Philip Morris International Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with the same period in 2013. PMI manufactures and sells cigarettes and other tobacco products outside the United States, across four geographic segments. Reported net revenues include excise taxes billed to customers.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenues | $17.779 billion | $18.527 billion | -4.0% |
| Net revenues excluding excise taxes | $6.917 billion | $7.584 billion | -8.8% |
| Gross profit | $4.543 billion | $5.095 billion | -10.8% |
| Operating income | $2.951 billion | $3.391 billion | -13.0% |
| Net earnings attributable to PMI | $1.875 billion | $2.125 billion | -11.8% |
| Diluted EPS | $1.18 | $1.28 | -7.8% |
| Operating cash flow | $715 million | $1.363 billion | -$648 million |
| Capital expenditures | $256 million | $240 million | +$16 million |
| Dividends declared per share | $0.94 | $0.85 | +$0.09 |
Gross margin was approximately 25.5% of reported revenue versus 27.5% a year earlier; operating margin was approximately 16.6% versus 18.3%. These percentages are calculated from reported figures.
Cash and cash equivalents were $1.823 billion at March 31, 2014, down from $2.154 billion at year-end. Total debt was approximately $29.7 billion, up from $27.7 billion. Current assets were $14.825 billion and current liabilities $13.971 billion. PMI had $8.0 billion of committed revolving facilities fully available, with no borrowings under those facilities; commercial paper outstanding was $2.6 billion. The company reported a 13.8-to-1.0 covenant EBITDA-to-interest ratio against a 3.5-to-1.0 minimum.
Material changes versus the prior comparable period
- Cigarette shipment volume declined 4.4% to 196.0 billion units; PMI said the decline would have been approximately 2.0% excluding unfavorable estimated inventory movements.
- Net revenues excluding excise taxes fell $667 million, reflecting unfavorable currency ($542 million) and volume/mix ($531 million), partly offset by pricing ($406 million). Currency reduced reported net revenues by $1.3 billion.
- Operating income fell $440 million. Management attributed the decrease primarily to unfavorable volume/mix, currency, higher manufacturing costs and higher exit charges, partly offset by pricing and lower marketing, administration and research costs.
- Asia operating companies income declined 31.8% to $915 million; European Union income rose 4.3% to $978 million. EEMA income declined 0.9% to $927 million, and Latin America & Canada declined 20.5% to $202 million.
- Net cash from operations declined mainly because of higher exit-cost payments, working-capital movements and lower earnings. Financing used $805 million, including $1.241 billion of share repurchases and $1.503 billion of dividends paid.
Outlook, management commentary, risks and unusual items
- On April 17, 2014, PMI forecast full-year reported diluted EPS of $5.09–$5.19, compared with $5.26 in 2013. Excluding an estimated $0.61 unfavorable currency impact and approximately $0.03 per share of Australian restructuring charges, management projected 6%–8% growth versus 2013 adjusted EPS of $5.40. The forecast included a $300 million productivity and cost-savings target and $4.0 billion of share repurchases. Guidance excludes future exchange-rate changes, specified unusual events and the proposed Netherlands closure.
- PMI decided to cease cigarette production in Australia by year-end 2014 and shift production to South Korea; it recorded $23 million in Q1 charges. Approximately $124 million of future cash payments for exit costs were expected, substantially by year-end. On April 4, PMI also announced consultations on a possible closure of its Bergen op Zoom, Netherlands factory; the proposal was not included in guidance.
- Management cited ongoing pressure from declining cigarette markets, excise-tax increases, consumer down-trading, illicit trade, regulation, competition and foreign exchange. Tobacco litigation remains a significant contingent risk: claimed damages in some cases reach billions of dollars. PMI said no loss was considered probable and reasonably estimable for pending tobacco cases, so no estimated loss was accrued; an adverse outcome could nevertheless materially affect a particular period.
- PMI disclosed a Thai investigation involving proposed charges alleging approximately $2 billion in customs duties and taxes for 2003–2007, and a separate informal inquiry alleging approximately $1.8 billion for 2000–2003. The company stated prosecution was probable in the first matter and said it believed its import valuations complied with applicable rules.
- Management described reduced-risk products as a strategic priority, with commercial pilot tests expected in the second half of 2014 and an initial national launch expected in 2015; success and regulatory approval were not assured. PMI planned up to €500 million for an Italian production facility and pilot plant.
Most important facts for investors to verify
- Whether shipment volume, pricing and market share trends improve, particularly in Asia and markets affected by inventory timing and down-trading.
- How foreign exchange movements and excise-tax increases affect reported revenue, margins and the full-year EPS forecast.
- Progress and actual cash costs for the Australian restructuring, and any decision on the Netherlands factory proposal.
- Debt growth, cash generation, share repurchases and dividends relative to liquidity and operating performance.
- Developments in tobacco litigation and the Thai customs/tax matters, for which potential losses were not accrued or could not be clearly estimated.
- Delivery against the $300 million savings target, $4.0 billion repurchase target and reduced-risk product commercialization plans.