Philip Morris International Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The interim financial statements are unaudited. PMI manufactures and sells cigarettes, other tobacco products and nicotine-containing products outside the United States, with four geographic segments.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages. Revenue includes excise taxes unless stated otherwise.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenues | $19,319 | $19,041 | $35,875 | $35,829 |
| Net revenues excluding excise taxes | $6,917 | $6,649 | $12,981 | $12,732 |
| Gross profit | $4,398 | $4,285 | $8,285 | $8,272 |
| Operating income | $2,721 | $2,753 | $5,117 | $5,226 |
| Net earnings attributable to PMI | $1,781 | $1,788 | $3,371 | $3,318 |
| Diluted EPS | $1.14 | $1.15 | $2.17 | $2.13 |
| Dividends declared per share | $1.04 | $1.02 | $2.08 | $2.04 |
- Reported gross margin was approximately 22.8% in Q2 and 23.1% for the first half; operating margin was approximately 14.1% and 14.3%, respectively. These use reported net revenues, which include excise taxes.
- For the first half, net revenues excluding excise taxes rose 2.0%, reflecting $775 million of price increases, offset by $315 million of unfavorable currency and $211 million of unfavorable volume/mix. Operating income fell 2.1% as volume/mix, currency, higher marketing and research costs, and manufacturing costs outweighed pricing.
- In Q2, net revenues excluding excise taxes increased 4.0%, driven by pricing and favorable volume/mix, partly offset by currency. Operating income declined 1.2%; reported PMI-attributable earnings fell 0.4% and diluted EPS fell 0.9%. Excluding the stated $0.11 unfavorable currency effect, diluted EPS increased 8.7%.
- First-half operating cash flow was $4,071, up from $2,836. Capital expenditures were $560; operating cash flow less capital expenditures was $3,511. Investing cash outflow was $1,239, including $660 of net investment hedges and other. Financing cash outflow was $1,591, including $3,236 of dividends paid.
Balance sheet, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $6,197, versus $4,239 at year-end 2016. Current assets were $18,432 and current liabilities $17,243.
- Total debt was $31.7 billion, compared with $29.1 billion at December 31, 2016; this includes $898 of short-term borrowings, $4,254 of current long-term debt and $26,595 of long-term debt.
- PMI had $8.0 billion of committed revolving credit facilities, fully available, and no commercial paper outstanding. Its facility covenant required a minimum EBITDA-to-interest ratio of 3.5:1; the reported ratio was 10.4:1.
- Total liabilities of $48,937 exceeded total assets of $38,660; stockholders’ deficit was $10,277. The filing reports a $4.16 annualized dividend rate and no intention to repurchase shares in 2017.
Business changes and segment trends
- Total cigarette shipments declined 9.4% year over year in the first half; combined cigarette and heated-tobacco-unit shipments declined 7.1%. Heated tobacco units rose to 10.8 billion from 1.6 billion.
- Reduced-risk product (RRP) revenue, including excise taxes, increased to $1,069 from $180 for the first half; excluding excise taxes, it was $1,050 versus $178. Asia, principally Japan, drove most of the increase.
- First-half operating companies income increased in Asia to $1,688 from $1,527, was broadly flat in EEMA at $1,423, and declined in the European Union to $1,741 from $1,976 and Latin America & Canada to $445 from $453. The European Union faced weaker volume/mix and higher RRP investment; Asia benefited from pricing and RRP growth.
- Management attributed first-half reported EPS growth to operations, lower interest expense and a lower tax rate, partly offset by unfavorable currency. A $61 tax benefit from a legal-entity restructuring contributed $0.04 per share.
Outlook, commentary and risks
- On July 20, 2017, PMI forecast full-year reported diluted EPS of $4.78–$4.93 at then-prevailing exchange rates, versus $4.48 in 2016. Excluding an estimated $0.14 unfavorable currency effect and the first-quarter $0.04 favorable tax item, the forecast implied approximately 9%–12% growth versus adjusted 2016 EPS. The company forecast net revenue growth excluding excise taxes of over 7%, excluding currency and acquisitions. The forecast assumed no 2017 share repurchases and excluded future currency changes, acquisitions, unusual events, and unanticipated impairment or exit costs.
- PMI estimated a full-year 2017 effective tax rate of approximately 28%, versus 26.3% for the first half. It expected 2017 capital expenditures of approximately $1.6 billion.
- Management cited ongoing cigarette-market contraction, excise-tax increases, down-trading and illicit trade, intense competition, regulatory limits on packaging and marketing, currency volatility, and political and economic risks. RRP adoption, scientific substantiation, production capacity and regulatory treatment remain important uncertainties. PMI expected year-end 2017 installed heated-tobacco-unit capacity of approximately 50 billion units, subject to demand and execution.
- PMI stated that no estimated loss was accrued for pending tobacco litigation: management had not concluded a loss was probable and could not estimate a loss range. Quebec class-action judgments include large claimed damages under appeal; PMI’s subsidiary completed approximately CAD 226 million of court-ordered security payments in March 2017. The company warned an adverse outcome could materially affect results, cash flows or financial position.
- Other notable exposures include Thai criminal proceedings seeking fines of approximately THB 80.8 billion and THB 19.8 billion over alleged customs underpayments; a new Thai customs act was scheduled to take effect in November 2017 and could substantially limit fines. In South Korea, PMI’s affiliate paid approximately KRW 272 billion (about $244 million) in disputed tax assessments and is appealing; the amounts are included in other assets.
- PMI’s full-year forecast is subject to the filing’s stated risks, including currency, regulation, litigation, taxes, consumer demand, competition and the successful commercialization of RRPs.
Important facts for investors to verify
- Whether RRP revenue growth and IQOS adoption can offset continuing cigarette shipment declines, and whether supply capacity and regulatory approvals keep pace with demand.
- How pricing, volume/mix and foreign-exchange movements affect operating income and the $4.78–$4.93 EPS forecast.
- Developments in the Quebec tobacco class-action appeals and Thai and South Korean proceedings, including the treatment and recoverability of posted security and paid assessments.
- Debt maturity and refinancing needs, the rise in total debt, and the company’s ability to sustain dividends while funding RRP investment and capital expenditures.
- The effect of receivable sales and working-capital movements on operating cash flow: PMI sold $4.5 billion of receivables in the first half, with $0.6 billion still outstanding at period-end.
- Whether the estimated 28% full-year tax rate and other forecast assumptions remain valid; the filing says potential changes from tax examinations cannot currently be estimated.