Philip Morris International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. PMI manufactures and sells cigarettes, other tobacco products and nicotine-containing products in markets outside the United States. Financial statements are unaudited and prepared under U.S. GAAP; amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenues | $19.935B | $19.422B | $55.764B | $55.537B |
| Gross profit | $4.550B | $4.544B | $12.822B | $13.412B |
| Operating income | $2.977B | $2.959B | $8.203B | $8.722B |
| Net earnings attributable to PMI | $1.938B | $1.942B | $5.256B | $5.624B |
| Diluted EPS | $1.25 | $1.25 | $3.38 | $3.62 |
- Margins: Operating margin on reported net revenues was approximately 14.9% in Q3 (15.2% prior year) and 14.7% for nine months (15.7% prior year). Gross margin was approximately 22.8% and 23.0%, respectively, versus 23.4% and 24.1% in the comparable periods. Excise taxes are included in reported net revenues.
- Revenue drivers: Excluding excise taxes, revenue rose 0.8% in Q3 to $6.982B, as $440M of pricing gains were partly offset by $196M unfavorable currency and $189M unfavorable volume/mix. For nine months, revenue excluding excise taxes fell 3.4% to $19.714B; $1.1B pricing gains were outweighed by $1.2B unfavorable currency and $554M unfavorable volume/mix.
- Cash flow: Nine-month operating cash flow was $5.928B, versus $5.993B. Investing used $943M, including $734M of capital expenditures; financing used $3.560B. Cash increased to $4.884B from $3.417B at year-end 2015. Receivables sales supported operating cash flow: $7.0B cumulative sales during the period, with $0.7B still outstanding at period end.
- Debt and liquidity: Total debt was approximately $30.1B, up from $28.5B at December 31, 2015; cash was $4.884B. PMI had $8.0B of committed revolving facilities, all available, and no commercial paper outstanding. The facility covenant EBITDA-to-interest ratio was 10.0x against a 3.5x minimum. S&P and Fitch had negative outlooks; Moody’s outlook was stable.
- Dividends: $4.759B paid in the first nine months. The quarterly dividend was increased 2% to $1.04 per share, or $4.16 annualized. No share repurchases were planned for 2016.
Material changes versus comparable periods
- Q3 reported revenue increased 2.6%, but PMI-attributable earnings slipped 0.2% and diluted EPS was unchanged. Nine-month revenue increased 0.4%, while PMI-attributable earnings fell 6.5% and diluted EPS fell 6.6%.
- Operating income declined 6.0% for nine months, mainly because of unfavorable volume/mix ($705M) and currency ($660M), partly offset by $1.1B of price increases. Net interest expense declined 11.7% to $690M; the nine-month effective tax rate decreased to 28.1% from 28.7%.
- Cigarette shipment volume fell 5.4% in Q3 and 3.9% year to date. The nine-month decline was concentrated in Asia, EEMA and Latin America & Canada; EU volume increased 0.7%. HeatSticks volume rose to 2.1B units in Q3 and 3.7B year to date, from 278M and 334M, respectively.
- By segment, nine-month operating companies income increased in the EU (4.0%) but declined in EEMA (12.2%), Asia (5.5%) and Latin America & Canada (20.3%). Currency and volume/mix pressures were significant in the latter regions.
Outlook, commentary and risks
- PMI reaffirmed its 2016 reported diluted EPS forecast of $4.53–$4.58. Excluding an estimated $0.35 per-share unfavorable currency impact, the company projected 10.5%–11.5% growth versus 2015 adjusted EPS of $4.42. Guidance excludes future acquisitions, unusual events, impairment and exit charges, and future currency changes. Management estimated a full-year effective tax rate of approximately 28%.
- PMI expects total capital expenditures of approximately $1.2B in 2016 and $1.5B in 2017, including RRP capacity investment. It anticipates HeatSticks capacity constraints through Q1 2017, expects RRPs to approach break-even operating companies income in 2017 and to contribute positively in 2018. These expectations depend on demand, execution and regulatory approvals.
- Management cited higher pricing as an offset to declining cigarette volumes, unfavorable product/geographic mix and foreign-exchange headwinds. Risks include excise-tax increases, down-trading, illicit trade, regulation and packaging restrictions, competition, geopolitical and currency exposure, and declining cigarette consumption.
- Litigation and investigations: PMI reported no accrual for pending tobacco-related cases because management had not concluded a loss was probable and could not estimate a loss range. Two Quebec class-action judgments include substantial awards; an appeal hearing was scheduled for November 2016, and PMI’s subsidiary had posted CAD 226M in court-ordered security. A Thai customs/tax criminal case sought approximately THB 80.8B ($2.31B); a separate Thai investigation alleged about $250M in underpaid taxes. South Korean authorities alleged approximately $152M in underpaid taxes and recommended a $61M penalty. Outcomes and potential financial effects remain uncertain.
- Other notable items: exit-cost liabilities were $28M, expected to be substantially paid by the end of 2017. No asset impairment charges were recorded in the periods presented. Disclosure controls were concluded to be effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Whether price increases can continue to offset declining shipment volumes, adverse mix and currency effects, particularly in EEMA, Asia and Latin America & Canada.
- Progress against the 2016 EPS forecast, including the actual currency impact and the basis for the adjusted-EPS comparison.
- RRP demand, supply capacity, capital spending, profitability milestones and the timing and outcome of regulatory reviews.
- Developments in the Quebec appeals, Thai proceedings and South Korean tax matter, including security requirements, penalties and any change in accrual or loss estimates.
- Debt growth, dividend funding and the sustainability of operating cash flow, including the contribution from receivables sales and working-capital movements.