Business Context and Reporting Period
Company: Altria Group, Inc. (ALG)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Headquarters: New York, N.Y.
Market Cap (Non-Affiliates): Approximately $92 billion (as of June 30, 2003)
Altria Group operates as a holding company for the largest consumer packaged goods business in the world. Its primary subsidiaries include Philip Morris USA Inc. (PM USA), Philip Morris International Inc. (PMI), and Kraft Foods Inc. (Kraft, 84.6% owned). The company also holds a 36% economic interest in SABMiller plc following the 2002 merger of Miller Brewing Company. In 2003, the company's financial services subsidiary, Philip Morris Capital Corporation (PMCC), shifted strategy from portfolio growth to maximizing gains and cash flow from existing assets.
Key Financial Metrics and Operational Data
Note: Specific consolidated revenue, net income, and cash flow figures are incorporated by reference to the 2003 Annual Report and are not explicitly stated in the provided text. The following operational and segment data is available:
- Domestic Tobacco (PM USA): Total cigarette shipments were 187.2 billion units (down 2.3% from 2002). Marlboro shipments were 147.9 billion units (down 0.4%). Retail share for key brands improved sequentially throughout 2003, reaching 48.7% for the full year.
- International Tobacco (PMI): Total shipments increased 1.8% to 735.8 billion units. Estimated international market share was 14.5% (up from 14.2%).
- Financial Services (PMCC): Total assets were $8.5 billion (down from $9.2 billion in 2002). Proceeds from asset sales and maturities totaled $507 million, with recorded gains of $45 million.
- Segment Income Contribution (2003): International tobacco (37.6%), North American food (29.5%), Domestic tobacco (23.3%), International food (7.7%), Financial services (1.9%).
- Employees: Approximately 165,000 worldwide as of December 31, 2003.
Material Changes and Segment Performance
Domestic Tobacco: The relative percentage of operating income from domestic tobacco decreased from 29.0% in 2002 to 23.3% in 2003. This decline reflects price promotions to narrow price gaps in a competitive market and lower volume due to weak economic conditions and increased state excise taxes.
International Tobacco: The relative percentage of operating income increased from 32.8% to 37.6%, driven by volume growth and acquisitions in Serbia, Greece, and Ecuador.
Financial Services: Operating income contribution rose from 0.3% to 1.9%. This increase is partially offset by a $290 million provision for leveraged lease exposure to the U.S. airline industry recorded in 2002. PMCC reduced its portfolio of finance assets through sales and maturities.
Food Products (Kraft): Kraft announced a multi-year restructuring program in January 2004 (post-period) anticipating up to $1.2 billion in pre-tax charges over three years, including the closure of up to 20 plants and elimination of 6,000 positions. Raw material costs for dairy, coffee, and cocoa were higher in 2003 than in 2002.
Outlook, Risks, and Contingencies
Restructuring Outlook: Kraft expects to incur $750 million to $800 million in pre-tax charges in 2004 related to its restructuring program. Annual cost savings are expected to reach $400 million by 2006.
Legal Proceedings and Litigation:
- Tobacco Litigation: Significant uncertainty remains regarding pending litigation. There are 13 cases on appeal with verdicts against PM USA, including the Price case in Illinois ($10.1 billion verdict). PM USA has placed a $6 billion intercompany note and $610 million in cash deposits into escrow to stay execution of the Price judgment.
- Health Care Cost Recovery: The U.S. government lawsuit seeking over $20 billion annually in health care costs is scheduled for trial in September 2004. The Master Settlement Agreement (MSA) requires annual payments of $8.4 billion (2004-2007) from the industry.
- Italian Tax Matters: PMI affiliates resolved most of $2.9 billion in tax assessments for $308 million but face remaining assessments totaling approximately $449 million (principal and penalties).
- Airline Leases: PMCC faces exposure to airline bankruptcies (UAL, American, Atlas, US Airways). Aggregate exposure to UAL was $596 million (6.8% of portfolio) and American was $212 million (2.4% of portfolio).
Market Risks:
- Excise Taxes: Continued increases in cigarette taxes are expected to reduce consumption and shift sales to discount segments.
- Competition: Increased competition from non-settling manufacturers and counterfeit/diverted cigarettes.
- Commodity Prices: Volatility in raw material costs (coffee, cocoa, dairy) with limited hedging coverage.
- Liquidity: ALG has limited access to the commercial paper market due to credit rating agency actions in 2003.
Investor Verification Checklist
- Verify the specific consolidated revenue, net income, and cash flow figures in the 2003 Annual Report (incorporated by reference).
- Monitor the status of the Price case appeal and the $6 billion escrowed note.
- Track the progress of the U.S. government's RICO lawsuit trial scheduled for September 2004.
- Assess the impact of Kraft's announced $1.2 billion restructuring program on 2004 earnings.
- Review PMCC's exposure to airline industry bankruptcies and potential increases in allowance for losses.
- Confirm the company's liquidity position given limited access to the commercial paper market.