Altria Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Unaudited results. Altria’s businesses include U.S. smokeable and oral tobacco products and wine, as well as equity investments in ABI, JUUL and Cronos.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenues | $7.123B | $6.856B | $19.849B | $19.103B |
| Operating income | $3.160B | $2.944B | $8.292B | $7.899B |
| Net earnings (losses) attributable to Altria | $(952)M | $(2.600)B | $2.543B | $516M |
| Diluted EPS | $(0.51) | $(1.39) | $1.36 | $0.27 |
| Adjusted diluted EPS | $1.19 | $1.19 | $3.37 | $3.19 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5.844B | $5.274B |
Q3 gross profit was $3.717B, up from $3.497B. Gross margin, calculated as gross profit divided by net revenues, was about 52.2% versus 51.0%; operating margin was about 44.4% versus 42.9%. For the first nine months, gross margin was about 49.8% versus 50.4%, and operating margin about 41.8% versus 41.4%.
At September 30, cash and cash equivalents were $4.123B. Total debt was about $29.3B, comprising $1.5B current and $27.755B long-term debt. Current assets of $6.399B were below current liabilities of $8.290B. Altria had $3.0B available under its revolving credit agreement and reported a 9.2-to-1 covenant EBITDA-to-interest ratio, above the 4.0-to-1 minimum. The company paid $4.690B in dividends during the nine-month period.
Material changes and business performance
- Q3 revenue rose 3.9% and operating income rose 7.3% year over year. Reported quarterly net loss included a $2.6B non-cash JUUL impairment and losses from equity investments and Cronos-related instruments. Adjusted diluted EPS was unchanged at $1.19.
- For nine months, reported net earnings rose largely because 2019 included a larger JUUL impairment and Cronos-related losses. Adjusted net earnings increased 4.9% to $6.276B and adjusted diluted EPS increased 5.6% to $3.37; these are non-GAAP measures.
- Smokeable products revenue increased 4.1% for nine months and adjusted operating companies income (OCI) rose 10.5%, primarily reflecting pricing and lower costs. Cigarette shipments fell 1.4%; Marlboro shipments were down 0.7% and total cigarette retail share declined 0.7 percentage points.
- Oral tobacco revenue increased 7.9% and adjusted OCI rose 8.3% for nine months, mainly due to pricing and volume. Total segment shipment volume rose 1.4%, but retail share fell 2.7 percentage points, primarily amid growth in oral nicotine pouches.
- Wine revenue declined 10.1% for nine months. Ste. Michelle recorded $395M in charges, mainly a $292M inventory write-off and $100M estimated losses on non-cancelable grape commitments. Reported OCI was a $347M loss; adjusted OCI was $48M.
- Investing cash outflow was $107M for nine months, compared with $2.412B in 2019, when Altria invested in Cronos and acquired Burger Group assets through Helix. Financing cash outflow was $3.713B, including $4.690B in dividends paid. Cash increased from $2.117B at year-end 2019.
Outlook, management commentary and risks
- Altria narrowed 2020 adjusted diluted EPS guidance to $4.30–$4.38, or 2%–4% growth over the 2019 adjusted base of $4.21. It also narrowed its forecast adjusted effective tax rate to 24.5%–25.5%. Guidance excludes specified special items and has no corresponding GAAP reconciliation.
- Management revised its estimate of 2020 U.S. cigarette industry volume to unchanged to down 1.5%, from its prior estimate of down 2%–3.5%. It cited year-to-date performance and anticipated continued category resilience.
- Management said tobacco operations and supply chains had not experienced material COVID-19 impacts to date, but continued to monitor consumer income, purchasing behavior, workforce and supply risks. COVID-19 affected Ste. Michelle’s direct-to-consumer and on-premise wine sales and contributed to uncertainty in the business.
- Altria expects about $20M of additional 2020 wine-business charges. The strategic reset is intended to improve profitability and cash generation; management cited expected annual pre-tax cost savings of about $15M and cash savings of about $40M by 2021.
- JUUL’s September strategic update and weaker business prospects led to the $2.6B impairment; its carrying value was $1.605B at quarter-end. Further impairment is possible. The FTC challenges Altria’s 35% JUUL investment, and the filing also describes private antitrust actions and extensive e-vapor litigation.
- ABI’s fair value was $10.7B versus a $16.7B carrying value, about 36% below book; Altria concluded the decline was temporary and recorded no impairment. ABI reduced its 2019 dividend and omitted its interim 2020 dividend, lowering Altria’s expected investment earnings and cash dividends. Cronos’s fair value was about 20% below its $1.0B carrying value; Altria likewise recorded no impairment.
- Litigation remains a significant contingency, including tobacco and health claims, JUUL-related cases and antitrust matters. Management said it generally could not conclude that losses in pending cases were probable and reasonably estimable, while noting adverse outcomes could materially affect results, cash flows or financial position. The filing lists 1,145 e-vapor cases pending against Altria and/or subsidiaries as of October 27, 2020.
- In July, the board increased the quarterly dividend 2.4% to $0.86 per share, or $3.44 annualized. Future payments remain at the board’s discretion. Altria borrowed $3.0B on its revolver in March as a precaution and repaid it in June; it issued $2.0B of long-term notes in May and canceled the remaining $500M share-repurchase authorization.
Important facts for investors to verify
- Whether Altria meets its adjusted EPS and tax-rate guidance, and how excluded special items affect GAAP results.
- JUUL’s operating outlook, the possibility of additional impairment, and outcomes of the FTC proceeding and related litigation.
- ABI’s recovery, dividends and share valuation, and whether Altria continues to regard the carrying-value shortfall as temporary; also monitor Cronos’s valuation and operating performance.
- Whether smokeable and oral tobacco pricing can offset shipment-volume and retail-share declines, alongside regulatory, tax and litigation developments.
- Ste. Michelle’s inventory reduction, grape-purchase commitments, restructuring progress and cash generation.
- Debt levels, liquidity, dividend coverage and the substantial settlement-payment obligations; the filing estimates State Settlement Agreement and FDA user-fee charges of about $4.5B in 2020 and $4.3B in 2021, subject to assumptions and adjustments.