Philip Morris International Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. PMI is a Virginia holding company whose subsidiaries sell cigarettes and nicotine products outside the United States. The filing also reports fourth-quarter results; amounts below are in U.S. dollars unless stated otherwise.
Financial results and key metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net revenues, including excise taxes | $78.1 billion | $75.0 billion | +4.2% |
| Net revenues, excluding excise taxes | $28.7 billion | $26.7 billion | +7.7% |
| Gross profit | $18.3 billion | $17.3 billion | +5.9% |
| Operating income | $11.5 billion | $10.8 billion | +6.4% |
| Net earnings attributable to PMI | $6.0 billion | $7.0 billion | -13.4% |
| Diluted EPS | $3.88 | $4.48 | -13.4% |
| Operating cash flow | $8.9 billion | $8.1 billion | +$0.8 billion |
| Capital expenditures | $1.5 billion | $1.2 billion | +$0.4 billion |
Reported gross margin was approximately 23.5% of net revenues, and operating margin approximately 14.7%; both use revenue inclusive of excise taxes. Excise taxes were $49.4 billion, up 2.2%. Price increases and favorable volume/mix lifted revenue excluding excise taxes, partly offset by $437 million of unfavorable currency effects. Operating income benefited primarily from pricing, while increased costs and currency were offsets.
For Q4 2017, net revenues were $21.6 billion versus $19.2 billion in Q4 2016. PMI-attributable earnings were $694 million and diluted EPS was $0.44, versus $1.7 billion and $1.10, respectively, in the prior-year quarter. The 2017 fourth-quarter decline reflects the annual tax charge described below.
Cash, debt and shareholder distributions
- Cash and cash equivalents were $8.4 billion at year-end, up from $4.2 billion. Total debt was $34.3 billion, up from $29.1 billion; long-term debt was $31.3 billion. The weighted-average financing cost was 2.6%.
- PMI had $8.0 billion of committed revolving credit facilities available and no commercial paper outstanding at year-end. Its covenant interest-coverage ratio was 10.6x against a 3.5x minimum.
- Dividends paid were $6.5 billion; dividends declared were $4.22 per share. The annualized dividend rate was $4.28 per share after a 2017 increase. No shares were repurchased under an authorized program.
- Stockholders’ deficit was $10.2 billion. The filing notes that PMI is a holding company and depends principally on subsidiary dividends and debt repayments for funds.
Material changes versus the prior comparable period
- Total shipments of cigarettes and heated tobacco units fell 2.7% to 798.2 billion units. Cigarette shipments declined 6.3% to 761.9 billion, while heated tobacco unit shipments rose to 36.2 billion from 7.4 billion.
- Reduced-risk product (RRP) net revenues, including excise taxes billed to customers, increased to $3.8 billion from $739 million; excluding excise taxes, they were $3.6 billion versus $733 million. Growth was led by Japan. IQOS was available in key cities in 37 markets and nationwide in Japan.
- Operating companies income increased in Asia to $4.1 billion from $3.2 billion, but declined in the EU to $3.8 billion from $4.0 billion and in Eastern Europe, Middle East & Africa to $2.9 billion from $3.0 billion. Latin America & Canada rose to $1.0 billion from $938 million.
- The effective tax rate rose to 40.7% from 27.9%, principally due to a provisional $1.6 billion expense associated with the U.S. Tax Cuts and Jobs Act. The charge reduced 2017 net earnings but had no net impact on operating cash flow for the year. A $1.7 billion transition-tax payable is due over eight years beginning in 2018.
- Net debt funding and cash generation supported higher cash balances, while net cash used in investing increased to $3.0 billion, including $1.5 billion of cash collateral posted for net-investment hedges and higher capital spending.
Guidance, management commentary and risks
Management’s February 2018 forecast for FY 2018 reported diluted EPS was $5.20–$5.35. Excluding an estimated favorable currency contribution of about $0.16 per share, the forecast implied 7%–10% growth versus 2017 adjusted diluted EPS of $4.72. Assumptions included net revenue growth excluding excise taxes and currency of over 8%, operating cash flow above $9.0 billion, capital expenditures of approximately $1.7 billion, and no share repurchases. The forecast assumed an effective tax rate of approximately 28% and is subject to currency, tax-law implementation, earnings mix and other risks.
- Management’s strategy is to develop smoke-free products and encourage adult smokers who would otherwise continue smoking to switch. It cautions that RRPs contain nicotine, are not risk-free, and that commercial success and regulatory treatment are uncertain. FDA review of IQOS applications was ongoing; the agency had not yet made a decision.
- Management reported increased investment in RRPs and said 2017 heated-tobacco supply constraints had eased. Some RRP components have limited sources, leaving commercialization exposed to supply interruptions.
- Key business risks include declining cigarette consumption, excise-tax increases, down-trading and illicit trade; extensive marketing, packaging and product regulation; intense competition; foreign-exchange volatility; and political, economic and supply-chain disruption.
- Tobacco-related litigation remains a material uncertainty. PMI reported large claims in several jurisdictions, including Quebec class-action judgments under appeal. Management had not concluded a loss was probable and could not estimate possible losses for pending tobacco-related cases; accordingly, no loss was accrued for those cases. Separate Thai customs proceedings and South Korean tax assessments are also contested.
- PMI committed $80 million annually for 12 years to the Foundation for a Smoke-Free World; it made an initial $4.5 million contribution in 2017 and an $80 million contribution in early 2018.
Most important facts for investors to verify
- Whether RRP shipment and revenue growth can continue, and whether margins, repeat use and device warranty costs support profitable expansion.
- How much of the 2017 shipment trend reflects underlying consumer demand versus inventory movements, especially in Japan.
- The final tax consequences of the Tax Cuts and Jobs Act, including transition-tax estimates, payment timing and the assumed 2018 effective tax rate.
- Debt growth, dividend coverage, cash conversion and the extent to which receivables sales and other working-capital movements support reported operating cash flow.
- Developments in Quebec litigation, Thai customs cases, South Korean assessments and other regulatory or legal contingencies that could affect cash flows or financial position.