Altria Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Altria’s businesses include smokeable products, smokeless products, wine, financial services and alternative products. It also held a 26.8% interest in SABMiller, accounted for under the equity method.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenues | $6.553bn | $6.242bn | $18.386bn | $18.376bn |
| Gross profit | $2.821bn | $2.484bn | $8.049bn | $7.180bn |
| Operating income | $2.132bn | $1.969bn | $6.285bn | $5.488bn |
| Net earnings attributable to Altria | $1.396bn | $657m | $4.047bn | $3.077bn |
| Diluted EPS | $0.70 | $0.32 | $2.02 | $1.51 |
| Operating cash flow | Not stated separately | Not stated separately | $2.976bn | $2.120bn |
For the nine-month period, reported gross margin was approximately 43.8% and operating margin approximately 34.2%; Q3 margins were approximately 43.0% and 32.5%, respectively. These are calculated from reported figures, with revenue including excise taxes.
- Nine-month net revenue was essentially flat year over year; Q3 revenue rose 5.0%. Nine-month operating income increased 14.5% and net earnings increased 31.5%.
- Operating cash flow increased $856m year over year. Capital expenditures were $90m; operating cash flow less capital expenditures was approximately $2.886bn. Investing cash flow was $485m and financing cash outflow was $2.150bn.
- Cash was $4.211bn at September 30, 2013, versus $2.900bn at year-end 2012. Total debt was $14.9bn, versus $13.9bn; current and long-term debt on the balance sheet were $1.984bn and $12.892bn. Current liabilities exceeded current assets by approximately $788m, which management said it expected to fund through operating cash flow and/or short-term borrowing.
- Altria had no short-term borrowings outstanding at quarter-end and had a $3.0bn revolving credit facility available through August 2018. It reported covenant ratios of debt to EBITDA of 1.7x and EBITDA to interest of 8.4x, within its stated limits.
- The Board raised the quarterly dividend 9.1% to $0.48 per share, or an annualized $1.92. Dividends declared were $1.36 per share for the first nine months. The company targets a payout ratio of approximately 80% of adjusted diluted EPS. It repurchased $348m of shares in the first nine months and had approximately $709m remaining under its $1.0bn repurchase authorization.
Segment performance and changes versus prior period
- Smokeable products: Nine-month operating companies income rose to $5.471bn from $4.716bn, while revenue declined to $16.448bn from $16.616bn. Cigarette shipments fell 3.6% for the nine months; Q3 shipments rose 1.2%, partly reflecting an extra shipping day, inventory changes and share gains. Marlboro retail share was flat; total cigarette share gained 0.3 percentage points for the nine months.
- Smokeless products: Nine-month revenue increased 7.2% to $1.333bn and operating companies income rose 13.4% to $769m. Shipments increased 6.0%; Copenhagen and Skoal combined shipments rose 7.2%. Total segment retail share edged down 0.2 percentage points for the nine months.
- Wine: Nine-month revenue grew 7.9% to $411m and operating companies income rose 15.9% to $73m, supported by volume, premium mix and pricing. Wine shipments increased 4.7% for the nine months but declined 2.0% in Q3.
- SABMiller investment: Equity-investment earnings were $738m for the nine months, down from $973m, primarily because the 2012 comparison included $342m of gains from strategic alliance transactions. Q3 equity-investment earnings increased to $255m from $230m.
Outlook, unusual items, risks and contingencies
- Management reaffirmed 2013 reported diluted EPS guidance of $2.57–$2.62 and forecast adjusted diluted EPS growth of 7%–9% over 2012 adjusted EPS. The reported forecast includes estimated net income of $0.21 per share from NPM adjustment items; management cautioned that stated risks could affect the outlook.
- Results benefited from $664m of nine-month pre-tax NPM adjustment items recorded as reductions in cost of sales: $519m related to settlements with certain states and $145m following an arbitration ruling. The arbitration credit is subject to state challenges; the company expected a further $145m credit, plus interest, against a 2014 MSA payment. The timing and final value of other disputed adjustments remain uncertain.
- The prior-year comparison included an $874m pre-tax loss on early debt extinguishment, materially boosting year-over-year reported earnings growth in 2013. Other comparison items included prior-year SABMiller gains and tax-related items.
- Management said the 2011 cost-reduction program was substantially completed and remained on track to deliver $400m in annualized savings by the end of 2013. Nu Mark launched MarkTen e-cigarettes in Indiana in August 2013 and planned an Arizona expansion in December.
- Tobacco litigation remains a significant contingency. Management stated it had not concluded that losses in pending tobacco cases were probable and could not estimate potential losses for those cases; accordingly, it had not accrued amounts for them, except for identified judgments and related provisions. Tobacco and health judgment charges were $22m for the nine months, and the period-end accrued liability, including interest, was $6m.
- Other material risks include tobacco regulation and potential FDA action (including possible menthol regulation), excise-tax increases, declining cigarette consumption, competitive and illicit trade pressures, and tobacco litigation and appeal-bond exposure. The filing also notes wine competition and grape-supply risks. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and guidance depends on NPM adjustment credits, and whether challenged awards or settlements may be reversed or delayed.
- Underlying tobacco volume, pricing and market-share trends, including whether shipment changes reflect consumer demand or trade inventories and calendar effects.
- Cash generation relative to dividends, repurchases, debt service and recurring tobacco settlement payments; also the maturity profile of debt and continued covenant headroom.
- Developments in Engle progeny and other tobacco litigation, state bond-cap challenges, and the potential effects of FDA or tax changes.
- The sustainability of adjusted EPS growth and the assumed $400m annualized cost savings, alongside performance of the smokeless and wine businesses.