Altria Group, Inc. — Q3 2017 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results. Altria’s businesses include smokeable and smokeless tobacco, wine, innovative tobacco products, and finance assets; it also holds an approximately 10.2% equity-method investment in AB InBev.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenues | $6.729bn | $6.905bn | $19.475bn | $19.492bn |
| Gross profit | $3.183bn | $3.150bn | $9.081bn | $8.763bn |
| Operating income | $2.607bn | $2.382bn | $7.393bn | $6.769bn |
| Net earnings attributable to Altria | $1.866bn | $1.093bn | $5.256bn | $3.963bn |
| Diluted EPS | $0.97 | $0.56 | $2.72 | $2.02 |
| Operating cash flow | Not separately stated | Not separately stated | $4.165bn | $3.530bn |
Margins: Gross margin was approximately 47.3% in Q3 and 46.6% for the nine-month period; operating margin was approximately 38.7% and 37.9%, respectively, calculated using reported net revenues.
- Cash and liquidity: Cash and equivalents were $2.582bn at September 30, down from $4.569bn at year-end 2016. Current assets were $5.156bn versus current liabilities of $6.662bn. Management cited operating cash flow and available borrowing capacity as sources to fund working capital needs.
- Debt: Long-term debt carrying value was $13.890bn, with no short-term borrowings. Estimated fair value of debt was $15.3bn. Altria had $3.0bn available under its revolving credit facility through August 2020. Credit-agreement leverage and interest-coverage ratios were 1.3x and 14.6x, respectively.
- Cash uses and shareholder returns: Nine-month capital expenditures were $151m; dividends paid were $3.544bn and share repurchases were $2.359bn. The quarterly dividend was raised 8.2% to $0.66 per share; $576m remained under the $4bn repurchase authorization at quarter-end.
Material changes versus prior comparable periods
- For nine months, revenue was essentially flat, while operating income rose 9.2% and net earnings attributable to Altria rose 32.6%. Diluted EPS increased 34.7% to $2.72.
- For Q3, revenue declined 2.5%, but operating income increased 9.4% and net earnings attributable to Altria increased 70.7%.
- Earnings comparisons were significantly affected by the $823m 2016 debt-extinguishment loss, which did not recur in 2017. 2017 results also benefited from higher operating income, a higher AB InBev-related business-combination gain for the nine-month period, and tax benefits; lower equity earnings from AB InBev partly offset these factors.
- Smokeable operating companies income increased to $6.564bn for nine months, supported by pricing and lower costs, while cigarette shipments fell 4.0%. Smokeless operating companies income rose to $951m, though shipments declined 1.7% and the product recall reduced first-quarter segment income by an estimated $60m. Wine operating income decreased 18.0% to $82m amid lower shipments, competition and trade inventory reductions.
- Operating cash flow increased by $635m, primarily because 2016 included $500m of voluntary pension contributions and higher tobacco-litigation payments. Cash declined by $1.987bn during the first nine months, mainly reflecting dividends and repurchases.
Outlook, commentary and risks
- Guidance: In October 2017, Altria reaffirmed expected 2017 adjusted diluted EPS growth of 7.5%–9.5% over 2016 adjusted EPS, and forecast an approximately 35.5% full-year effective tax rate on operations. These are non-GAAP measures; the filing does not provide a corresponding GAAP EPS forecast or reconciliation because excluded items are difficult to predict.
- Costs and productivity: Manufacturing-facility consolidation was expected to finish by Q1 2018, with approximately $150m of total pre-tax charges and $50m of annualized cost savings by the end of 2018. The separate productivity initiative was expected to deliver approximately $300m in annualized savings by the end of 2017.
- Tax and unusual items: Nine-month tax rate was 31.2%, down 4.2 percentage points, reflecting foreign-tax-credit valuation-allowance benefits and the effective settlement of the IRS 2010–2013 audit, partly offset by foreign-tax-credit reserves. Q3 included a $232m valuation-allowance release and a $36m reversal of tax accruals, partly offset by $114m of tax expense for foreign-tax-credit reserves.
- Litigation and settlement exposure: The filing describes extensive tobacco-related litigation, including Engle progeny cases and other claims. Management said it had not recorded provisions for pending tobacco cases where loss was not considered probable and estimable; adverse outcomes could nevertheless materially affect a period. Accrued settlement charges were $3.383bn. State settlement agreements and FDA fees generated approximately $3.6bn of nine-month cost-of-sales charges; estimated charges were approximately $4.9bn in 2017 and each year thereafter, subject to assumptions and adjustments.
- Regulatory and market risks: FDA rulemaking and product approvals, potential restrictions on nicotine, flavors or smokeless-tobacco constituents, excise taxes, declining cigarette volumes, illicit trade, competition, and product recalls could affect sales, costs and product access. Corrective statements in newspapers and on television under the federal government’s RICO case were scheduled to begin in Q4 2017.
- Other risks: AB InBev investment returns and value are exposed to currency and business risks; its shares remain subject to a five-year transfer restriction through October 2021. The company also identifies wine competition and supply risks, operational disruption, cyberattacks and potential impairment of goodwill or intangible assets.
Key facts for investors to verify
- Underlying earnings growth after separating the prior-year debt-extinguishment loss, tax benefits, AB InBev gains and other excluded items; review the assumptions behind adjusted EPS guidance.
- Whether cigarette shipment and retail-share declines, including California tax effects, persist, and whether pricing offsets volume losses.
- Actual future tobacco settlement and FDA payments, NPM-adjustment recoveries or repayments, and the resolution of disputes involving state settlement allocations.
- Developments in Engle progeny and other tobacco litigation, including appeals, judgments, bond requirements and unprovided potential losses.
- Cash generation and capital allocation relative to dividends, repurchases, debt, and the reported working-capital deficit.
- Progress on facility consolidation and productivity savings, and any further recall, regulatory or tax developments.