Business context and reporting period
Altria Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. Although the request identifies 2015 Q4, the filing reports full-year results and includes unaudited fourth-quarter data. Altria’s principal businesses are U.S. cigarettes and other smokeable products, smokeless tobacco, and wine; it also holds an approximately 27% equity-method investment in SABMiller.
Financial performance and position
Amounts are in U.S. dollars. Net revenues include excise taxes billed to customers.
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $25.434 billion | $24.522 billion | +3.7% |
| Operating income | $8.361 billion | $7.620 billion | +9.7% |
| Earnings before income taxes | $8.078 billion | $7.774 billion | +3.9% |
| Net earnings attributable to Altria | $5.241 billion | $5.070 billion | +3.4% |
| Diluted EPS | $2.67 | $2.56 | +4.3% |
| Net cash from operating activities | $5.810 billion | $4.663 billion | +24.6% |
| Capital expenditures | $229 million | $163 million | +40.5% |
Reported gross profit was $11.114 billion (43.7% of net revenues); operating income was $8.361 billion (32.9%); and net earnings attributable to Altria were $5.241 billion (20.6%). The filing reports a 31.8% pre-tax profit margin, compared with 31.7% in 2014. These ratios use reported net revenues, which include excise taxes.
At December 31, 2015, cash and cash equivalents were $2.369 billion, total debt was $12.919 billion (including $12.915 billion long-term debt), and stockholders’ equity was $2.873 billion. Debt declined from $14.693 billion at year-end 2014. The company reported a working-capital deficit, but management said operating cash flow and/or commercial paper access could fund it. A $3.0 billion revolving credit facility was undrawn; covenant ratios were within limits. All debt was fixed-rate, with a 5.5% weighted-average coupon.
Cash used in investing activities was $15 million and cash used in financing activities was $6.747 billion. Financing outflows included $4.179 billion in common dividends, $554 million in share repurchases, and $1.793 billion in debt repayments. Quarterly Q4 2015 net revenues were $6.318 billion and net earnings attributable to Altria were $1.247 billion, versus $6.258 billion and $1.236 billion, respectively, in Q4 2014; diluted EPS was $0.64 versus $0.63.
Material changes versus prior periods
- Smokeable products operating companies income rose to $7.569 billion from $6.873 billion, supported mainly by pricing, higher shipment volume, lower resolution costs after the federal tobacco quota buy-out ended, and higher NPM adjustment items. Cigarette shipments increased 0.5%; Marlboro retail share reached 44.0%, up 0.2 percentage points.
- Smokeless products operating companies income increased 4.4% to $1.108 billion. Shipments rose 2.5%; Copenhagen gains offset declines in Skoal and other brands. Total segment retail share was 54.9%, down 0.1 percentage point.
- Wine operating companies income increased 13.4% to $152 million, as shipments rose 6.2% and product mix improved.
- SABMiller equity earnings fell 24.8% to $757 million, affected by special items and unfavorable currency translation. The carrying value of the investment decreased to $5.483 billion from $6.183 billion, while its disclosed fair value rose to $25.8 billion from $22.5 billion.
- Operating cash flow increased by $1.147 billion, principally reflecting higher smokeable revenues and the end of federal quota buy-out payments; higher settlement payments partly offset the increase.
Guidance, outlook, risks and unusual items
In January 2016, management forecast 2016 adjusted diluted EPS growth of 7%–9% over 2015 adjusted diluted EPS, excluding specified items, and an effective tax rate on operations of 35.3%. The forecast excludes any impact from the proposed AB InBev–SABMiller combination and is subject to the risks described in the filing. Management expected 2016 capital expenditures of $140–$180 million.
The board approved a productivity initiative in January 2016, targeting approximately $300 million of annualized savings by the end of 2017. Estimated pre-tax restructuring charges were approximately $140 million, substantially all expected in Q1 2016. Altria maintained an approximately 80% target payout ratio on adjusted diluted EPS; its annualized dividend rate was $2.26 per share. A $1.0 billion share-repurchase program was expected to be completed by year-end 2016.
AB InBev’s proposed combination with SABMiller was subject to shareholder and regulatory approvals. Altria expected, if completed, to receive restricted shares representing approximately 10.5% of the combined company plus about $2.5 billion in pre-tax cash, subject to proration. The shares were expected to be subject to a five-year transfer restriction. Altria estimated a one-time pre-tax accounting gain of approximately $12 billion (about $8 billion after tax), based on year-end assumptions; the actual amount could vary materially.
Notable 2015 items included a $228 million pre-tax loss on early debt extinguishment, $150 million of pre-tax tobacco and health litigation charges, and $126 million of pre-tax SABMiller special charges. The filing states that management did not consider losses probable and estimable for pending tobacco-related cases generally, except for matters specifically accrued; accordingly, it did not record a general provision for potential outcomes. Litigation remains a significant, difficult-to-quantify risk. Regulatory changes and enforcement, excise taxes, declining cigarette consumption, competition and consumer shifts, tobacco supply, and impairment risk for smokeless-brand intangibles are also material concerns. The filing notes that Skoal and certain discount-brand trademark fair values exceeded carrying values by only approximately 15% and 10%, respectively.
Altria’s principal customer, McLane, represented approximately 26% of consolidated net revenues; Core-Mark represented approximately 10%. The filing also identifies cyber and information-system risks, environmental matters, and concentration in wine distribution. The auditor reported fairly presented financial statements and effective internal control over financial reporting.
Most important facts for investors to verify
- Reconcile reported GAAP EPS of $2.67 with management’s adjusted EPS basis and the 2016 growth forecast, including excluded items.
- Track the AB InBev–SABMiller transaction’s approvals, proration, exchange rates, tax treatment, restricted-share terms, and actual gain and proceeds.
- Review developments in Engle progeny and other tobacco litigation, bond requirements, NPM adjustment disputes, and related provisions or cash payments.
- Assess whether pricing can continue to offset category-volume trends and competitive pressure, particularly for cigarettes, Skoal, and discount smokeless brands.
- Monitor dividend coverage, debt maturities, working-capital deficit, settlement-related obligations, and progress on the announced productivity savings.