Philip Morris International Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. Results are unaudited. PMI manufactures and sells cigarettes and other tobacco products outside the United States.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / prior year-end | Change |
|---|---|---|---|
| Net revenues | $18.527 billion | $18.022 billion | +2.8% |
| Net revenues excluding excise taxes | $7.584 billion | $7.448 billion | +1.8% |
| Gross profit | $5.095 billion | $5.006 billion | +1.8% |
| Operating income | $3.387 billion | $3.403 billion | -0.5% |
| Net earnings attributable to PMI | $2.125 billion | $2.161 billion | -1.7% |
| Diluted EPS | $1.28 | $1.25 | +2.4% |
| Operating cash flow | $1.363 billion | $1.898 billion | Down $535 million |
| Capital expenditures | $240 million | $227 million | Up $13 million |
| Cash and cash equivalents | $3.981 billion | $2.983 billion at Dec. 31, 2012 | Up $998 million |
| Total debt | $25.6 billion | $22.8 billion at Dec. 31, 2012 | Up $2.8 billion |
| Declared dividend per share | $0.85 | $0.77 | Higher year over year |
Reported gross margin was approximately 27.5% versus 27.8%; operating margin was approximately 18.3% versus 18.9%. Excise taxes are included in net revenues, so these reported margins include substantial pass-through taxes. Operating cash flow less capital expenditures was approximately $1.123 billion, versus $1.671 billion in Q1 2012.
Current assets were $16.661 billion and current liabilities $14.509 billion, compared with $16.590 billion and $17.016 billion at year-end. Total stockholders’ deficit was $4.055 billion. PMI repurchased $1.5 billion of shares during the quarter and paid $1.414 billion in dividends.
Material changes and operating performance
- Cigarette shipments fell 6.5% to 204.9 billion units. Excluding the Philippines, shipments declined 2.1%; including other tobacco products on a cigarette-equivalent basis, combined shipments fell 6.0%. OTP volume rose 8.8%.
- Price increases added $531 million to net revenues excluding excise taxes, partly offset by $292 million of unfavorable volume/mix and $103 million of unfavorable currency. Excise taxes on products increased 3.5% to $10.943 billion.
- Operating income was pressured by unfavorable volume/mix ($231 million), currency ($122 million), higher manufacturing costs ($110 million) and higher marketing, administration and research costs ($89 million), partly offset by pricing.
- Segment operating companies income: EEMA rose 15.4% to $935 million; Latin America & Canada rose 7.2% to $254 million; European Union fell 8.9% to $938 million; Asia fell 4.6% to $1.342 billion.
- Asia shipments fell 10.4%, driven by the Philippines, where PMI shipments dropped 42.5% following a major excise-tax increase, price increases and inventory reversals. Excluding the Philippines, Asia shipments increased 2.8%.
- PMI-attributable earnings declined while EPS increased, principally reflecting fewer shares outstanding following repurchases. Unfavorable currency reduced diluted EPS by $0.07; excluding that effect, diluted EPS increased 8.0%.
Outlook, risks and unusual items
- On April 18, 2013, PMI forecast full-year reported diluted EPS of $5.55–$5.65. At then-prevailing exchange rates, currency was expected to reduce 2013 EPS by about $0.19. Excluding that currency impact, PMI projected approximately 10%–12% growth versus 2012 adjusted EPS of $5.22. Management expected most growth in the second half, particularly Q4.
- The forecast included approximately $300 million in gross productivity and cost savings and a $6.0 billion share-repurchase target for 2013. It excluded potential acquisitions, unanticipated charges, future currency changes and unusual events; adjusted EPS is a non-GAAP measure.
- Management cited continued excise-tax increases, weak economic conditions, downtrading, illicit trade, currency volatility, regulatory restrictions and competition as risks. The EU proposed significant product and packaging restrictions; Thailand published an 85% pack-warning requirement for implementation in October 2013. Litigation and regulatory outcomes remain uncertain.
- Tobacco-related litigation claims can be substantial. Management said no loss was considered probable and estimable for pending tobacco cases, so no provision was recorded; an adverse outcome could materially affect results, cash flows or financial position. A Thai customs and excise investigation concerned alleged amounts of approximately $2.0 billion for 2003–2007 and $1.8 billion for 2000–2003; the first matter awaited resolution by the Attorney General after a non-prosecution order was disputed.
- PMI recorded $3 million of exit costs in Q1 2013 and a $17 million tax expense from the American Taxpayer Relief Act. The effective tax rate was 29.6%, versus 30.0%.
- PMI issued debt in multiple currencies in Q1 and entered a $2.0 billion 364-day revolving credit facility. It reported $8.0 billion of committed facilities, with none drawn, and a 15.6-to-1 covenant ratio against a 3.5-to-1 minimum. Total debt rose despite cash increasing.
- Next-generation, potentially reduced-risk products remained in development. PMI anticipated €500–€600 million of factory investment over three years, with a first factory targeted for 2016 and initial launches in 2016–2017; commercialization and regulatory approval are uncertain.
Important facts for investors to verify
- Whether shipment declines, particularly the Philippines’ tax-driven disruption and inventory effects, persist or reverse, and how actual consumer offtake compares with reported shipments.
- Whether pricing can offset volume/mix, manufacturing-cost and currency pressures without accelerating downtrading or illicit trade.
- Progress against the $5.55–$5.65 EPS forecast, the assumed currency impact, $300 million savings target and $6.0 billion repurchase target.
- Debt growth, refinancing needs, cash generation, dividend and repurchase funding, and continued compliance with credit-facility covenants.
- Developments in tobacco litigation, the Thai investigation, excise-tax changes and proposed packaging, ingredient and marketing regulations.
- Whether next-generation products meet development, investment and regulatory milestones, and whether projected launch timing remains achievable.