Philip Morris International Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited consolidated financial statements prepared under U.S. GAAP. PMI manufactures and sells cigarettes and other tobacco products outside the United States across four geographic segments.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenues | $20.234bn | $17.383bn | $36.764bn | $32.970bn |
| Net revenues excluding excise taxes | $8.273bn | $7.061bn | $15.064bn | $13.557bn |
| Operating income | $3.712bn | $2.906bn | $6.719bn | $5.621bn |
| Net earnings attributable to PMI | $2.409bn | $1.982bn | $4.328bn | $3.685bn |
| Diluted EPS | $1.35 | $1.07 | $2.42 | $1.97 |
| Operating cash flow | Not separately provided | Not separately provided | $6.515bn | $5.439bn |
- For the six months, reported revenue rose 11.5%, including an 11.8% increase in excise taxes. Revenue excluding excise taxes increased 11.1%; operating income rose 19.5%, PMI-attributable earnings 17.4%, and diluted EPS 22.8%. Q2 operating income increased 27.7%, PMI-attributable earnings 21.5%, and diluted EPS 26.2%.
- Six-month gross profit was $9.925bn and operating income $6.719bn. Excluding excise taxes from revenue, gross margin was approximately 65.9% and operating margin 44.6%, versus 63.7% and 41.5% in 2010. Q2 gross and operating margins on the same basis were approximately 65.6% and 44.9%, versus 63.9% and 41.2%.
- Six-month operating cash flow increased $1.076bn, attributed mainly to higher earnings, lower pension contributions and favorable working-capital movements. Investing cash outflow was $421m; financing cash outflow was $5.698bn. Cash increased to $2.178bn from $1.703bn at year-end.
- Total debt was approximately $16.9bn, versus $16.5bn at December 31, 2010. Balance-sheet short-term borrowings were $570m and current long-term debt $3.314bn; long-term debt was $13.037bn. The current portion of long-term debt increased from $1.385bn. Committed credit facilities totaled $5.2bn, with no facility borrowings; the filing reports a 14.8:1 covenant ratio against a 3.5:1 minimum. Current assets were $14.333bn and current liabilities $14.763bn.
- Dividends declared were $0.64 per share for Q2 and $1.28 for the six months. PMI repurchased $2.922bn of shares during the six-month period.
Material changes and operating drivers
- Six-month cigarette shipments rose 0.8% to 449.1bn units, but fell 1.5% excluding acquisitions. Asia was the principal growth region; shipments declined in the EU, EEMA and Latin America & Canada. Q2 shipments increased 0.1%.
- Revenue excluding excise taxes for the first half benefited from $1.1bn of pricing, $511m of favorable currency and $108m from acquisitions, partly offset by $182m unfavorable volume/mix. The $1.1bn rise in operating income primarily reflected pricing and currency, offset in part by volume/mix, higher manufacturing and marketing costs, and $17m in impairment and exit charges.
- Asia operating companies income rose 58.8% for the first half, reflecting pricing, currency, volume/mix and the Philippines acquisition. Japan shipments benefited from shortages of competitors’ products; management estimated a first-half diluted EPS benefit of approximately $0.10–$0.12 from these shortages. Higher air-freight costs partly offset the benefit.
- Currency contributed approximately $0.16 to six-month diluted EPS. PMI attributed the improvement in operating results to pricing, currency and operating performance, while the prior-year comparison included a favorable tax-reserve reversal.
Outlook, risks and unusual items
- On July 21, 2011, PMI raised its full-year 2011 reported diluted EPS forecast by $0.15 to $4.70–$4.80, approximately 20%–22.5% above 2010 reported EPS of $3.92. The increase reflected about $0.10 of improved business outlook, largely Japan, and about $0.05 of favorable currency at then-prevailing rates. Forecast currency benefit was approximately $0.25; excluding it, reported EPS growth was projected at approximately 13.5%–16.0%. Guidance excludes potential acquisitions, impairment and exit charges, and unusual events; it is subject to the filing’s stated risks.
- The six-month effective tax rate was 29.0%, compared with 26.6% in 2010; Q2 rates were 29.1% and 23.9%. The prior-year rate benefited from a $148m reversal of tax reserves following an IRS examination. 2011 benefited from a $15m Brazil valuation-allowance reversal and, for the six-month period, an $11m Greek tax-rate change.
- PMI recorded $17m of first-half asset impairment and exit costs, primarily severance for EU factory and R&D restructuring. Approximately $44m of related future cash payments were expected, substantially by the end of 2012.
- Major risks include excise-tax increases and downtrading, tighter tobacco regulation (including proposed plain packaging and marketing restrictions), illicit trade, currency and political exposure, agricultural supply and cost risks, and tobacco litigation. PMI reported no accrued estimated loss for pending tobacco cases because management did not consider loss probable and could not estimate a loss range; it cautioned that an adverse outcome could materially affect results, cash flows or financial position.
- Australia introduced proposed plain-packaging legislation in July 2011. PMI’s affiliate had served a notice of claim under the Hong Kong–Australia investment treaty. In Thailand, a proposed customs and excise matter alleged approximately $2bn for 2003–2007 and a separate informal inquiry alleged approximately $1.8bn for 2000–2003; the prosecutor reportedly issued a non-prosecution order in the first matter, subject to approval. The filing also describes numerous pending tobacco-related claims, including claims seeking damages in the billions in certain jurisdictions.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $4.70–$4.80 EPS outlook was achieved, and how much depended on currency, Japan shipment conditions and pricing.
- Whether underlying volume, excluding acquisitions and temporary competitor shortages, supports continued earnings growth, particularly in Asia and the EU.
- Debt maturities and refinancing needs, including the higher current portion of long-term debt, alongside continued dividends and share repurchases.
- Developments in tobacco regulation, litigation and investigations, especially Australia’s packaging proposal and the status of the Thai proceedings; potential financial exposure remains uncertain.
- The sustainability of margin gains amid excise-tax increases, downtrading, higher manufacturing costs and currency volatility.