Altria Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2009. Figures are unaudited and in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Altria’s businesses include U.S. cigarettes, smokeless products, cigars, wine and financial services. On January 6, 2009, Altria acquired UST, adding U.S. Smokeless Tobacco Company and Ste. Michelle Wine Estates. Altria also held a 27.3% interest in SABMiller. Philip Morris International (PMI), spun off in March 2008, is reported as discontinued operations in the prior-year comparison.
Key financial metrics
| Metric | Nine months 2009 | Nine months 2008 | Third quarter 2009 | Third quarter 2008 |
|---|---|---|---|---|
| Net revenues | $17,542 | $14,702 | $6,300 | $5,238 |
| Gross profit | $6,783 | $5,839 | $2,285 | $2,111 |
| Operating income | $4,262 | $3,884 | $1,394 | $1,329 |
| Continuing-operations earnings attributable to Altria | $2,481 | $2,411 | $882 | $867 |
| Diluted EPS from continuing operations | $1.19 | $1.15 | Not separately presented | Not separately presented |
| Diluted EPS attributable to Altria | $1.19 | $2.03 | $0.42 | $0.42 |
| Operating cash flow, continuing operations | $2,007 | $2,242 | Not provided | Not provided |
Reported gross profit as a share of revenue was approximately 38.7% for the nine-month period (39.7% in 2008) and 36.3% for the quarter (40.3% in 2008). Revenue includes excise taxes billed to customers; the substantial 2009 tax increase affects comparability.
- Cash and liquidity: Cash was $1,030 at September 30, 2009, down from $7,916 at year-end 2008. Cash from continuing operating activities was $2,007; continuing investing activities used $9,705, primarily for the UST acquisition. The filing states that Altria believes it has adequate liquidity and financial resources.
- Debt: Consumer-products debt was approximately $12.0 billion, compared with $7.0 billion at December 31, 2008. Altria issued $4.2 billion of notes in February to refinance the bridge borrowing used for UST. No commercial paper or revolving-facility borrowings were outstanding at quarter-end. The $3.4 billion revolving facility expires in April 2010; covenant ratios were within stated requirements.
- Margins and segment results: Nine-month operating income rose 9.7%. Cigarette operating companies income increased to $3,902 from $3,746; the smokeless segment reported $302 and wine $22, both including UST only after its acquisition. Financial-services operating companies income was $260, up from $97, reflecting asset-sale gains.
- Dividends and repurchases: The quarterly dividend was raised 6.3% to $0.34 per share, or an annualized $1.36. Altria indefinitely suspended its $4.0 billion share-repurchase program in September to preserve flexibility and focus on reducing interest expense.
Material changes versus the prior comparable period
- Nine-month revenue increased 19.3%, primarily from UST, higher cigarette pricing and the higher federal excise tax; cigarette and cigar volume declines partly offset these effects. Excise taxes on products rose 86.9% to $4,818.
- Nine-month continuing-operations earnings increased 2.9%, while diluted continuing-operations EPS rose from $1.15 to $1.19. Higher operating income, SABMiller earnings and lower taxes were partly offset by sharply higher interest expense associated with acquisition financing.
- Quarterly earnings attributable to Altria increased 1.7% to $882, while diluted EPS remained $0.42. Cigarette operating companies income declined 2.6% in the quarter, as lower volume and restructuring costs outweighed pricing and cost reductions.
- Nine-month net earnings attributable to Altria fell 41.6% to $2,481, mainly because the 2008 period included $1,840 of PMI discontinued-operation earnings attributable to Altria. This makes total net earnings and EPS comparisons less representative of continuing operations.
- PM USA’s nine-month cigarette shipments fell 12.5% to 112.5 billion units; management estimated a decline of about 10% after adjusting for trade inventories and calendar differences. Altria attributed the gap versus industry volume partly to FET-related price disruption, inventory reductions and portfolio share losses.
Guidance, outlook, risks and unusual items
- Outlook: In October 2009, Altria narrowed its full-year reported diluted EPS guidance from continuing operations to $1.53–$1.56, and adjusted diluted EPS growth guidance to 5%–7% over 2008. The adjusted measure excludes specified charges; management cited higher excise taxes, smokeless-brand investment, cost reductions, increased pension expense and no share repurchases as relevant factors.
- Acquisition and restructuring: UST’s preliminary purchase accounting included $4.9 billion of goodwill and approximately $9.1 billion of acquired trademarks. Appraisals remained subject to revision. Altria expected about $300 million of annual UST synergies by 2011 and approximately $0.5 billion of acquisition-related, restructuring and integration charges over 2009–2010. A broader integration and restructuring program also carried expected charges in 2009 and 2010.
- Litigation: Altria disclosed extensive tobacco litigation and said it could not estimate possible losses in pending tobacco cases where an unfavorable outcome was reasonably possible but not considered probable. Approximately 3,330 Engle-progeny cases involving about 9,019 plaintiffs were pending as of October 26, 2009. Certain adverse verdicts and appeals could materially affect results, cash flows or financial position.
- Tax contingency: The IRS challenged tax benefits from PMCC leveraged leases. A 2009 jury verdict favored the IRS in a case concerning earlier tax years. Altria estimated potential federal tax and interest disallowances of about $1.0 billion for 2000–2003 and approximately $900 million for 2004–2009 if similar positions were applied; these amounts were contingent, not stated as established liabilities.
- Regulation and market risks: The 2009 FDA tobacco-control law grants broad authority over product standards, marketing, packaging and sales, with compliance costs not yet known and potentially substantial. Federal and state excise-tax increases, litigation, declining cigarette consumption, down-trading, illicit trade and competitive pressures pose continuing risks.
- Other unusual items: Nine-month SABMiller equity earnings included $183 million of gains related primarily to SABMiller share issuances. A tax-reserve reversal related to a Kraft tax matter was offset by a reduction in a Kraft receivable, leaving no net earnings impact. The 2008 comparison included a $404 million headquarters-sale gain and a $393 million loss on early debt extinguishment.
Most important facts for investors to verify
- Reconcile reported EPS guidance with the specified non-GAAP adjusted EPS measure and its excluded charges.
- Track cigarette and smokeless volumes, market share, pricing effects and the extent to which inventory changes explain shipment trends.
- Assess debt maturities, refinancing of the revolving facility, interest costs and the sustainability of the dividend following the buyback suspension.
- Monitor UST integration progress, actual synergies, final purchase accounting and remaining restructuring charges.
- Follow developments in tobacco litigation, including Engle-progeny cases, and the IRS leveraged-lease disputes and potential cash exposure.
- Evaluate the effects of FDA implementation, excise taxes and related costs on product demand, margins and compliance spending.