Philip Morris International Inc. annual report, FY2015

Philip Morris International Inc. — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. PMI manufactures and sells cigarettes, other tobacco products and nicotine-containing products outside the United States, in more than 180 markets. Marlboro accounted for about 34% of 2015 shipment volume.

Financial results and key metrics

Metric	2015	2014	Change
Net revenues, including excise taxes	$73.9 billion	$80.1 billion	-7.7%
Net revenues excluding excise taxes	$26.8 billion	$29.8 billion	-10.0%
Operating income	$10.6 billion	$11.7 billion	-9.2%
Net earnings attributable to PMI	$6.9 billion	$7.5 billion	-8.3%
Diluted EPS	$4.42	$4.76	-7.1%
Net cash from operating activities	$7.9 billion	$7.7 billion	+$126 million

• Gross profit was $17.4 billion, down from $19.3 billion. Operating margin on reported net revenues was approximately 14.4%, versus 14.6% in 2014; pre-tax margin was 13.0%, versus 13.3%.
• Reported EPS included a $0.03 per-share 2015 impairment/exit charge and a $0.03 per-share tax benefit. The principal reported EPS headwind was currency, at $1.20 per share; management attributed a $0.53 per-share increase to operations.
• Cigarette shipments declined 1.0% to 847.3 billion units; excluding estimated favorable inventory movements, the decline was 1.6%. Marlboro shipments rose 0.9%; PMI’s estimated international cigarette share excluding China rose to 28.7% from 28.5%.
• Operating income fell in the EU, EEMA and Asia, while Latin America & Canada operating companies income increased 5.3%. Price increases contributed $2.1 billion to net revenues excluding excise taxes, but were outweighed by $4.7 billion of currency pressure and unfavorable volume/mix.
• Cash and cash equivalents were $3.4 billion. Total debt was $28.5 billion, including $2.4 billion of current long-term debt and $825 million of subsidiary short-term borrowings. Stockholders’ deficit was $11.5 billion. The current ratio was approximately 1.03.
• Capital expenditures were $960 million. Operating cash flow less capital expenditures was approximately $6.9 billion, a simple cash-flow proxy. Cash dividends paid were $6.3 billion; declared dividends were $4.04 per share. No shares were repurchased under the expired authorization during 2015.

Fourth quarter: Net revenues were $18.4 billion versus $19.9 billion in Q4 2014; net earnings attributable to PMI were $1.25 billion versus $1.61 billion, and diluted EPS was $0.80 versus $1.03.

Material changes and unusual items

• The stronger U.S. dollar reduced 2015 net revenues by $13.5 billion including excise taxes, and operating income by $2.3 billion. Price increases, lower costs and reduced asset impairment charges partly offset this pressure.
• PMI recorded $68 million of 2015 pre-tax restructuring charges in the EU; it expects total charges of about $93 million for that program through 2017. In 2014, impairment and exit charges were $535 million, including charges tied to the Netherlands factory closure.
• Sampoerna’s Indonesian rights issue generated approximately $1.5 billion in net proceeds, increasing PMI additional paid-in capital by $1.1 billion and reducing PMI’s ownership interest.
• PMI sold $3.3 billion of receivables during 2015; $888 million remained sold and outstanding at year-end. Management said these sales positively affected operating cash flow.
• PMI dissolved its Swedish Match snus joint venture in July 2015; the filing says the dissolution was not material to consolidated results or financial position.

Outlook, risks and contingencies

• For 2016, management forecast reported diluted EPS of $4.25–$4.35 at exchange rates prevailing when announced, versus $4.42 in 2015. The forecast included an estimated $0.60-per-share unfavorable currency impact; excluding that impact, PMI projected 10%–12% growth versus adjusted 2015 EPS of $4.42. The forecast excluded future currency changes, acquisitions, unusual events and unanticipated charges.
• Management expected international cigarette volume excluding China and the U.S. to decline about 2.0%–2.5%, and the total cost base including reduced-risk products to rise about 1% excluding currency. It did not plan share repurchases in 2016, but said it would revisit the decision depending on currency conditions.
• PMI was expanding iQOS and other reduced-risk products, while emphasizing that further scientific evidence and regulatory review may be needed to support reduced-exposure or reduced-risk claims. Its Bologna-area factory was expected to become operational in 2016, with capacity of up to 30 billion HeatSticks annually.
• Key business risks include declining cigarette consumption, excise-tax increases, consumer down-trading, illicit trade, intense competition, foreign-exchange volatility, political and economic disruption, and evolving tobacco regulation. The EU Tobacco Products Directive implementation and plain-packaging rules were among the regulatory developments highlighted.
• PMI reported major Quebec class-action verdicts against its subsidiary, including an allocated share of about CAD 3.1 billion in the Blais case. The verdicts were under appeal; the court ordered CAD 226 million of combined security for the Blais and Letourneau cases, and PMI’s subsidiary paid its first CAD 37.6 million installment in December 2015. PMI had not accrued losses for pending tobacco litigation, stating that loss was not considered probable and could not be reasonably estimated.
• In Thailand, prosecutors charged the subsidiary and seven current or former employees over alleged customs and excise underpayment, seeking a fine of about THB 80.8 billion (approximately $2.26 billion). PMI disputed the allegations; a preliminary hearing was scheduled for April 2016.
• Credit facilities totaled $8.0 billion and were undrawn at year-end; the covenant EBITDA-to-interest ratio was 10.5x against a 3.5x minimum. Fitch maintained an “A” long-term rating but changed its outlook to Negative; S&P and Moody’s outlooks were Stable.

Important facts for investors to verify

• Track 2016 reported EPS against the $4.25–$4.35 forecast, separating operating performance from currency effects.
• Review the Quebec appeals, security installments and any subsequent change in the likelihood or estimability of litigation losses; also monitor the Thai tax case.
• Assess whether pricing can offset declining volumes, down-trading and higher excise taxes without further share or margin erosion.
• Verify iQOS adoption, manufacturing ramp-up, investment requirements and regulatory acceptance of any product claims.
• Examine cash generation and liquidity alongside dividend commitments, debt maturities and the effect of receivable sales on reported operating cash flow.