Philip Morris International Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited U.S. GAAP results. PMI manufactures and sells cigarettes and other tobacco products outside the United States, across four geographic segments.
Financial results and liquidity
- Revenue: Net revenues were $16.53 billion, up 6.0% year over year. Excluding excise taxes, revenue was $6.79 billion, up 4.5%; price increases and acquisitions more than offset lower volume/mix.
- Profit: Operating income was $3.01 billion, up 10.8%; net earnings attributable to PMI were $1.92 billion, up 12.7%. Basic and diluted EPS were $1.06, versus $0.90.
- Margins: Gross profit was $4.50 billion, or 27.2% of reported net revenues, versus 26.5% a year earlier. Operating margin was 18.2%, versus 17.4%; both use reported revenues that include excise taxes.
- Cash flow: Operating cash flow was $2.40 billion, compared with $1.97 billion. Investing cash outflow was $175 million; financing cash outflow was $2.66 billion. Cash declined $381 million to $1.32 billion.
- Debt and liquidity: Total debt was approximately $16.9 billion, versus $16.5 billion at year-end; cash was $1.32 billion. Committed revolving credit facilities totaled $5.2 billion, with no facility borrowings. The company reported a 14.0x covenant EBITDA-to-interest ratio against a 3.5x minimum.
- Shareholder returns: Q1 dividends declared were $0.64 per share and cash dividends paid were $1.16 billion. PMI repurchased 22.2 million shares for approximately $1.36 billion during the quarter.
Material changes and operating performance
- Revenue growth was supported by $453 million of price increases, $105 million from acquisitions, and $17 million of favorable currency on revenue excluding excise taxes; lower volume/mix reduced it by $280 million.
- Cigarette shipments rose 1.6% to 207.9 billion units, but fell 3.3% excluding the Philippines business combination. Asia shipments increased 14.0%, largely due to the combination and Indonesia; European Union shipments fell 7.3%, and Latin America & Canada shipments fell 5.5%.
- Segment operating companies income increased in Asia to $1.09 billion and Latin America & Canada to $251 million; it declined in the European Union to $1.01 billion and EEMA to $722 million. Asia’s increase reflected pricing, lower manufacturing costs, currency and the Philippines combination.
- Net earnings growth reflected higher operating income, favorable currency and a lower effective tax rate. PMI attributed $0.03 of diluted EPS growth to currency and $0.05 to lower share count and share-based payments.
- Current portion of long-term debt increased to $3.24 billion from $1.39 billion at December 31, 2010, while long-term debt declined. Current liabilities exceeded current assets at quarter-end.
Outlook, commentary and risks
- On April 21, 2011, PMI raised 2011 reported diluted EPS guidance by $0.20 to $4.55–$4.65 at prevailing exchange rates, versus $3.92 in 2010. The increase was attributed approximately equally to an improved business outlook and favorable currency. Guidance excludes potential acquisitions, impairment and exit charges, and unusual events.
- Q1 included $16 million of pre-tax impairment and exit costs, primarily severance for EU factory and R&D restructuring. Approximately $62 million of future exit-cost payments were expected, substantially by the end of 2012. The Greek tax-rate decrease provided an $11 million tax benefit.
- Management cited continuing pressure from excise-tax increases, regulation and marketing restrictions, plain-packaging proposals, illicit trade, competition, economic and political uncertainty, currency movements, agricultural input costs, and tobacco-related litigation.
- PMI reported 93 individual smoking-and-health cases, 11 class actions, 11 health-care cost recovery actions, 2 “lights” class actions, 10 individual “lights” cases and 5 public civil actions pending as of May 1, 2011. It said no loss provision was recorded for pending tobacco cases because loss was not considered probable and the amount or range could not be estimated; adverse outcomes could nevertheless materially affect results or liquidity.
- In Thailand, authorities had proposed charges alleging about $2 billion of customs-duty and excise-tax underpayment for 2003–2007, with a separate informal inquiry concerning about $1.8 billion for 2000–2003. The filing said prosecutors issued a non-prosecution order in the first matter, subject to approval becoming final. The related WTO ruling found no basis for Thailand’s customs-value position, but did not itself resolve the investigation.
- The March 2011 Japan earthquake and tsunami caused temporary logistics disruption but, according to PMI, had no material financial impact on Q1 results.
- Disclosure controls were concluded effective, and PMI reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the 2011 EPS forecast is achieved, including the assumptions for currency and business performance.
- Whether shipment trends stabilize, especially in the EU, Mexico, Japan and other markets affected by taxes, down-trading or distributor inventory movements; distinguish reported growth from acquisition-driven growth.
- Debt maturities, refinancing needs and liquidity, including the increased current portion of long-term debt and the proposed extension of the $2.5 billion revolving facility.
- Developments in material litigation and investigations, particularly the Thai tax/customs matters and large tobacco-related claims; no estimated loss range is provided for pending tobacco litigation.
- Implementation and commercial effects of regulatory changes, including Australia’s proposed plain-packaging legislation, EU tobacco-product review and ongoing excise-tax increases.