Altria Group, Inc. — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing was signed February 24, 2011. Altria is a U.S.-focused holding company with cigarette, smokeless tobacco, cigar, wine and financial-services businesses, plus a 27.1% interest in SABMiller. Detailed consolidated financial statements and management’s discussion are incorporated by reference to the 2010 Annual Report and are not reproduced in the supplied filing text.
Financial and operating performance
| Metric | 2010 information in supplied text |
|---|---|
| Revenue, earnings and margins | The supplied text does not provide clear consolidated revenue, profit, EPS or margin figures. It refers readers to the incorporated Annual Report. |
| Cash flow, liquidity and debt | Clear consolidated cash-flow, cash, debt and liquidity figures are not provided in the supplied text. Altria says its principal funding sources are subsidiary dividends and distributions, interest on intercompany loans, and dividends from SABMiller. Its subsidiaries were not restricted by long-term debt or other agreements from paying dividends at year-end. |
| Segment contribution | Share of operating companies income: cigarettes 82.1%, smokeless products 12.1%, cigars 2.5%, wine 0.9% and financial services 2.4%. These are percentages, not segment dollar amounts. |
| State settlements and FETRA | Recorded cost of sales for the State Settlement Agreements and FETRA was approximately $4.8 billion, versus $5.0 billion in 2009. |
| PMCC finance assets | PMCC reported approximately $4.4 billion of net leveraged-lease finance receivables; finance assets also included $0.3 billion of direct-finance-lease receivables and a $0.2 billion allowance for losses. |
| Capital returns | Quarterly dividend increased to $0.38 per share in August 2010, or an annualized rate of $1.52. The stated target payout ratio is approximately 80% of adjusted diluted EPS. No shares were repurchased under the prior program in 2010 or 2009. In January 2011, the board authorized a new $1.0 billion, one-year repurchase program. |
Material changes versus prior periods
- Cigarettes: PM USA shipments fell 5.3% to 140.8 billion units from 148.7 billion in 2009. Marlboro shipments declined 3.7% to 121.9 billion. Total cigarette retail share was 49.8%, versus 49.9%; Marlboro share rose to 42.6% from 41.8%.
- Smokeless products: Shipments increased 12.2% to 724.4 million cans and packs from 645.6 million. Retail share rose to 55.3% from 54.6%. Comparisons are affected by the January 2009 UST acquisition and differing periods of ownership.
- Cigars: Shipments declined 1.0% to 1,246 million units; retail share fell to 28.9% from 30.4%.
- Wine: Shipments increased 11.3% to 6.681 million cases from 6.005 million. Retail unit volume rose 5.6%; 2010 retail-volume comparisons include Villa Maria Estate, whose distribution rights were obtained in 2010.
- Business mix: Smokeless products’ share of operating companies income rose to 12.1% from 6.4% in 2009, while cigarettes’ share declined to 82.1% from 85.3%. The filing attributes mix changes in part to the UST acquisition and other segment items.
Outlook, risks and unusual items
- Management expects ongoing governmental action, declining social acceptance of smoking and private smoking restrictions to continue reducing cigarette consumption. The filing does not provide a clear consolidated earnings or revenue forecast in the supplied text.
- The 2009 federal excise-tax increase, further potential tobacco taxes, consumer down-trading, competition from lower-priced and illicit products, and FDA regulation may pressure volumes, pricing and costs. The 2009 tax increase is cited among factors affecting PM USA’s cigarette business.
- The 2009 Family Smoking Prevention and Tobacco Control Act gives the FDA broad authority over tobacco products; PM USA and a USSTC subsidiary are subject to quarterly user fees. Altria says regulatory actions could restrict products, marketing and distribution or increase operating costs.
- Tobacco litigation remains a significant contingent risk. Management stated it had not concluded that a loss was probable in pending tobacco-related cases and could not estimate a possible loss or range for those cases; accordingly, no general provision was recorded for unfavorable outcomes. Specific matters have recorded provisions, including approximately $26 million plus $3.4 million of accrued interest for the Scott case at year-end 2010.
- PM USA’s potential MSA credits for 2003–2009 remain disputed and subject to proceedings. Its estimated share of the disputed adjustments totals approximately $1.739 billion before interest, but the filing cautions that any final adjustment is uncertain and may be smaller or unavailable.
- IRS challenges to PMCC leveraged-lease tax benefits could create significant tax, interest and possible penalty payments. Altria paid approximately $945 million in July 2010 under a closing agreement for 2000–2003 matters and intends to seek a refund relating to LILO/SILO transactions. The filing estimates approximately $900 million of federal tax and interest exposure for 2004–2010, excluding potential penalties, subject to audit and litigation outcomes.
- PMCC’s portfolio is in run-off: it ceased making new investments in 2003 and manages existing leases to generate cash and gains. Lease defaults could require additional loss allowances.
- Other risks include wine competition and grape supply, environmental obligations, customer concentration, and disruption at key facilities or suppliers. McLane accounted for approximately 27% of consolidated net revenues in 2010; three distributors represented approximately 65% of wine-segment net revenues.
- PM USA filed a February 2011 lawsuit challenging USDA calculations of tobacco-transition payment allocations. Management stated the quota buy-out had not materially affected 2010 results and was not expected to have a material adverse effect in 2011 and beyond.
Important facts for investors to verify
- Review the incorporated 2010 Annual Report for consolidated revenue, net income, EPS, margins, cash flow, balance-sheet liquidity, debt maturities and full segment dollar results; those values are not clear in the supplied text.
- Assess the sustainability of the dividend and the proposed share repurchase against reported free cash flow, leverage and adjusted diluted EPS.
- Monitor cigarette volume and share trends, smokeless growth, and whether wine gains persist after accounting for acquisition and distribution-comparability effects.
- Track tobacco litigation, including Engle progeny trials and appeals, the Scott judgment, and any changes to bond-cap statutes or recorded provisions.
- Verify the progress and potential value of MSA disputed-payment adjustments and the outcomes of the PMCC LILO/SILO tax disputes.
- Evaluate dependence on major customers and distributors, and the effect of regulation, excise taxes and down-trading on segment performance.