Philip Morris International Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The interim financial statements are unaudited. PMI manufactures and sells tobacco products outside the United States across four geographic segments.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenues | $20.483 billion, up 2.2% | $39.010 billion, up 2.5% |
| Net revenues excluding excise taxes | $7.917 billion, down 2.5% | $15.501 billion, down 0.4% |
| Gross profit | $5.216 billion, down 4.4% | $10.311 billion, down 1.4% |
| Operating income | $3.332 billion, down 7.5% | $6.719 billion, down 4.1% |
| Net earnings attributable to PMI | $2.124 billion, down 8.3% | $4.249 billion, down 5.1% |
| Diluted EPS | $1.30, down 4.4% | $2.58, down 0.8% |
| Net cash from operating activities | Not reported separately for the quarter | $4.500 billion, versus $5.378 billion |
For the six months, excise taxes were $23.509 billion, up 4.5%; interest expense, net, was $482 million, up $60 million; and the effective tax rate was 29.3%, versus 29.6%. Capital expenditures were $520 million. Dividends declared were $1.70 per share for the six-month period and $0.85 for the quarter.
At June 30, cash and cash equivalents were $3.586 billion. Total debt was approximately $25.5 billion, compared with $22.8 billion at December 31, 2012. Current assets were $16.755 billion and current liabilities $14.706 billion. Stockholders’ deficit was $5.225 billion. PMI had $8.0 billion of committed revolving credit facilities, with no borrowings under those facilities; its covenant EBITDA-to-interest ratio was 14.8:1 against a minimum of 3.5:1.
Material changes and operating drivers
- Shipment volume fell 3.9% in the quarter and 5.1% in the first half. Excluding the Philippines, cigarette volume declined 2.6% in the quarter and 2.4% in the first half.
- Higher pricing partly offset unfavorable volume and mix and currency. In the first half, price increases contributed $1.030 billion to revenue excluding excise taxes, while volume/mix reduced it by $751 million and currency by $346 million.
- Asia was the largest segment earnings drag: first-half operating companies income declined 10.9%, and second-quarter income declined 17.3%, reflecting volume/mix, currency, manufacturing costs and higher operating expenses. The Philippines’ January excise-tax increase sharply reduced shipments and market share.
- First-half operating cash flow declined $878 million year over year, mainly from working-capital needs, including timing of income-tax payments and receivable collections. Financing included $3.0 billion of share repurchases and $2.8 billion of dividends paid.
- Currency translation reduced first-half net revenues by $585 million. The company cited the Argentine peso, Indonesian rupiah, Japanese yen and Russian ruble among the main adverse currencies.
Outlook, commentary and risks
- On July 18, 2013, PMI forecast 2013 reported diluted EPS of $5.43–$5.53. At the exchange rates then prevailing, it expected approximately $0.31 per-share currency headwind and 10%–12% growth versus 2012 adjusted EPS of $5.22. Management expected most growth in the second half, particularly a strong fourth quarter.
- The forecast included approximately $300 million of gross productivity and cost savings and a $6.0 billion 2013 share-repurchase target. It excluded future acquisitions, unanticipated impairment or exit charges, future currency changes and unusual events. Adjusted EPS is a non-GAAP measure.
- Management cited continued pressure from excise-tax increases, weak economic conditions, illicit trade, down-trading, lower cigarette consumption, competition and higher manufacturing and marketing costs. Tobacco regulation—including potential plain packaging, ingredient restrictions and larger health warnings—could constrain brands and sales.
- Litigation remains a material uncertainty. PMI reported 63 individual smoking-and-health cases, 11 class actions, 15 health-care cost recovery actions and other tobacco-related cases pending as of August 1, 2013. Management said no loss was considered probable and estimable for pending tobacco cases, so no related loss was accrued; outcomes could nevertheless materially affect results or cash flows.
- A Thai customs and tax investigation alleged approximately $2.0 billion of underpayments for 2003–2007 and approximately $1.8 billion for 2000–2003. The Public Prosecutor issued a non-prosecution order for the later period, but the matter was referred to the Attorney General for resolution.
- PMI expected to complete its purchase of Grupo Carso’s remaining 20% interest in its Mexican tobacco business by September 30, 2013, subject to antitrust approval, for an estimated $700 million; the transaction was projected to be marginally EPS-accretive beginning in the fourth quarter.
- Reduced-risk products remained under development. PMI anticipated first factory readiness by 2016 and initial market launches in 2016–2017, subject to development and regulatory approval; planned factory investment was €500–€600 million over three years.
Most important facts for investors to verify
- Whether the 2013 EPS forecast, second-half growth profile, savings target and share-repurchase plan were achieved, and how subsequent exchange rates affected results.
- Whether cigarette volume and market share stabilized, particularly in the Philippines, and whether illicit trade and tax-driven down-trading persisted.
- How operating cash flow, working capital, debt levels and refinancing needs evolved after the first-half increase in debt.
- Developments in major tobacco litigation, the Thai investigation and tax examinations, including any change in estimated exposure or accruals.
- Progress, cost, regulatory approval and commercialization timing for the Mexican acquisition and reduced-risk products.