Philip Morris International Inc. — 2015 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited interim statements prepared under U.S. GAAP. PMI manufactures and sells cigarettes, other tobacco and nicotine products outside the United States, across four geographic segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenues | $18.763B | $21.051B | $36.115B | $38.830B |
| Net revenues excluding excise taxes | $6.859B | $7.797B | $13.475B | $14.714B |
| Operating income | $2.892B | $2.874B | $5.763B | $5.825B |
| Net earnings attributable to PMI | $1.887B | $1.851B | $3.682B | $3.726B |
| Diluted EPS | $1.21 | $1.17 | $2.37 | $2.35 |
| Operating margin, on reported net revenues | 15.4% | 13.7% | 16.0% | 15.0% |
Reported net revenues include excise taxes collected from customers. Excluding those taxes, revenues declined 12.0% in Q2 and 8.4% for the six-month period. Currency was the principal drag: it reduced revenue excluding excise taxes by $1.3B in Q2 and $2.2B year to date. Pricing partly offset the impact; Q2 price gains were $514M and six-month gains were $1.1B. Q2 cigarette shipment volume fell 1.3%; six-month volume was essentially flat, although excluding estimated favorable inventory movements it declined 1.0%.
Q2 operating income rose 0.6%, benefiting from price increases and the absence of 2014 impairment and exit costs, partly offset by currency, volume/mix and higher costs. Six-month operating income declined 1.1%; the prior-year period included $512M of impairment and exit costs, primarily tied to the Netherlands factory closure. Gross margin on reported net revenues was approximately 23.9% in Q2 versus 24.2% and 24.6% for the six months versus 24.8%.
By segment, six-month operating companies income increased in the European Union ($1.890B, up 11.9%) and Latin America & Canada ($555M, up 18.8%); it declined in EEMA ($1.761B, down 12.6%) and Asia ($1.731B, down 4.6%). Segment performance reflected pricing gains, substantially offset in several regions by currency, volume/mix, and cost pressures.
Cash flow, debt and liquidity
- Six-month operating cash flow was $3.3B, down $120M year over year. Capital expenditures were $413M; investing cash outflow was $224M.
- Financing cash outflow was $2.640B, including $3.110B in dividends paid. Cash and cash equivalents were $1.838B at June 30, up from $1.682B at year-end.
- Total debt was approximately $29.2B, versus $29.5B at December 31, 2014. Balance-sheet short-term borrowings were $1.710B; current maturities of long-term debt were $2.926B, and long-term debt was $24.566B.
- PMI had $8.0B of committed revolving facilities, with none drawn, and $813M of commercial paper outstanding. Its covenant EBITDA-to-interest ratio was 11.5x against a 3.5x minimum. Management expected operating cash flow and available facilities to meet liquidity needs.
- The quarterly dividend was $1.00 per share, an annualized rate of $4.00. PMI announced it did not plan share repurchases in 2015.
Material changes, outlook and risks
- Guidance: On July 16, 2015, PMI reaffirmed full-year reported diluted EPS guidance of $4.32–$4.42 at then-prevailing exchange rates, versus $4.76 in 2014. The forecast included an estimated $1.15 per-share unfavorable currency impact. PMI anticipated currency-neutral adjusted EPS growth of 9%–11%, toward the upper end, while excluding future currency changes, acquisitions, unusual events and certain other charges.
- Spending and products: Guidance included second-half investment in iQOS deployments in Japan, Italy and other launch markets, accelerated Q4 spending for planned 2016 launches, and additional marketing for combustible products. iQOS expansion and the scientific assessment and regulatory approval of reduced-risk products remain uncertain.
- Litigation: Quebec courts issued May 2015 class-action judgments against PMI’s subsidiary. The Blais case included approximately CAD 3.1B (about $2.38B) allocated to the subsidiary for compensatory damages, plus a small punitive award; the Letourneau case allocated approximately CAD 46M (about $35.3M) in punitive damages. Appeals were filed, and the Quebec Court of Appeal overturned orders requiring initial payments into trust pending appeal. PMI recorded no tobacco-litigation loss, stating an unfavorable outcome was not considered probable and a possible loss could not be estimated. Management warned an adverse outcome could materially affect results, cash flows or financial position.
- Other exposures: PMI disclosed a Thai investigation involving proposed charges of about $2B for alleged historical customs and excise-tax underpayment; the company disputed the allegations. Risks also include extensive tobacco litigation, higher excise taxes, declining cigarette consumption, illicit trade, currency volatility, and regulations affecting packaging, marketing, ingredients and product sales. Fitch affirmed ratings but revised its outlook to Negative in July; PMI said it did not expect this to affect borrowing costs.
- Unusual items: 2014 impairment and exit charges of $512M did not recur in the first half of 2015. The 2015 effective tax rate was 29.2%, including a $58M adverse effect from changes in repatriation assertions; management estimated a full-year rate of approximately 29%.
Key facts for investors to verify
- Whether reported and currency-neutral EPS guidance assumptions remain achievable, particularly exchange rates, pricing, volumes and planned iQOS spending.
- Progress and financial consequences of appeals in the Quebec cases, and any change to PMI’s assessment or accrual for litigation exposure.
- Whether cigarette shipment trends, market share and price increases can offset market contraction, consumer down-trading and excise-tax changes.
- Debt maturities, refinancing access, cash generation and dividend funding, including any change in ratings or credit-facility availability.
- Developments in the Thai investigation and regulatory actions that could affect PMI’s products, pricing, branding or ability to market reduced-risk products.
Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.