ALTRIA GROUP, INC. annual report, FY2009

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Altria Group, Inc. — 2009 Form 10-K

Reporting period: Fiscal year ended December 31, 2009. This is an annual report, not a standalone fourth-quarter report. Altria is a holding company with U.S. tobacco, wine and financial-services businesses, and a 27.3% interest in SABMiller. The filing incorporates its financial statements and MD&A from the 2009 Annual Report; the supplied text does not provide clear consolidated revenue, net income, EPS, operating cash flow, margins, or total debt figures.

Business context and material changes

  • Altria acquired UST on January 6, 2009, adding smokeless tobacco and wine businesses. The transaction was valued at about $11.7 billion, including assumed debt; total cash outlay, including acquisition-related costs and payments, was about $11 billion.
  • The acquisition was funded with $6.7 billion of available cash and a $4.3 billion bridge loan. The bridge loan was prepaid and terminated after Altria issued $4.2 billion of senior unsecured notes in February 2009.
  • Beginning in 2009, Altria reported five segments: cigarettes, smokeless products, cigars, wine and financial services. Segment shares of operating companies income were cigarettes 85.3%, smokeless products 6.4%, cigars 3.0%, wine 0.7% and financial services 4.6%. Comparisons with prior years are affected by the UST acquisition and changed segment reporting.
  • Altria consolidated cigarette manufacturing in Richmond, Virginia, ceasing production at its Cabarrus, North Carolina facility in July 2009; decommissioning was expected during 2010.

Operating performance and key metrics

  • Cigarettes: U.S. shipments fell 12.2% to 148.7 billion units; Marlboro shipments declined 10.6% to 126.5 billion. Total retail share was 49.9%, down from 50.9% in 2008, while Marlboro share was 41.8% versus 41.9%.
  • Smokeless products: Full-year domestic shipments were 645.6 million cans and packs, down 2.4% from 2008. Fourth-quarter retail share was 54.7%, compared with 53.8% in the third quarter and 56.3% in the first quarter.
  • Cigars: Shipments declined 3.6% to 1,259 million units. Retail share increased to 30.5% from 29.3%; Black & Mild share rose to 29.9% from 28.6%.
  • Wine: Ste. Michelle shipments declined 2.1% to 6.005 million cases, while measured U.S. retail volume increased 10%.
  • Financial services: PMCC no longer makes new investments and manages its existing lease portfolio. Net finance receivables were about $4.8 billion for leveraged leases and $0.3 billion for direct-finance leases; the allowance for losses was $0.3 billion.
  • Settlement costs: State tobacco settlement and FETRA costs recorded in cost of sales were about $5.0 billion in 2009, down from $5.5 billion in 2008.
  • Cash flow, margins and liquidity: The supplied filing text does not provide clear consolidated cash-flow, margin, or liquidity totals. Altria said its subsidiaries were not restricted by long-term debt or other agreements from paying dividends to the parent.

Capital allocation, outlook and management commentary

  • The board raised the quarterly dividend 6.3% in the third quarter of 2009 to $0.34 per share. In February 2010, it approved a further increase to $0.35 per share, an annualized rate of $1.40. Altria also changed its target payout ratio from approximately 75% to approximately 80% of adjusted diluted EPS, beginning with the next declared dividend. Future dividends remain at board discretion.
  • Altria suspended indefinitely its $4.0 billion 2008–2010 share-repurchase program in September 2009 to preserve financial flexibility and focus on reducing interest expense. No program shares were repurchased in 2009; 53.5 million shares were bought back in 2008 for about $1.2 billion.
  • The filing text provides no clear earnings or revenue guidance. Management stated that tobacco consumption is expected to face continued pressure from regulation, taxes, changing social acceptance and other factors; economic uncertainty may also encourage consumers to trade down.
  • Altria said the FETRA quota buy-out was not expected to materially adversely affect consolidated results in 2010 and beyond. The company also described environmental compliance costs as not expected to have a material adverse effect.

Risks, contingencies and unusual items

  • Regulation: The 2009 Family Smoking Prevention and Tobacco Control Act gave the FDA broad authority over tobacco products. Altria said implementation could raise costs, constrain marketing or product development, affect consumer acceptance and materially affect results or financial condition.
  • Litigation: Numerous tobacco-related cases remain pending, including Engle progeny and “Lights/Ultra Lights” cases. Management said losses in pending tobacco cases were not considered probable and could not be reasonably estimated; accordingly, no provision was recorded for those cases. An adverse result or settlement could materially affect a particular quarter or year.
  • Recent verdicts: In the 2009 Naugle Engle progeny case, a jury awarded about $56.6 million in compensatory and $244 million in punitive damages. In February 2010, the court offered a reduced award of about $13 million compensatory and $26 million punitive damages, or a new trial on those damages. Appeals and other post-trial proceedings continued in several cases.
  • Federal government case: A federal court judgment finding RICO violations was largely affirmed on appeal in 2009, but the judgment and remedial orders remained stayed pending further review. Altria and PM USA filed petitions for Supreme Court review in February 2010.
  • IRS challenges: The IRS challenged tax benefits on certain PMCC leveraged leases. Potential tax and interest disallowances were estimated at about $1.0 billion for 2000–2003 and about $900 million for 2004–2009 if similarly disallowed; timing and outcome were uncertain. A jury had ruled for the IRS in a refund case concerning earlier years, and Altria intended to contest proposed adjustments.
  • Other exposures: State settlement-payment adjustments for 2003–2008 remained unresolved. Altria reported a $12 million third-party guarantee and $25 million of contingent guarantees, primarily surety bonds, which it said were not expected to significantly affect liquidity.
  • Concentration and operating risks: McLane accounted for approximately 27% of consolidated net revenue in 2009. Three distributors represented about 64% of wine-segment revenue. Risks also include tobacco excise taxes, lower-priced competitors, supply or facility disruption, grape availability, and potential losses on PMCC leases.

Important facts for investors to verify

  • Consult the incorporated 2009 Annual Report for audited revenue, earnings, EPS, cash flow, margins, debt, liquidity, and full year-over-year financial comparisons; those values are not clear in the supplied text.
  • Review UST acquisition financing, debt maturity and interest costs, and whether anticipated integration benefits and synergies were realized.
  • Track cigarette shipment and market-share declines, smokeless-product trends, and whether pricing and cost reductions offset lower volumes.
  • Assess developments in major tobacco litigation, the federal RICO case, MSA adjustments, and PMCC IRS lease disputes, including potential cash and earnings effects.
  • Confirm the impact of FDA implementation, excise-tax changes, dividend policy and the continued suspension of share repurchases.