Philip Morris International Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited U.S. GAAP results. PMI sells cigarettes and smoke-free products primarily outside the United States; its portfolio includes IQOS and other reduced-risk products (RRPs). In Q3, PMI renamed its Latin America & Canada segment Americas and added an Other category for recent acquisitions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Net revenues | $8.122B | $7.446B | $23.301B | $21.250B |
| Gross profit | $5.526B | $5.030B | $16.078B | $14.253B |
| Operating income | $3.455B | $3.243B | $10.028B | $8.763B |
| Net earnings attributable to PMI | $2.426B | $2.307B | $7.016B | $6.080B |
| Diluted EPS | $1.55 | $1.48 | $4.48 | $3.90 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $7.935B | $6.650B |
Net revenues exclude excise taxes. Q3 net revenues rose 9.1% (7.6% excluding favorable currency); operating income rose 6.5% (4.5% excluding currency); PMI-attributable earnings increased 5.2%, and diluted EPS increased 4.7%. Approximate gross, operating and PMI-attributable net margins were 68.0%, 42.5% and 29.9% in Q3, versus 67.5%, 43.5% and 31.0% a year earlier. For the nine months, revenues rose 9.7%, operating income 14.4%, PMI-attributable earnings 15.4%, and diluted EPS 14.9%; approximate operating margin improved to 43.0% from 41.2%.
Growth reflected pricing, favorable volume/mix and strong heated tobacco unit sales, partly offset by lower cigarette volumes in several markets. RRP net revenues were $2.326B in Q3, up 34.5%, and $6.724B for the nine months, up 37.5%. Cigarette shipments declined 0.4% in Q3 and 1.6% YTD; heated tobacco unit shipments increased 23.8% and 27.9%, respectively. Reported results included favorable currency effects on diluted EPS of $0.04 in Q3 and $0.18 YTD.
Cash, debt and liquidity
YTD operating cash flow was $7.935B; investing cash use was $2.018B, including $1.869B for acquisitions; financing cash use was $8.176B, including $5.628B of dividends. Capital expenditures were $459M, implying approximate operating cash flow less capital expenditures of $7.476B. Cash and cash equivalents were $4.491B at September 30, down from $7.280B at December 31, 2020; cash-flow statements include $309M of restricted cash at quarter-end. Total debt was approximately $29.1B, down from $31.5B at year-end. Current assets of $17.846B and current liabilities of $17.877B imply a current ratio near 1.0. PMI had $6.3B of committed revolving facilities available and no borrowings under them; commercial paper outstanding was zero at quarter-end.
PMI paid $5.628B in dividends during the first nine months. The quarterly dividend was raised 4.2% to $1.25 per share, an annualized rate of $5.00. A share repurchase program of up to $7B was authorized, with target spending of $5B–$7B over three years; approximately $94M of shares were repurchased through September 30.
Material changes and unusual items
- The $246M Saudi Arabia customs assessment was recorded as a reduction in YTD net revenues and reduced diluted EPS by $0.14. Excluding this assessment and unfavorable currency, ME&A YTD net revenues increased 11.5%.
- PMI recorded $170M of YTD asset impairment and exit costs, compared with $71M in 2020, including restructuring in Switzerland and distributor-contract termination costs in South Korea. The South Korea operating-model changes were expected to be completed in Q4 2021.
- OtiTopic’s acquisition was treated as an asset acquisition; PMI expensed $51M of acquired in-process research and development. Fertin Pharma and Vectura were acquired in September; their post-acquisition operating results through September 30 were described as immaterial and were not recorded. Preliminary purchase-price allocations remain subject to refinement.
- YTD results included a $38M gain from dilution of PMI’s Medicago investment, equivalent to a $0.02 diluted-EPS benefit.
- YTD operating cash flow benefited from $1.235B of inventory changes. PMI also sold $8.6B of receivables cumulatively during the nine months; $0.7B remained outstanding with financial institutions at period-end.
Outlook, commentary and risks
Management estimated a full-year 2021 effective tax rate of about 22%, excluding discrete tax events, and expected 2021 capital expenditures of approximately $0.6B. The filing does not provide a clear full-year revenue or EPS guidance figure. Management said semiconductor shortages were constraining IQOS device supply, expected tight supply to persist into the first half of 2022, and moved additional major IQOS ILUMA launches outside Japan to the second half of 2022. PMI expected user growth to re-accelerate when supply constraints ease.
Key risks include extensive tobacco regulation and taxation, declining cigarette consumption, illicit trade, currency and geopolitical exposures, COVID-19 disruptions, and uncertainty in adoption and regulation of RRPs. The ITC issued U.S. exclusion and cease-and-desist orders in a BAT patent dispute involving Platform 1; the orders were subject to a 60-day Presidential Review period, and PMI estimated the adverse impact on its financial results to be immaterial. PMI also disclosed substantial tobacco litigation, including Canadian proceedings under a stay through March 31, 2022; management had not generally concluded losses were probable and estimable, and warned that an adverse outcome could materially affect a particular period. A $260M Indonesian tax assessment received in October 2021 was expected to be paid in Q4 while PMI filed an objection. The Medicago government guarantee has a currently non-estimable maximum obligation, though PMI said it had no material financial-statement impact at quarter-end.
Important facts for investors to verify
- Whether semiconductor availability, device launches and IQOS user growth track management’s stated timeline.
- Final outcomes and accounting for the Saudi customs assessment, Indonesian tax assessment, tobacco litigation and patent disputes.
- Whether acquired businesses integrate successfully and whether preliminary acquisition valuations or future impairments materially change results.
- How much reported operating cash flow depends on inventory timing and ongoing receivables sales.
- Whether RRP revenue growth, pricing, margins and regulatory authorizations can offset cigarette volume and market-share declines.