Business Context and Reporting Period
Company: Philip Morris International Inc. (PMI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: PMI is a holding company engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside the United States. The company operates in four reportable segments: European Union; Eastern Europe, Middle East & Africa (EEMA); Asia; and Latin America & Canada.
Key Financial Metrics
| Metric (in millions, except per share) | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Revenues | $32,970 | $28,499 |
| Operating Income | $5,621 | $4,749 |
| Net Earnings Attributable to PMI | $3,685 | $3,022 |
| Diluted Earnings Per Share (EPS) | $1.97 | $1.52 |
| Net Cash Provided by Operating Activities | $5,439 | $4,573 |
| Total Debt (Short-term + Long-term) | $15,231 | $15,416 |
| Cash and Cash Equivalents | $1,584 | $1,540 |
Note: Net revenues include excise taxes on products of $19,413 million for the six months ended June 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 15.7% year-over-year. Excluding excise taxes, net revenues grew 15.6%, driven by favorable currency movements ($872 million), net price increases ($790 million), and acquisitions ($285 million), partially offset by lower volume/mix ($121 million).
- Profitability: Operating income rose 18.4% to $5.6 billion. Net earnings attributable to PMI increased 21.9% to $3.7 billion. Diluted EPS increased 29.6% to $1.97.
- Volume Trends: Total cigarette shipment volume increased 4.5% to 445.7 billion units. Excluding acquisitions, volume was down 1.0%. Significant growth occurred in Asia (driven by the Philippines business combination and Japan inventory builds) and Latin America & Canada, while the European Union and EEMA saw declines due to tax-driven price increases and market contractions.
- Tax Rate: The effective tax rate decreased to 26.6% from 29.2% in the prior year, favorably impacted by a $148 million reversal of tax reserves following the conclusion of an IRS examination of Altria Group, Inc.'s consolidated tax returns.
Guidance, Outlook, and Risks
Guidance and Outlook
On July 22, 2010, PMI raised its full-year 2010 forecast for reported diluted EPS to a range of $3.75 to $3.85, representing a 16% to 19% increase compared to 2009. Excluding currency, reported diluted EPS is projected to increase by approximately 14% to 17%. The guidance includes a $0.07 per share benefit from the reversal of tax provisions and excludes the impact of future acquisitions or unusual events.
Management Commentary
- Acquisitions: The February 2010 business combination in the Philippines (PMFTC Inc.) contributed 23.3 billion units to volume in the first half of 2010. PMI expects this to be accretive to EPS in 2011 as cost synergies are realized.
- Share Repurchases: PMI completed a $13.0 billion two-year share repurchase program in April 2010 and initiated a new three-year $12 billion program in May 2010. During the first six months of 2010, the company repurchased 57.7 million shares for $2.8 billion.
- Regulatory Environment: Management highlighted ongoing challenges from the World Health Organization's Framework Convention on Tobacco Control (FCTC), including potential plain packaging mandates, ingredient bans, and increased excise taxes.
Risks and Contingencies
- Litigation: Significant tobacco-related litigation remains pending in Brazil, Israel, Nigeria, and Canada, with damages claimed ranging into the billions. Management believes it has valid defenses and has not recorded provisions for these cases as losses are not deemed probable or estimable.
- Regulatory Actions: Risks include proposed plain packaging legislation (e.g., in Australia and the UK), bans on product descriptors, and increased health warning sizes. The European Court of Justice recently ruled against minimum retail selling price laws in several EU member states.
- Colombia Acquisition: PMI's proposed acquisition of Protabaco Ltda. was initially rejected by the Colombian competition authority in June 2010; PMI is seeking reconsideration.
Investor Verification Checklist
- Volume vs. Price Mix: Verify the extent to which revenue growth is driven by price increases and currency versus actual volume growth, noting the 1.0% volume decline excluding acquisitions.
- Philippines Integration: Monitor the integration progress and cost synergy realization of the PMFTC Inc. business combination to confirm accretive impact in 2011.
- Tax Rate Sustainability: Assess the sustainability of the 26.6% effective tax rate, which was significantly boosted by a one-time $148 million tax reserve reversal.
- Regulatory Exposure: Review developments regarding plain packaging legislation in Australia and the UK, and the outcome of the Protabaco acquisition appeal in Colombia.
- Litigation Exposure: Track the status of high-stakes litigation in Brazil, Canada, and Nigeria, particularly the class actions and health care cost recovery suits.