing and cost savings can offset continued shipment and market-share declines, and whether oral nicotine products gain traction.
- Whether wine inventory, premium-category growth and profitability stabilize after the goodwill impairment.
- How debt service, settlement payments, litigation outcomes and the dividend target affect liquidity and capital allocation.