Philip Morris International Inc. — 2013 Q3 Form 10-Q
Business context and reporting period. PMI manufactures and sells cigarettes and other tobacco products outside the United States across four geographic segments. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenues, including excise taxes | $20.629 billion, up 5.3% | $59.639 billion, up 3.4% |
| Net revenues excluding excise taxes | $7.927 billion, up 0.1% | $23.428 billion, down 0.3% |
| Operating income | $3.593 billion, down 0.8% | $10.312 billion, down 3.0% |
| Operating margin on reported net revenues | 17.4%, versus 18.5% | 17.3%, versus 18.4% |
| Net earnings attributable to PMI | $2.340 billion, up 5.1% | $6.589 billion, down 1.7% |
| Diluted EPS | $1.44, up 9.1% | $4.02, up 2.6% |
| Net cash provided by operating activities | Quarterly figure not presented in the supplied filing text | $7.815 billion, versus $7.771 billion |
| Capital expenditures | Quarterly figure not presented in the supplied filing text | $821 million, versus $719 million |
Nine-month operating cash flow less capital expenditures was approximately $6.994 billion, compared with $7.052 billion in 2012. Interest expense, net, rose to $721 million for the nine months and $239 million for the quarter, primarily reflecting higher average debt.
Balance sheet, debt and liquidity
- At September 30, 2013, cash and cash equivalents were $3.382 billion. Total debt was approximately $26.8 billion, up from $22.8 billion at December 31, 2012; cash-adjusted net debt was approximately $23.4 billion.
- Current assets were $16.016 billion and current liabilities were $16.018 billion. The filing reports $8.0 billion of committed revolving credit facilities, with no borrowings under those facilities; commercial paper outstanding was $2.7 billion.
- The rolling-four-quarter covenant ratio of consolidated EBITDA to interest expense was 14.6:1, against a minimum of 3.5:1. Credit ratings and outlooks were stable.
- Stockholders’ deficit was $7.191 billion. Repurchases, dividends and other capital returns were substantial contributors to financing outflows; the deficit is not, by itself, an indication of immediate liquidity stress.
Material changes and operating trends
- Cigarette shipment volume fell 5.3% for the first nine months and 5.7% in Q3. Excluding the Philippines, nine-month cigarette volume was down 3.0%.
- For the first nine months, price increases contributed $1.5 billion to net revenues excluding excise taxes, but were offset by $1.1 billion of unfavorable volume/mix and $466 million of unfavorable currency. Currency reduced diluted EPS by $0.23.
- Asia was the principal segment pressure: nine-month operating companies income declined 12.3%, including the impact of the Philippines’ January excise-tax increase, currency, unfavorable volume/mix and higher manufacturing costs. EEMA operating companies income rose 5.8%, supported by pricing; European Union income was broadly flat; Latin America & Canada rose 3.1%.
- Q3 PMI earnings and EPS increased despite lower operating income, mainly because the effective tax rate fell to 28.4% from 31.9%. The prior-year quarter included a $79 million tax provision related to the IRS examination of Altria returns.
- Nine-month dividends declared were $2.64 per share, versus $2.39. The quarterly dividend was raised 10.6% to $0.94 per share. PMI repurchased $4.5 billion of shares in the first nine months and targeted $6.0 billion of repurchases for 2013.
Outlook, commentary and risks
- On October 17, 2013, PMI forecast 2013 reported diluted EPS of $5.35–$5.40, versus $5.17 in 2012. The forecast included approximately $0.33 per share of unfavorable currency impact, a $0.01 tax item and an anticipated $0.03-per-share fourth-quarter restructuring charge. Excluding currency and those items, PMI projected approximately 10% growth versus 2012 adjusted EPS of $5.22. The forecast assumed approximately $300 million of gross productivity and cost savings and excluded future acquisitions, unusual events and further exchange-rate changes.
- PMI announced a potential restructuring of global and regional functions based in Switzerland, expected to eliminate or relocate approximately 170 positions; plans were expected to be finalized in Q4 2013.
- PMI is developing reduced-risk products, targeting initial launches in 2016–17. It anticipated €500–€600 million of capital spending over three years for European manufacturing capacity, with a 30-billion-unit annual capacity target for 2016. Commercialization and any reduced-risk claims depend on development results and regulatory approval.
- Key business risks include falling cigarette consumption, excise-tax increases, down-trading, illicit trade, foreign-exchange movements, tobacco regulation and litigation. PMI noted proposed EU product and packaging restrictions and ongoing challenges to Australia’s plain-packaging law.
- In Thailand, authorities were reported to have ordered prosecution in an investigation alleging approximately $2 billion of customs-duty and excise-tax underpayment for 2003–2007; PMI said criminal charges were probable and disputed the allegations. A separate informal inquiry concerned approximately $1.8 billion for 2000–2003.
- PMI disclosed pending tobacco-related cases, including claims with damages alleged in the billions in certain jurisdictions. Management said no loss was considered probable and estimable for pending tobacco cases, so no estimated loss was accrued; an unfavorable outcome could materially affect a particular period.
- At September 30, PMI had contingent guarantees of approximately $0.7 billion, primarily related to excise taxes; no related liability was recorded. A further approximately $38 million dividend to Grupo Carso relating to the Mexican business’s first-nine-month earnings was payable upon declaration.
Most important facts for investors to verify
- Whether PMI achieved its $5.35–$5.40 full-year 2013 EPS forecast and the assumed currency, cost-savings and share-repurchase targets.
- Subsequent cigarette-volume, pricing and market-share trends, particularly in the Philippines and other markets affected by tax increases or illicit trade.
- Developments and potential financial exposure from the Thai customs investigation and material tobacco litigation.
- Actual restructuring costs and timing, and progress, spending and regulatory approvals for reduced-risk products.
- Debt growth, refinancing needs, cash generation and capital returns, including whether liquidity and covenant headroom remain adequate.