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Altria Group, Inc. - Q1 2003 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003. Altria Group, Inc. (formerly Philip Morris Companies Inc., name change effective Jan 27, 2003) operates primarily through two segments: Consumer Products (tobacco and food) and Financial Services. The company reported 2,024,843,316 shares of common stock outstanding as of April 30, 2003.

Key Financial Metrics

Note: Debt figures derived from sum of short-term borrowings, current portion of long-term debt, and long-term debt across consumer products and financial services segments.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 5.7% ($1.2 billion) primarily due to the absence of Miller Brewing Company revenues (merged into SABMiller in July 2002) and a 23.9% drop in domestic tobacco revenues.
• Domestic Tobacco Weakness: Domestic tobacco operating income fell 40.6% ($508 million) driven by a 16.1% volume decline and increased promotional spending. Market share dropped to 49.7%.
• Food Segment Growth: North American food operating income increased 18.1% due to the absence of 2002 separation/integration charges and higher pricing, offsetting higher commodity costs.
• International Tobacco: Revenues increased 14.9% and operating income rose 8.1%, aided by favorable currency movements and volume growth in Central/Eastern Europe and Asia.
• Cash Flow Improvement: Operating cash flow surged to $2.2 billion (vs. $1.1 billion in 2002) largely due to the timing of tobacco litigation settlement payments.

Outlook, Risks, and Unusual Items

• Credit Rating Downgrades: Following a $10.1 billion judgment in the Price litigation (March 2003), Moody's, S&P, and Fitch downgraded Altria's long-term debt ratings to "Baa2", "BBB", and "BBB" respectively, with negative outlooks. This eliminated access to the commercial paper market, forcing reliance on credit lines.
• Litigation Contingencies:
  • Price Case: A $10.1 billion judgment ($7.1B compensatory, $3B punitive) was stayed pending appeal. Altria must post a bond involving a $6 billion note and cash deposits.
  • Engle Case: A $74 billion punitive damages verdict remains on appeal; $1.7 billion is held in escrow.
  • US Government Lawsuit: Seeking disgorgement of approx. $289 billion; trial scheduled for September 2004.
• Share Repurchases: Altria completed a $10 billion program and initiated a new $3 billion program. However, repurchases were suspended following the credit rating downgrades until capital market access is restored.
• Financial Services: PMCC is shifting strategy from new lease investments to asset sales. Exposure to airline bankruptcies (UAL, US Airways) resulted in write-offs and increased allowances for losses.

Investor Verification Checklist

• Litigation Bonding: Verify the status of the $12 billion bond requirement for the Price case and the sufficiency of the $6 billion note/cash deposit arrangement.
• Liquidity Constraints: Confirm the company's ability to refinance maturing debt and commercial paper given the loss of investment-grade ratings and commercial paper market access.
• Domestic Volume Trends: Monitor domestic tobacco shipment volumes and market share, which are under pressure from discount brands and excise tax increases.
• Escrow Assets: Review the classification and liquidity of the $1.7 billion held in escrow for the Engle and Price cases.
• Food Commodity Costs: Assess the impact of rising cocoa and coffee prices on North American and International food margins.