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Altria Group, Inc. Q1 2004 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004. Altria Group, Inc. (ALG) operates through its subsidiaries Philip Morris USA (PM USA), Philip Morris International (PMI), and Kraft Foods Inc. (Kraft), alongside financial services via Philip Morris Capital Corporation (PMCC). The company reported 2,050,802,670 shares of common stock outstanding as of April 30, 2004.

Key Financial Metrics

Note: Total debt includes short-term borrowings and long-term debt. Operating cash flow decreased significantly due to the timing of litigation settlement payments.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12.7% ($2.5 billion), driven by a 24.3% increase in international tobacco revenues (favorable currency and price increases) and a 4.9% increase in domestic tobacco revenues.
• Operating Income Decline: Operating income decreased 3.5% ($136 million) primarily due to $325 million in pre-tax asset impairment and exit costs related to Kraft's restructuring program and lower operating results in food and international tobacco segments.
• Segment Performance:
  • Domestic Tobacco: Operating income rose 30.7% to $970 million, aided by the absence of one-time buy-down costs incurred in Q1 2003.
  • North American Food: Operating income fell 33.5% to $846 million due to restructuring charges ($262 million), higher commodity costs, and increased promotional spending.
  • International Tobacco: Operating income increased 8.6% to $1,835 million, driven by currency benefits and pricing, offset by volume declines in Western Europe.
• Cash Flow Volatility: Net cash provided by operating activities dropped to $289 million from $2.2 billion in the prior year, largely due to the timing of tobacco litigation settlement payments made in March 2004 versus April 2003.

Guidance, Outlook, and Risks

• 2004 Guidance: ALG reaffirmed full-year 2004 diluted EPS guidance of $4.57 to $4.67, including anticipated charges of $0.23 per share for Kraft restructuring. This excludes potential charges from a draft cooperation agreement with the European Commission (estimated at $0.11 per share). Including these potential charges and a lower effective tax rate, EPS is projected at $4.50 to $4.60.
• Kraft Restructuring: Kraft announced a multi-year program to close up to 20 plants and eliminate 6,000 positions. Total pre-tax charges are expected to reach $1.2 billion over three years, with $750 million to $800 million in 2004.
• Legal Contingencies:
  • Price Case: A $10.1 billion verdict (compensatory and punitive) in the Illinois "Lights/Ultra Lights" class action remains on appeal. PM USA has posted security and made cash deposits totaling $810 million through March 31, 2004.
  • Engle Case: A $145 billion punitive damages verdict in Florida was reversed by an appellate court; the case is pending further review by the Florida Supreme Court. PM USA holds $1.2 billion in escrow.
  • US Government Lawsuit: Trial scheduled for September 2004 regarding RICO claims seeking disgorgement of approximately $290 billion.
• Financial Services Risk: PMCC has significant exposure to airline lessees under bankruptcy protection, including United Air Lines ($589 million exposure) and US Airways ($145 million exposure).

Investor Verification Checklist

• Restructuring Execution: Verify the progress of Kraft's plant closures and workforce reductions against the projected $1.2 billion in charges and $400 million in annualized cost savings by 2006.
• Litigation Bonding: Monitor the status of the Price and Engle appeals and the potential requirement for additional bonding or cash deposits if appeals are unsuccessful.
• European Commission Agreement: Track the finalization of the draft cooperation agreement with the EU regarding anti-contraband efforts and the associated $250 million initial charge.
• Airline Lessee Solvency: Assess the financial stability of United Air Lines and US Airways to determine if PMCC needs to increase its allowance for losses on finance leases.
• Commodity Costs: Monitor dairy, coffee, and cocoa prices, which are expected to remain elevated in 2004, impacting Kraft's margins.