Altria Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Unaudited consolidated results. Altria’s businesses include smokeable and smokeless tobacco, wine and financial services, plus a 27% equity-method interest in SABMiller.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net revenues | $5.647 billion | $5.643 billion |
| Gross profit | $2.202 billion | $2.148 billion |
| Operating income | $1.642 billion | $1.539 billion |
| Net earnings attributable to Altria | $973 million | $937 million |
| Diluted EPS | $0.48 | $0.45 |
| Cash from operating activities | $1.837 billion | $2.062 billion |
| Cash and equivalents, March 31 | $4.156 billion | $3.270 billion at Dec. 31, 2011 |
| Total debt | $13.7 billion | $13.7 billion at Dec. 31, 2011 |
- Gross margin was approximately 39.0% of net revenues and operating margin approximately 29.1% (calculated from reported figures). Excise taxes were $1.653 billion, down 2.8% year over year.
- Operating cash flow fell 11%, primarily because pension contributions were $504 million, including a voluntary $500 million contribution, versus $204 million in the prior-year quarter. Investing activities provided $287 million, mainly from finance-asset proceeds; financing activities used $1.238 billion, including $838 million of dividends and $266 million of share repurchases.
- Current assets were $7.893 billion versus current liabilities of $8.781 billion. Management reported a working-capital deficit but expected to fund it from operating cash flow and/or commercial paper. No short-term borrowings were outstanding; the $3.0 billion revolving facility was undrawn.
- Long-term debt had a reported fair value of $17.7 billion against carrying value of $13.7 billion. Credit-agreement leverage and interest-coverage ratios were 1.8x and 6.4x, respectively; the company said it expected to remain in covenant compliance.
Changes versus Q1 2011
- Revenue was essentially flat. Operating income rose 6.7% and attributable net earnings rose 3.8%; diluted EPS increased 6.7%, supported by higher earnings and fewer shares outstanding.
- Marketing, administration and research costs declined $67 million, primarily reflecting cost-reduction actions and a postretirement-plan curtailment gain. Interest and other debt expense rose $15 million following 2011 debt issuance.
- Segment operating-company income increased in smokeable products ($1.439 billion versus $1.369 billion), wine ($15 million versus $12 million) and financial services ($52 million versus $21 million); smokeless products was nearly unchanged at $192 million versus $193 million. Financial-services growth chiefly reflected asset-sale gains.
- Smokeable shipment volume declined 2.5%, while smokeable operating-company income rose 5.1%, mainly on pricing and cost savings. Cigarette shipments fell 2.6%; Marlboro retail share edged up to 42.3%. Smokeless shipment volume declined 7.5%, despite a 1.0-point gain in combined retail share. Wine shipments rose 6.6%.
- Beginning in 2012, Altria combined its former cigarette and cigar segments into smokeable products and recast prior-period segment data. Middleton also became a wholly owned subsidiary of PM USA.
Outlook, commentary and significant risks
- Management reaffirmed 2012 reported diluted EPS guidance of $2.14–$2.20. Adjusted diluted EPS, a non-GAAP measure excluding specified items, was expected to grow 6%–9% over 2011 adjusted EPS; management anticipated more modest adjusted EPS growth in the middle quarters.
- The 2011 cost-reduction program is expected to produce $400 million in annualized savings against previously planned spending by the end of 2013. Altria expects about $70 million in additional pre-tax charges during the remainder of 2012; net charges incurred through March 31 were $228 million.
- The board’s $1.0 billion repurchase authorization was intended to be completed by year-end 2012. Through March 31, 21.7 million shares had been repurchased under the program for $622 million. Management cited a target dividend payout ratio of about 80% of adjusted EPS; the annualized dividend rate was $1.64 per share.
- State tobacco settlements, FETRA and FDA user fees generated about $1.2 billion of Q1 cost-of-sales charges; estimated charges were about $5 billion annually based on current assumptions. The filing also describes disputed Master Settlement Agreement adjustments, including potential credits, which remain unresolved.
- Litigation is a major contingency. Altria said it had not accrued losses for pending tobacco-related cases because management did not consider losses probable and could not estimate a loss range. The filing warns that adverse verdicts, appeals, bonding issues or regulatory developments could materially affect results, cash flows or financial position. PM USA reported about $49 million of security posted for appealed judgments.
- Other key exposures include FDA authority and proposed tobacco-product requirements, possible menthol regulation, excise-tax increases, declining cigarette volumes, down-trading and illicit trade. PMCC’s American Airlines aircraft leases are exposed to bankruptcy-related rejection or restructuring; its finance-asset allowance was $204 million.
- IRS challenges to PMCC leveraged-lease tax treatment remain material: Altria disclosed approximately $600 million of potential additional federal and state tax and interest payments for 2004–2009, excluding potential penalties, and continuing refund disputes for earlier years. A $627 million one-time charge was recorded in Q2 2011.
Most important facts for investors to verify
- Whether reported and adjusted EPS guidance was achieved, including the effects excluded from adjusted EPS and the anticipated slower mid-year growth.
- Actual tobacco shipment trends, pricing, market share and the sustainability of smokeable-product margin gains and cost savings.
- Cash conversion after pension contributions, dividends and buybacks, and liquidity relative to settlement payments and debt obligations.
- Developments in tobacco litigation, MSA adjustment proceedings and regulatory actions, including FDA requirements and menthol policy.
- Outcomes of PMCC lease-credit exposures and IRS tax disputes, including any resulting allowance increases or tax payments.