Altria Group, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are identified separately below. Altria is a U.S.-focused holding company whose principal businesses include cigarettes, cigars, smokeless tobacco and wine, as well as innovative tobacco products, finance assets and a 10.2% equity-method investment in AB InBev. Altria acquired Nat Sherman in January 2017.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenues, including excise taxes | $25.576 billion | $25.744 billion |
| Gross profit | $11.951 billion | $11.591 billion |
| Operating income | $9.556 billion | $8.762 billion |
| Earnings attributable to Altria | $10.222 billion | $14.239 billion |
| Diluted EPS | $5.31 | $7.28 |
| Net cash from operating activities | $4.922 billion | $3.821 billion |
| Capital expenditures | $199 million | $189 million |
| Total debt at year-end | $13.894 billion | $13.881 billion |
- Revenue declined 0.7%; operating income rose 9.1%. Earnings attributable to Altria fell 28.2% and diluted EPS fell 27.1%, principally because 2016 included a much larger AB InBev/SABMiller transaction gain.
- Operating income improved primarily on pricing and lower costs in the smokeable and smokeless segments. The filing does not present a single consolidated net cash flow after capital expenditures as a headline measure.
- FY 2017 effective tax rate was a benefit rate of 4.1%, versus a 34.8% provision rate in 2016. The 2017 result included approximately $3.4 billion of net Tax Reform Act benefits, mainly from remeasuring deferred tax liabilities and a tax-basis adjustment, partly offset by deemed repatriation tax.
- Fourth-quarter 2017 revenue was $6.101 billion, net earnings attributable to Altria were $4.966 billion and diluted EPS was $2.60. Fourth-quarter 2016 net earnings attributable to Altria were $10.276 billion and EPS was $5.27; that quarter included the major transaction gain.
- Cash and cash equivalents were $1.253 billion at year-end, down from $4.569 billion. Altria reported working-capital deficits, which management expected to fund with operating cash flow and/or short-term borrowing. It had no short-term borrowings and $3.0 billion available under its revolving credit agreement.
- All debt was fixed-rate, with a weighted-average coupon of approximately 4.9%. Credit-agreement leverage ratios were 1.3x debt/EBITDA and 14.8x EBITDA/interest, against limits of 3.0x maximum and 4.0x minimum, respectively.
- Dividends declared were $2.54 per share; cash dividends paid were $4.807 billion. The quarterly dividend was raised 8.2% to $0.66 in 2017. Management targets a payout of approximately 80% of adjusted diluted EPS.
Material changes and segment trends
- Smokeable products: Revenue was $22.636 billion versus $22.851 billion; operating companies income rose to $8.408 billion from $7.768 billion. Cigarette shipment volume fell 5.1% to 116.6 billion units and cigarette retail share declined 0.4 percentage points to 50.7%. Cigar volume rose 9.9%.
- Smokeless products: Revenue increased 5.1% to $2.155 billion and operating companies income increased 10.5% to $1.300 billion. Shipment volume fell 1.4%; total retail share declined one percentage point to 53.7%. A voluntary product-tampering recall reduced segment operating companies income by an estimated $60 million.
- Wine: Revenue decreased 6.4% to $698 million and operating companies income decreased 10.4% to $147 million. Shipment volume declined 8.6%, reflecting competition, trade inventory reductions and slower premium-category growth.
- Altria’s AB InBev investment generated $532 million of equity earnings in 2017; the investment’s carrying value was $17.952 billion, compared with a disclosed fair value of $22.1 billion. Equity earnings use a one-quarter reporting lag.
- Cash from operations increased year over year, helped by higher smokeable and smokeless operating income, lower pension contributions and lower litigation payments; the comparison also reflected taxes paid on transaction proceeds and derivative gains in 2016. Financing cash outflow increased, including $2.917 billion of share repurchases and $4.807 billion of dividends.
Outlook, risks and unusual items
- For 2018, management forecast adjusted diluted EPS growth of 15%–19% over 2017 adjusted diluted EPS and an adjusted effective tax rate of approximately 23%–24%. It did not provide a corresponding GAAP EPS forecast or reconciliation because excluded items are difficult to predict.
- Management planned to reinvest approximately one-third of the total tax-reform benefit in 2018, with a moderating investment level in later years. Expected 2018 capital expenditures were $200–$250 million.
- The 2017 earnings comparison is affected by significant one-time items: the Tax Reform Act benefit, a $445 million gain associated with remaining AB InBev divestitures, $81 million in pension settlement charges, litigation charges and restructuring/implementation costs. The 2016 comparison included a $13.9 billion pre-tax gain on the AB InBev/SABMiller transaction and an $823 million debt-extinguishment loss.
- Manufacturing-facility consolidation was expected to be substantially complete by the end of Q1 2018, with approximately $50 million in annualized savings by year-end 2018. Estimated total pre-tax charges were approximately $150 million.
- Major risks include tobacco litigation and potentially significant judgments, regulation by the FDA, excise-tax increases, declining cigarette consumption, down-trading and competitive pressure, product recalls, tobacco supply and facility disruption, cyber risks, and wine competition and grape supply. Management said it could not estimate a possible loss range for pending tobacco cases generally when loss was not considered probable and reasonably estimable. Tobacco litigation liabilities recorded at year-end were $106 million; additional exposure could be material in a particular period.
- FDA product reviews and potential standards—including proposals concerning nicotine, flavors and smokeless-tobacco NNN levels—could affect product availability, costs or sales. Corrective statements ordered in the federal government’s RICO case began appearing in newspapers and on television in Q4 2017; the court had not imposed monetary penalties in that case.
Investor facts to verify
- Reconcile GAAP EPS with adjusted EPS and isolate the effects of tax reform, transaction-related gains, litigation, pension settlement and restructuring items.
- Track cigarette and smokeless shipment volumes, brand retail share, pricing and consumer down-trading, including the effects of state and local excise taxes.
- Monitor litigation outcomes, appeals, bond requirements and any changes to the company’s ability to estimate or accrue potential losses.
- Check the progress and realized savings from facility consolidation, and whether the announced 2018 EPS outlook and tax-rate assumptions are achieved.
- Review AB InBev earnings, dividends, valuation and tax estimates, including the restrictions on Altria’s restricted shares through October 2021.
- Assess cash generation against dividends, repurchases, debt maturities and settlement payments; the filing describes liquidity as adequate but reports working-capital deficits.