Philip Morris International Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited U.S. GAAP results. PMI sells cigarettes and smoke-free nicotine products primarily outside the United States, and is pursuing a transition toward smoke-free products.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenues | $7.585 billion | $7.153 billion | +6.0% |
| Gross profit | $5.311 billion | $4.751 billion | +11.8% |
| Operating income | $3.444 billion | $2.789 billion | +23.5% |
| Net earnings attributable to PMI | $2.418 billion | $1.826 billion | +32.4% |
| Diluted EPS | $1.55 | $1.17 | +32.5% |
| Net cash from operating activities | $435 million | $1.111 billion | Down $676 million |
| Capital expenditures | $179 million | $170 million | — |
Gross margin was approximately 70.0%, versus 66.4% a year earlier; operating margin was approximately 45.4%, versus 39.0%. PMI attributed higher earnings mainly to pricing, lower manufacturing and administrative costs, favorable currency, and stronger RRP sales. Reported EPS included a $0.10-per-share favorable currency impact and a $0.02-per-share charge for 2021 asset impairment and exit costs; Q1 2020 included a $0.04-per-share unfavorable fair-value adjustment on equity securities.
Net revenues excluding excise taxes increased 2.9% excluding currency. RRP net revenues rose 36.5% to $2.122 billion, while combustible-product net revenues fell 2.4% to $5.463 billion. Cigarette shipments declined 7.3%; heated tobacco unit shipments increased 29.9%. Total cigarette and heated tobacco unit shipments declined 3.7%.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $3.902 billion at March 31, 2021, down from $7.280 billion at year-end 2020.
- Total debt was approximately $29.4 billion, down from $31.5 billion at December 31, 2020. Stockholders’ deficit was $9.574 billion.
- Operating cash flow fell year over year, principally because of higher working-capital needs, including excise-tax inventory and payment timing, and lower use of receivables sales. PMI reported approximately $1.3 billion of higher working-capital requirements, partly offset by higher earnings.
- Financing cash outflow was $3.649 billion, including $1.879 billion of dividends paid and $1.632 billion of long-term debt repayment. The quarterly dividend declared was $1.20 per share; the annualized rate was $4.80.
- PMI had $7.25 billion of committed revolving credit facilities, fully available, and no commercial paper outstanding at quarter-end. Its $8.0 billion commercial paper program had an average outstanding balance of $0.9 billion during the quarter. The covenant EBITDA-to-interest ratio was 13.5x against a 3.5x minimum.
Material changes and segment performance
Operating income increased 23.5% overall, with growth in five of six segments. EU revenue rose 14.8% and operating income 28.7%; East Asia & Australia revenue rose 17.3% and operating income 43.0%; Eastern Europe operating income more than doubled, while revenue was nearly flat. South & Southeast Asia revenue declined 6.2% and operating income 11.7%, reflecting lower volume/mix and unfavorable pricing. Middle East & Africa revenue declined 8.6%, largely on volume/mix, though operating income increased 4.4%.
PMI’s total international share, excluding China and the United States, fell 0.7 percentage points to 26.8%. Cigarette share declined 1.4 points to 23.3%, while heated tobacco unit share increased 0.7 points to 3.5%. Management said estimated distributor inventory movements had a net unfavorable impact of approximately 0.9 billion units on Q1 comparisons.
Outlook, management commentary and risks
- Management expected 2021 capital expenditures of approximately $0.8 billion and a full-year effective tax rate of around 22%, excluding discrete tax events. The filing text does not provide a clear full-year EPS or revenue guidance figure.
- PMI reported that its manufacturing facilities were operating and that it had adequate access to key inputs and liquidity. It cautioned that pandemic restrictions, travel disruption, currency volatility, and supply-chain interruptions remained uncertain risks; semiconductor shortages could affect electronic-device supply.
- PMI recorded $48 million of Q1 impairment and exit costs: $26 million for South Korea distribution-contract terminations and $22 million for organizational-design and separation programs. It expected the South Korea operating-model implementation to be completed in Q3 2021. Approximately $104 million of exit-cost cash payments were expected in the remainder of 2021.
- Major risks include tobacco regulation and excise taxes, illicit trade, declining cigarette consumption, RRP adoption and regulatory authorization, product and patent litigation, and currency and international operating exposures. PMI noted that tobacco-related litigation losses could materially affect a particular period; it had not accrued estimated losses for pending tobacco cases generally where management could not conclude a loss was probable and estimable.
- Important proceedings include the Canadian tobacco litigation and related CCAA stay through September 30, 2021; Thai customs cases; and multiple BAT patent challenges to Platform 1 products. The filing also describes a contingent guarantee relating to an equity-method investee’s Canadian COVID-19 vaccine project; PMI said it was not material to the quarter’s financial statements.
Investor verification points
- Confirm whether the sharp decline in operating cash flow reverses as working capital and excise-tax payment timing normalize, and monitor reliance on receivables sales.
- Track the sustainability of RRP growth against declining cigarette shipments and overall market-share trends, including the effect of pricing, inventory movements and pandemic-related disruptions.
- Review debt maturities, cash levels, dividend funding and access to credit markets alongside PMI’s stated capital-expenditure plans.
- Monitor litigation, tax/customs disputes, guarantees, regulatory decisions and patent cases for developments that could change accruals, cash flows or RRP commercialization.
- Assess whether the stated tax-rate and capital-spending outlook changes; the filing provides no clear full-year EPS or revenue forecast.