Philip Morris International Inc. quarterly report, Q2 FY2022

Philip Morris International Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results under U.S. GAAP. PMI sells cigarettes and reduced-risk products (RRPs) mainly outside the United States and is expanding into wellness and healthcare.

Key financial metrics

Metric	Q2 2022	Q2 2021	First half 2022	First half 2021
Net revenues	$7.832B	$7.594B	$15.578B	$15.179B
Operating income	$3.056B	$3.129B	$6.354B	$6.573B
Net earnings attributable to PMI	$2.233B	$2.172B	$4.564B	$4.590B
Diluted EPS	$1.43	$1.39	$2.93	$2.93
Operating margin	39.0%	41.2%	40.8%	43.3%

Q2 gross profit was $5.184B, for a gross margin of 66.2%, versus $5.241B and 69.0% a year earlier. First-half gross profit was $10.322B, margin 66.3%, versus $10.552B and 69.5%. Margins are calculated as reported gross profit or operating income divided by net revenues.

Reported net revenue grew 3.1% in Q2 and 2.6% in the first half. Excluding currency and acquisitions, management reported growth of 8.7% and 8.8%, respectively.
Reported operating income declined 2.3% in Q2 and 3.3% in the first half. Excluding currency and acquisitions, it increased 8.0% and 8.3%, respectively.
Currency reduced diluted EPS by $0.16 in Q2 and $0.39 in the first half. Management said first-half diluted EPS would have increased 13.3% excluding currency; Q2 EPS would have increased 14.4% excluding currency.
First-half operating cash flow was $4.642B, versus $4.065B; investing cash outflow was $55M, and financing cash outflow was $3.800B. Capital expenditures were $478M.
Cash and cash equivalents were $5.036B at June 30, 2022. Total debt was $28.1B, including $1.558B short-term borrowings, $4.149B current long-term debt, and $22.345B long-term debt. Total current liabilities exceeded current assets by $2.171B. Stockholders’ deficit was $7.260B.
Net interest expense was $126M in Q2 and $280M in the first half, down from $161M and $328M, respectively. The effective tax rate was 20.3% in Q2 and 20.0% in the first half.

Material changes versus prior comparable periods

Q2 PMI-attributable earnings rose 2.8% and diluted EPS rose 2.9%, despite lower operating income; lower interest expense and tax rate helped. First-half PMI-attributable earnings fell 0.6%, while diluted EPS was unchanged.
RRP net revenues were $2.267B in Q2, approximately level with prior year, and $4.617B in the first half, up 5.0%. First-half combustible-product revenue was $10.819B, up 0.4%. Heated tobacco unit shipments increased 7.7% in the first half, while cigarette shipments increased 1.4%.
Regional results diverged. Middle East & Africa revenue rose sharply, partly reflecting the absence of the $246M Saudi customs-assessment reduction recorded in 2021. East Asia & Australia revenue and operating income declined, with lower heated tobacco volume in Japan and currency effects among the factors.
First-half 2022 results included $122M of pre-tax Ukraine-war-related charges, compared with $127M of asset impairment and exit costs in the first half of 2021. Q2 war-related charges were $80M. The 2021 comparison also included the Saudi assessment and Q2 asset impairment and exit costs of $79M.

Outlook, management commentary, risks and unusual items

Management estimated a full-year 2022 effective tax rate of 21%–22%, excluding discrete tax events, and expected approximately $1.0B of 2022 capital expenditures. The filing does not provide a clear full-year revenue or EPS guidance figure in the supplied text.
PMI expected its all-cash Swedish Match offer to close in Q4 2022, subject to shareholder acceptance and regulatory and other approvals. The offer was valued at approximately $16.0B. At quarter-end, related bridge and term-loan facilities had no borrowings; committed bridge capacity had been reduced to $11B and the euro term loan commitments totaled €5.5B. PMI suspended its share repurchase program after announcing the offer. Credit rating outlooks or reviews were negative/watchlisted by the agencies cited in the filing.
PMI said it was working on options to exit Russia in an orderly manner, while operations continued at a reduced scale; Ukrainian factory operations remained suspended. Russia and Ukraine together represented around 7% of first-half net revenues and 8% in Q2. Their assets, ongoing supply-chain and sanctions exposure, potential exit costs, and possible impairment remain uncertain.
Other risks include extensive tobacco-related litigation and regulation, excise-tax changes, illicit trade, currency movements, inflation and logistics costs, RRP adoption and regulatory approval, product supply constraints, and integration or impairment risks from the Vectura and Fertin acquisitions. PMI disclosed a pending Canadian tobacco litigation stay through September 30, 2022 and stated that it had not accrued losses for pending tobacco cases where loss was not determined probable and estimable.
Annual goodwill and indefinite-lived intangible reviews found no impairment charge. However, the Wellness and Healthcare reporting unit had less than 20% fair-value cushion over carrying value; PMI also noted uncertainty around Russian assets and Vectura intangible-asset valuations.

Most important facts for investors to verify

Whether the Swedish Match offer closed as expected, the final funding mix, resulting debt and credit ratings, and any integration or regulatory conditions.
Developments in Russia and Ukraine, including exit feasibility, asset recoverability, currency translation losses, additional charges, and operating or supply-chain disruption.
Whether underlying revenue and operating-income growth persists after separating currency, acquisitions, prior-year comparison items, pricing, volume and product mix.
RRP shipment and revenue trends, device availability and margins, and material regulatory or patent developments affecting IQOS and other products.
Changes in tobacco litigation, including Canadian proceedings, and tax or customs disputes that could create material cash outflows or recoveries.