Altria Group, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2022. Comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and results
Altria’s principal operations are U.S. smokeable tobacco and oral tobacco products. Its portfolio includes cigarettes, cigars, moist smokeless tobacco and oral nicotine pouches. It also holds investments in ABI, JUUL and Cronos. The wine business was sold in October 2021, affecting period comparisons.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenues | $6,550 | $6,786 | $18,985 | $19,758 |
| Gross profit | $3,697 | $3,673 | $10,736 | $10,677 |
| Operating income | $3,112 | $2,951 | $9,101 | $8,827 |
| Net earnings (losses) attributable to Altria | $224 | $(2,722) | $3,074 | $851 |
| Diluted EPS attributable to Altria | $0.12 | $(1.48) | $1.69 | $0.46 |
| Adjusted diluted EPS (non-GAAP) | $1.28 | $1.22 | $3.66 | $3.52 |
Cash flow and liquidity: Nine-month operating cash flow was $5.637 billion, versus $5.742 billion. Investing activities used $215 million, including $147 million of capital expenditures; financing activities used $7.476 billion. Cash and cash equivalents were $2.483 billion at September 30, down from $4.544 billion at year-end 2021. Altria had $3.0 billion available under its revolving credit agreement and reported compliance with its covenants.
Debt and capital returns: Total debt carrying value was $26.3 billion, down from $28.0 billion at December 31, 2021; the company repaid $1.1 billion of notes at maturity in August. The quarterly dividend was raised 4.4% to $0.94 per share, or $3.76 annualized. Nine-month dividends paid were $4.908 billion and share repurchases totaled $1.451 billion. Stockholders’ equity was a deficit of $4.232 billion.
Material changes versus the prior comparable period
- Q3 net revenues declined 3.5%, while operating income rose 5.5%. For the nine months, revenues declined 3.9% and operating income increased 3.1%. Revenue declines reflected the wine divestiture and lower smokeable-product revenues; lower corporate costs and stronger smokeable operating results supported operating income.
- Reported earnings comparisons were heavily affected by equity-investment items. Q3 2022 included a $2.5 billion non-cash, pre-tax ABI impairment and a $100 million JUUL fair-value loss. Q3 2021 included a $6.2 billion ABI impairment, contributing to the reported loss. For the nine months, 2022 included a $2.5 billion ABI impairment and $1.355 billion of JUUL fair-value losses; 2021 included a $6.2 billion ABI impairment and a $649 million debt-extinguishment loss.
- Adjusted diluted EPS increased 4.9% in Q3 and 4.0% year to date, reflecting higher adjusted operating results and, in part, fewer shares outstanding. These are company-defined non-GAAP measures and exclude specified special items.
- Smokeable segment nine-month revenue fell 1.5%, while adjusted operating companies income (OCI) rose 2.6%; cigarette shipments fell 9.0%, and Marlboro retail share declined 0.4 percentage point to 42.6%. Oral tobacco revenue was nearly flat for nine months, while adjusted OCI fell 3.4%; oral nicotine pouch on! shipments rose 72.3%, but traditional MST brands lost share.
Guidance, management commentary and key risks
- Management narrowed 2022 full-year adjusted diluted EPS guidance to $4.81–$4.89, implying 4.5%–6.0% growth over the 2021 adjusted base of $4.61. The forecast includes planned smoke-free investment and anticipated inflation in settlement and other costs. It excludes specified items and has no corresponding GAAP reconciliation because management cannot reliably forecast those items.
- Management cited high inflation, rising interest rates, supply-chain disruption, foreign-exchange movements and the Russia-Ukraine conflict as pressures on consumers, input costs and investments. It warned that price-sensitive consumers could shift to discount products or reduce purchases.
- The FDA’s June 2022 marketing denial orders for JUUL products were temporarily stayed in July, so products remained on the U.S. market as of the filing. Altria valued its JUUL investment at $350 million at quarter-end and identified regulatory, liquidity, litigation and market assumptions as significant valuation uncertainties.
- In October 2022, Altria agreed to transfer exclusive U.S. IQOS commercialization rights to a PMI subsidiary effective April 30, 2024, for total payments of approximately $2.7 billion plus interest; $1.0 billion had been paid by the filing date and the remaining $1.7 billion was due by July 2023. Altria also formed a 75%-owned heated-tobacco joint venture with Japan Tobacco, with initial PM USA capital contributions of up to $150 million.
- Litigation remains a significant contingency. A Massachusetts jury awarded $8 million in compensatory damages and $1 billion in punitive damages in the Fontaine case; Altria said it intended to challenge the award. The filing states that, other than specified matters, management had not concluded losses in pending cases were probable and generally could not estimate potential loss ranges.
- Other exposures include proposed FDA product standards, including menthol cigarette and flavored cigar restrictions and a potential nicotine limit for combustibles; MSA payments; tobacco volume declines; and possible further impairment of investments or trademarks. Management also identified potential Skoal trademark impairment if adverse market and macroeconomic conditions persist.
Important facts for investors to verify
- Progress and final economics of the IQOS rights transition, including receipt of the remaining payment and recognition of the deferred gain.
- FDA review of JUUL’s applications, JUUL’s liquidity and litigation developments, and resulting effects on the fair value of Altria’s investment.
- ABI share-price recovery or further impairment risk, and the assumptions behind the $2.5 billion impairment.
- Whether cigarette volume, discount share and Marlboro retail share stabilize, and whether on! growth offsets weakness in traditional oral tobacco.
- Outcome of significant tobacco, e-vapor and shareholder litigation, particularly the Fontaine award and pending JUUL-related proceedings.
- Delivery against 2022 adjusted EPS guidance and the sensitivity of results and cash generation to inflation, settlement costs, consumer trading-down and regulatory changes.