Philip Morris International Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. PMI sells cigarettes and reduced-risk products (RRPs), primarily outside the United States, and is expanding into wellness and healthcare. Its six geographic segments are reported alongside an “Other” category for Vectura Fertin Pharma.
Key financial metrics
Amounts in U.S. dollars; figures are in millions except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue including excise taxes | $19,341 | $19,355 |
| Net revenues | $7,746 | $7,585; up 2.1% reported and 9.0% excluding currency and acquisitions |
| Gross profit / gross margin | $5,138 / 66.3% | $5,311 / 70.0% |
| Operating income / operating margin | $3,298 / 42.6% | $3,444 / 45.4%; income down 4.2% reported |
| Net earnings attributable to PMI | $2,331 | $2,418; down 3.6% |
| Basic and diluted EPS | $1.50 | $1.55; down 3.2% |
| Net cash from operating activities | $1,118 | $435 |
| Capital expenditures | $229 | $179 |
| Cash from operations less capital expenditures | $889 | $256 |
| Cash and cash equivalents at period end | $4,622 | $4,496 at Dec. 31, 2021 |
| Total debt | $29,357 | $27,806 at Dec. 31, 2021 |
| Current assets / current liabilities | $18,724 / $20,417 | $17,717 / $19,255 at Dec. 31, 2021 |
PMI reported a 19.7% effective tax rate, versus 21.5% a year earlier. Cash dividends paid were $1,952 million; the quarterly dividend was $1.25 per share. The company reported $6.3 billion of committed revolving credit facilities, fully undrawn at quarter-end, and $2.2 billion of commercial paper outstanding.
Material changes and operating performance
- RRP net revenues rose 10.7% to $2.35 billion, while combustible-product net revenues fell 2.4% to $5.33 billion. RRP sales represented about 30% of net revenues.
- Total cigarette and heated-tobacco-unit shipments increased 3.5%; heated tobacco unit shipments rose 14.2%. Management cited stronger heated-tobacco volumes, especially in the EU, and growth in cigarette volumes in several markets.
- Currency was a major headwind: management attributed $0.23 of the $0.05 year-over-year diluted EPS decline to unfavorable currency. Excluding that currency impact, diluted EPS increased 11.6%.
- Operating income excluding currency and acquisitions rose 8.6%, but reported operating income declined. Higher manufacturing, logistics and inflation-related costs weighed on results.
- Regional results diverged: Middle East & Africa operating income increased 55.5% and EU operating income rose 2.5%; Eastern Europe fell 44.8%, South & Southeast Asia 15.9%, East Asia & Australia 17.8%, and Americas 9.7%.
- Operating cash flow improved by $683 million year over year. Management attributed the increase mainly to higher currency-neutral earnings and lower working-capital requirements, including timing of excise tax payments and inventory movements. Receivables sales also supported operating cash flow.
Outlook, management commentary, risks and unusual items
- Ukraine and Russia: PMI temporarily suspended operations in Ukraine, including its Kharkiv factory, and recorded $27 million of Ukraine-related pre-tax charges. In Russia, it suspended planned investments and launches, began scaling down manufacturing and was evaluating an orderly market exit; it recorded $15 million of Russia-related pre-tax charges. The filing says the conflict may materially adversely affect results, cash flows and financial position and may lead to further impairment charges. At quarter-end, Russian and Ukrainian operations had approximately $1.4 billion and $0.4 billion of assets, respectively.
- Management estimated Russia and Ukraine together represented around 6% of Q1 net revenues. For 2021, Russia represented around 10% of shipment volume and 6% of net revenues; Ukraine represented around 2% of shipment volume and under 2% of net revenues.
- Management expected full-year 2022 capital expenditures of approximately $1.0 billion and estimated a full-year effective tax rate of 21%–22%, excluding discrete tax events. The supplied filing text does not provide clear full-year revenue or EPS guidance.
- PMI launched its Vectura Fertin Pharma wellness and healthcare business on March 31, 2022. The category recorded $66 million of revenue and a $31 million operating loss in the quarter, primarily reflecting acquired-intangible amortization, R&D and employee-retention costs.
- Q1 unusual items included $42 million of pre-tax Ukraine-war charges and a $60 million pre-tax loss on equity securities ($47 million after tax). The prior-year quarter included $48 million of asset impairment and exit costs; there were no such charges in Q1 2022.
- On April 1, 2022, PMI began treating its Turkish affiliates as operating in a highly inflationary economy for U.S. GAAP purposes, with the U.S. dollar as functional currency.
- Risks include further disruption or impairment related to the Russia-Ukraine conflict, foreign-exchange volatility, inflation and supply constraints, tobacco and RRP regulation and taxation, litigation, and the uncertain integration and returns of recent acquisitions. An EU proposal on fluorinated greenhouse gases issued after quarter-end could affect certain Vectura Fertin Pharma products and potentially acquired asset values.
- PMI disclosed substantial pending tobacco-related litigation. For most pending tobacco cases, management said loss was not considered probable or reasonably estimable, so no loss was accrued; an unfavorable outcome could still materially affect a particular period. Other disclosed matters include Canadian proceedings under a stay through September 30, 2022, Thai customs cases, and patent disputes involving Platform 1. PMI stated that the U.S. ITC exclusion and cease-and-desist orders affecting Platform 1 were expected to have an immaterial financial impact, while appeals remained pending.
Important facts for investors to verify
- Track the status and financial consequences of any Russian market exit, Ukraine operating disruption, supply-chain effects and possible impairment reviews.
- Assess whether RRP growth, shipment trends and reported margins can withstand currency movements, inflation and device/component supply constraints.
- Monitor debt maturities, commercial-paper reliance, cash generation, receivables sales and the continued availability of committed credit facilities.
- Follow developments in tobacco litigation, the Canadian CCAA process, Thai tax/customs proceedings and Platform 1 patent disputes.
- Check subsequent disclosures for Turkey’s highly inflationary accounting effects and any EU greenhouse-gas rule impact on Vectura Fertin Pharma.