Philip Morris International Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. PMI is an international tobacco company operating in six geographic segments, selling cigarettes and smoke-free products primarily outside the United States. Its strategy is to grow smoke-free products and ultimately replace cigarettes.
Financial results and key metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net revenues | $28.694 billion | $29.805 billion | Down 3.7% |
| Gross profit / gross margin | $19.125 billion / 66.6% | $19.292 billion / 64.7% | Margin up approximately 1.9 points |
| Operating income / operating margin | $11.668 billion / 40.7% | $10.531 billion / 35.3% | Income up 10.8% |
| Net earnings attributable to PMI | $8.056 billion | $7.185 billion | Up 12.1% |
| Diluted EPS | $5.16 | $4.61 | Up 11.9% |
| Operating cash flow | $9.812 billion | $10.090 billion | Down $278 million |
| Capital expenditures | $602 million | $852 million | Down $250 million |
| Total debt at year-end | $31.536 billion | $31.045 billion | Up $491 million |
Net revenues including excise taxes were $76.047 billion, with $47.353 billion of excise taxes. Interest expense, net, was $618 million. The effective tax rate was 21.7%, versus 23.2% in 2019. Cash and cash equivalents were $7.280 billion at year-end; current liabilities were $19.615 billion and current assets were $21.492 billion. Total liabilities exceeded total assets, and PMI reported a stockholders’ deficit of $10.631 billion.
Smoke-free product net revenues rose 22.2% to $6.827 billion, about 23.8% of net revenues, from $5.587 billion, or about 18.7%, in 2019. Heated tobacco unit shipments grew 27.6% to 76.1 billion, while total cigarette and heated tobacco unit shipments fell 8.1% to 704.6 billion. Dividends paid were $7.364 billion; dividends declared were $4.74 per share.
Fourth-quarter 2020 net revenues were $7.444 billion, compared with $7.713 billion in Q4 2019. PMI-attributable net earnings were $1.976 billion versus $1.616 billion, and diluted EPS was $1.27 versus $1.04.
Material changes versus the prior comparable period
- Revenue declined amid pandemic disruption, lower cigarette volumes, unfavorable currency and the continuing effect of RBH’s 2019 deconsolidation; favorable pricing and heated tobacco growth partly offset these pressures.
- Operating income and EPS increased, but the reported year-over-year comparison benefited substantially from approximately $1.2 billion of 2019 charges, including plant-related impairment and exit costs, a Russian tax audit charge, Canadian tobacco-litigation expense and the RBH deconsolidation loss. Excluding specified unusual items and currency, operating income increased 3.5%.
- Regional results diverged: EU and East Asia & Australia operating income increased, while Middle East & Africa and South & Southeast Asia declined. Duty-free weakness was particularly significant.
- Operating cash flow decreased despite higher earnings, reflecting unfavorable currency, higher working-capital needs and pandemic-related inventory build-up. Investing cash use declined, partly due to lower capital expenditures.
Outlook, commentary, risks and unusual items
- Management estimated a 2021 effective tax rate of approximately 22%, excluding discrete tax events, and expected 2021 capital expenditures of approximately $800 million, funded from operating cash flows. No clear full-year 2021 revenue or EPS guidance is provided in the supplied filing text.
- PMI reported sufficient liquidity, operational factories and no significant current supplier-continuity issues, while cautioning that pandemic uncertainty remained. Risks included weaker duty-free and market demand, restrictions on consumer engagement and RRP conversion, supply-chain disruption, currency volatility and delayed restructuring initiatives.
- Long-term debt was primarily fixed-rate; weighted-average financing cost was 2.4%. At year-end there were no borrowings under committed facilities, and the covenant EBITDA-to-interest ratio was 12.6 to 1.0 against a 3.5 minimum. The company reported $7.25 billion of committed facilities as of February 8, 2021.
- Unusual 2020 items included a $119 million Brazilian indirect-tax credit and $149 million of asset impairment and exit costs. A further approximately $90 million Brazilian tax-credit determination remained pending.
- PMI disclosed material litigation and investigations. It had not accrued estimated losses for most pending tobacco-related cases because management did not conclude losses were probable and could not estimate a loss range. Canadian tobacco cases were stayed during RBH’s creditor-protection proceedings; developments could materially affect the value of PMI’s RBH investment. Other notable exposures include Saudi customs assessments and Thai and Korean tax-related proceedings.
- FDA marketing authorizations for IQOS included an exposure-modification order, not a risk-modification order; continued use of the authorized exposure information requires renewal after four years. PMI also disclosed multiple patent disputes concerning Platform 1 products.
- The Board approved a 2.6% quarterly dividend increase in 2020, to $1.20 per share. PMI did not repurchase shares under a public program during the year.
Most important facts for investors to verify
- Whether smoke-free revenue and heated tobacco unit growth can continue to offset declining cigarette volumes, and how much growth translates into recurring profit and cash flow.
- Underlying operating performance after adjusting for currency, RBH deconsolidation and significant prior- and current-year unusual items.
- Cash generation, working-capital needs, dividend coverage and the company’s ability to manage approximately $31.5 billion of debt and scheduled maturities.
- Developments in tobacco litigation, RBH’s Canadian restructuring, customs and tax disputes, and the BAT patent proceedings that could affect product commercialization.
- Changes in COVID-19 conditions, regulation, excise taxation, illicit trade and RRP authorization or marketing requirements across key markets.
The auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective at December 31, 2020. Tobacco-related litigation assessments were identified as a critical audit matter.