Altria Group, Inc. — Form 10-Q Summary
Business context and reporting period
For the quarter and nine months ended September 30, 2021. Altria’s businesses included U.S. smokeable tobacco, oral tobacco, wine and other activities, alongside equity investments in ABI, JUUL and Cronos. The company describes its strategy as transitioning adult smokers toward smoke-free products. On October 1, 2021, Altria completed the sale of its wine subsidiary for approximately $1.2 billion in net cash proceeds.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenues | $6.786 billion | $7.123 billion | $19.758 billion | $19.849 billion |
| Operating income | $2.951 billion | $3.160 billion | $8.827 billion | $8.292 billion |
| Net earnings (losses) attributable to Altria | $(2.722) billion | $(952) million | $851 million | $2.543 billion |
| Diluted EPS | $(1.48) | $(0.51) | $0.46 | $1.36 |
| Adjusted diluted EPS (non-GAAP) | $1.22 | $1.19 | $3.52 | $3.37 |
| Operating cash flow | Not separately stated | Not separately stated | $5.742 billion | $5.844 billion |
Q3 gross profit was $3.673 billion, versus $3.717 billion a year earlier. Nine-month gross profit was $10.677 billion, versus $9.877 billion. Q3 operating margin was approximately 43.5%, compared with 44.4%; nine-month operating margin was approximately 44.7%, compared with 41.8%.
At September 30, cash and cash equivalents were $2.957 billion. Total debt carrying value was $28.127 billion, down from $29.471 billion at December 31, 2020. Altria reported a working capital deficit; management said it expected to fund working capital needs with operating cash flow and access to credit and capital markets. The $3.0 billion revolving credit facility was undrawn, and Altria reported covenant compliance. Nine-month capital expenditures were $102 million; full-year 2021 capital expenditures were forecast at $150 million to $200 million.
Material changes versus prior periods
- A $6.157 billion non-cash, pre-tax impairment of the ABI investment drove the Q3 and nine-month GAAP losses. Altria said the decline in ABI’s fair value was other than temporary and that a recovery to carrying value would take longer than previously expected. After impairment, the investment’s fair and carrying values were both $11.2 billion.
- Q3 adjusted diluted EPS increased 2.5% to $1.22; nine-month adjusted diluted EPS rose 4.5% to $3.52. These non-GAAP measures exclude special items and should be considered alongside GAAP results.
- Smokeable segment adjusted operating companies income (OCI) increased 2.6% for the nine months, but declined 2.2% in Q3. Cigarette shipment volume fell 8.0% year to date and 12.9% in Q3; adjusted comparisons cited by the company showed declines of approximately 5% and 7%, respectively.
- Oral tobacco adjusted OCI was essentially flat year to date and declined 8.0% in Q3, with lower volume and product mix pressures. Wine adjusted OCI increased year to date, while the segment recorded transaction-related charges in Q3.
- Altria recorded a $649 million pre-tax debt extinguishment loss following first-quarter tenders and redemptions. It issued $5.5 billion of long-term notes, repaid $1.5 billion of notes at maturity and reduced near-term maturities. The weighted-average coupon on total long-term debt was 4.0%, versus 4.1% at year-end 2020.
- Operating cash flow decreased to $5.742 billion from $5.844 billion, primarily reflecting higher settlement and income tax payments. Financing cash outflow increased, including dividends, debt transactions and $972 million of share repurchases.
Outlook, commentary and risks
- Altria narrowed 2021 adjusted diluted EPS guidance to $4.58–$4.62, or 5%–6% growth over 2020 adjusted EPS of $4.36. It forecast an adjusted effective tax rate of 24.5%–25.5%. Guidance excludes specified special items and has no corresponding GAAP reconciliation in the filing.
- The board raised the quarterly dividend 4.7% to $0.90 per share, or $3.60 annualized. The stated long-term payout-ratio objective remained approximately 80% of adjusted diluted EPS. In October, the board expanded the share repurchase authorization from $2.0 billion to $3.5 billion, with completion expected by December 31, 2022; both dividends and repurchases remain subject to board discretion.
- Management cited continuing uncertainty around COVID-19, inflation, labor availability, consumer mobility and purchasing patterns, supply chains, regulation and excise taxes. It had not experienced material COVID-related disruption to tobacco operations or supply and distribution at the reporting date.
- Key business pressures include declining cigarette consumption, competition from oral nicotine pouches and other smoke-free products, pricing and discount-brand shifts, and potential federal tobacco and nicotine tax increases. Management estimated domestic cigarette industry volume declined 5% in the first nine months, adjusted for specified factors.
- Regulatory and litigation exposures include pending FDA product reviews for on! and JUUL, the FTC antitrust challenge to Altria’s JUUL investment, and extensive JUUL-related litigation. In September 2021, the ITC affirmed orders restricting importation and domestic sale of IQOS and HeatSticks, effective November 29, 2021 absent presidential rejection; Altria said PM USA planned to remove the products while awaiting review.
- The filing describes numerous tobacco, e-vapor, antitrust, shareholder and other proceedings. Management generally said it could not conclude that losses in pending cases were probable and reasonably estimable, while warning that adverse outcomes could materially affect results, cash flows or financial position. It also identified potential further ABI impairment, JUUL valuation and FDA authorization risks.
Important facts for investors to verify
- Reconcile the $6.157 billion ABI impairment, its tax effects and the basis for management’s non-GAAP adjusted EPS presentation; monitor subsequent ABI valuation and dividends.
- Track cigarette shipment and industry-volume trends, oral nicotine pouch growth, and whether pricing continues to offset volume and cost pressures.
- Review the outcome and timing of the FTC/JUUL proceedings, FDA decisions on on! and JUUL, and the IQOS import and sales restrictions.
- Assess post-sale proceeds and any remaining adjustments from the Ste. Michelle transaction, alongside the expanded buyback and dividend commitments.
- Monitor settlement payments, litigation developments, proposed tobacco taxes, and liquidity and debt metrics.