Business Context and Reporting Period
This Form 8-K Current Report is filed by Philip Morris International Inc. (PMI) for the reporting date of July 31, 2008. The filing primarily addresses the entry into a Material Definitive Agreement to acquire remaining shares of Rothmans Inc. and the revision of second-quarter 2008 financial results due to a finalized legal settlement.
Key Financial Metrics and Material Changes
Acquisition of Rothmans Inc.
- Transaction: PMI entered into a Support Agreement to commence a takeover bid for all outstanding common shares of Rothmans Inc.
- Offer Price: CDN $30.00 per share in cash.
- Ownership Structure: Rothmans holds a 60% interest in Rothmans, Benson & Hedges Inc. (RBH); PMI already owns the remaining 40% via a subsidiary.
- Conditions: The offer is subject to receiving at least 66 2/3% of shares, regulatory approvals (Competition Act and Investment Canada Act), and compliance with a settlement with the Government of Canada.
- Termination Fees: Rothmans may owe PMI approximately 2% of the consideration if terminated under specific circumstances; PMI may owe Rothmans approximately 4% under other specified circumstances.
Revision of Q2 2008 Results
PMI revised its second-quarter 2008 results following the finalization of a CAD $550 million settlement between Rothmans, RBH, and the Government of Canada regarding an RCMP investigation into product exports from 1989-1996.
- Charge: An after-tax, non-cash charge of $124 million was recorded.
- Segment Impact: The charge is included in the operating results of the Latin America segment.
- Revised Net Earnings: Reduced to $1.7 billion.
- Revised Earnings Per Share (EPS):
- Diluted EPS revised from $0.86 to $0.80.
- Basic EPS revised from $0.87 to $0.81.
Guidance, Outlook, and Management Commentary
- Full-Year 2008 Impact: PMI anticipates the Rothmans transaction will not affect 2008 full-year results.
- 2009 Outlook: The transaction is expected to be modestly accretive to earnings per share in 2009.
- 2008 Guidance Reaffirmed: PMI reaffirms its forecast for 2008 adjusted full-year diluted EPS, projecting growth of approximately 19% to 21% to a range of $3.32 to $3.38, based on a 2007 pro-forma adjusted base of $2.79.
- Risks: Forward-looking statements are subject to risks regarding the timing of the Offer completion and realization of financial benefits. Additional risks are detailed in the Form 10-Q for the period ended March 31, 2008.
Investor Verification Checklist
- Verify the finalization status of the CAD $550 million settlement with the Government of Canada and its impact on the Latin America segment.
- Confirm the tender percentage of Rothmans shares to determine if the 66 2/3% threshold for the Offer is met.
- Monitor regulatory approvals required under the Canadian Competition Act and Investment Canada Act.
- Review the full text of the Support Agreement (Exhibit 10.1) for specific termination rights and fee structures.
- Assess the impact of the $124 million non-cash charge on the company's liquidity and cash flow, noting it is non-cash in nature.