Philip Morris International Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. PMI sells cigarettes and smoke-free nicotine products primarily outside the United States and is pursuing a long-term shift toward smoke-free products.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenues | $29.805 billion | $29.625 billion |
| Gross profit / gross margin | $19.292 billion / 64.7% | $18.867 billion / 63.7% |
| Operating income / operating margin | $10.531 billion / 35.3% | $11.377 billion / 38.4% |
| Net earnings attributable to PMI | $7.185 billion | $7.911 billion |
| Diluted EPS | $4.61 | $5.08 |
| Operating cash flow | $10.090 billion | $9.478 billion |
| Capital expenditures | $0.852 billion | $1.436 billion |
| Total debt | $31.045 billion | $31.759 billion |
| Cash and cash equivalents | $6.861 billion | $6.593 billion |
| Dividends paid | $7.161 billion | $6.885 billion |
Net revenues rose 0.6%; excluding currency, they increased 3.8%, reflecting pricing and smoke-free product growth. Net earnings fell 9.2% and diluted EPS fell 9.3%. Operating cash flow increased $0.6 billion; less capital spending, cash flow was approximately $9.2 billion. Current assets were $20.5 billion versus current liabilities of $18.8 billion. Total liabilities exceeded assets, leaving stockholders’ deficit of $9.6 billion.
Smoke-free product revenue increased to $5.587 billion from $4.096 billion, about 18.7% of net revenue. Heated tobacco unit shipments rose 44.2% to 59.7 billion, while cigarette shipments fell 4.5% to 706.7 billion. Total cigarette and heated tobacco shipments declined 2.0% to 766.4 billion units.
For Q4 2019, net revenue was $7.713 billion versus $7.499 billion in Q4 2018; net earnings attributable to PMI were $1.616 billion versus $1.910 billion, and diluted EPS was $1.04 versus $1.23.
Material changes and unusual items
- Operating income declined 7.4%, but increased 5.9% after excluding unfavorable currency and identified 2019 charges and the RBH deconsolidation impact.
- Significant 2019 charges included $422 million of asset impairment and exit costs, a $374 million Russian excise/VAT audit charge, $194 million of Canadian tobacco litigation expense, and a $239 million loss on deconsolidating Canadian subsidiary RBH.
- Following RBH’s entry into Canadian creditor-protection proceedings, PMI deconsolidated it on March 22, 2019, and recorded its continuing investment at a fair value of $3.280 billion. The litigation restructuring process and its effect on investment value remain uncertain.
- Reported results were also affected by unfavorable currency movements. PMI issued $3.8 billion of long-term debt in 2019 and repaid $4.0 billion of long-term debt.
Outlook, risks and contingencies
- Management estimated 2020 capital expenditures of approximately $1.0 billion and an effective tax rate of approximately 23%, excluding discrete tax events. The filing provides no clear 2020 EPS or revenue-growth guidance.
- The annualized dividend rate was $4.68 per share following a 2.6% increase in the third quarter of 2019. PMI said it did not presently intend to repurchase shares in 2020.
- Management’s strategy centers on developing smoke-free products and persuading adult smokers who would otherwise continue smoking to switch. PMI cautions that adoption, scientific evidence, regulation, taxation and commercialization outcomes are less predictable than in its established cigarette business. FDA authorization for a version of IQOS permits U.S. sale but is not an FDA “approval” or a modified-risk order; the latter application remained under review.
- Principal risks include declining cigarette consumption, excise-tax increases and down-trading, regulatory and marketing restrictions, illicit trade, currency and political risks, product and supply-chain execution, and litigation. The company reported 77 smoking-and-health and health-care cost-recovery actions pending as of February 3, 2020; most had no accrued loss because management did not deem losses both probable and reasonably estimable. The filing warns that adverse outcomes could materially affect results or liquidity.
- Other items to monitor include the Russian tax assessment (paid and under consideration for challenge), Canadian litigation and RBH’s restructuring, and ongoing tax examinations. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor found controls effective at year-end.
Important facts for investors to verify
- Whether smoke-free revenue and shipment growth can continue, and how much is attributable to underlying consumer demand versus distributor inventory movements.
- How much of the decline in reported operating income and EPS reflects recurring operating trends versus the listed special charges, currency effects and RBH deconsolidation.
- Developments in the RBH creditor-protection process, Canadian tobacco litigation, and the valuation and recoverability of PMI’s $3.280 billion RBH investment.
- Debt maturities, cash generation, dividend coverage and access to committed credit facilities; 2019 dividends paid exceeded capital expenditures but were below operating cash flow.
- Regulatory decisions affecting IQOS marketing and risk-reduction claims, including the pending FDA modified-risk application, and the effects of taxes, product restrictions and illicit trade.