Altria Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results. Altria’s core business is U.S. tobacco products, with smokeable and oral tobacco segments and significant equity investments, including ABI, JUUL and Cronos.
Financial performance
Unless otherwise noted, amounts are in U.S. dollars. Revenue includes excise taxes billed to customers.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net revenues | $6.543 billion | $6.936 billion | $12.435 billion | $12.972 billion |
| Operating income | $3.105 billion | $3.186 billion | $5.989 billion | $5.876 billion |
| Net earnings attributable to Altria | $891 million | $2.149 billion | $2.850 billion | $3.573 billion |
| Diluted EPS attributable to Altria | $0.49 | $1.16 | $1.57 | $1.93 |
| Adjusted diluted EPS | $1.26 | $1.23 | $2.38 | $2.30 |
| Operating cash flow | Not provided separately | Not provided separately | $2.561 billion | $2.679 billion |
Q2 revenue fell 5.7% and reported net earnings fell 58.5%; first-half revenue fell 4.1% and reported net earnings fell 20.2%. Altria attributed the revenue declines mainly to lower smokeable and oral tobacco sales and the 2021 sale of its wine business. Reported earnings were heavily affected by a $1.155 billion non-cash JUUL fair-value loss in Q2 and a $1.255 billion loss in the first half. Adjusted first-half EPS rose 3.5%; adjusted Q2 EPS rose 2.4%.
Q2 gross profit was $3.666 billion and operating income was $3.105 billion. Calculated using reported net revenues, gross margin was approximately 56.0% and operating margin approximately 47.5%. First-half gross profit was $7.039 billion, approximately 56.6% of net revenues; operating margin was approximately 48.2%.
Segments: First-half smokeable OCI was $5.321 billion, up 3.4% reported and 2.9% adjusted; adjusted OCI margin was 59.3%. Oral tobacco OCI was $837 million, down 3.1% reported and 7.1% adjusted; adjusted OCI margin was 68.8%. In Q2, smokeable adjusted OCI increased 0.6%, while oral tobacco adjusted OCI decreased 8.9%.
Cash, debt and capital allocation
- Cash and cash equivalents were $2.567 billion at June 30, 2022, down from $4.544 billion at year-end 2021. Total long-term debt carrying value was $27.680 billion, including $2.634 billion classified as current. Debt fair value was $23.956 billion.
- First-half operating cash flow was $2.561 billion, versus $2.679 billion. Capital expenditures were $83 million; calculated operating cash flow less capital expenditures was $2.478 billion. Cash used in investing was $150 million and cash used in financing was $4.373 billion.
- Altria paid $3.279 billion in dividends and repurchased $1.083 billion of shares in the first half. The annualized dividend rate was $3.60 per share; $742 million remained under the share repurchase authorization at June 30.
- The $3.0 billion revolving credit facility was fully available, with no borrowings outstanding. Altria reported a 10.7-to-1 covenant EBITDA-to-interest ratio against a 4.0-to-1 minimum and compliance with covenants. Management said liquidity sources were sufficient for projected needs.
Outlook, commentary and material risks
- Management forecast 2022 adjusted diluted EPS of $4.79–$4.93, growth of 4%–7% over 2021 adjusted EPS of $4.61. The outlook includes planned smoke-free investments and anticipated inflation in settlement and material costs; it assumes PM USA will not have access to IQOS in 2022. The company cautioned that the external environment remained dynamic.
- The FDA issued marketing denial orders in June for JUUL’s U.S. products. In July, it temporarily stayed the orders for additional review, and JUUL products remained on the market at the filing date. Altria’s investment value fell to $450 million from $1.705 billion at year-end, producing the $1.255 billion first-half non-cash loss. Further regulatory, liquidity, litigation or market deterioration could reduce the value further.
- Altria recorded a $107 million non-cash impairment on Cronos in Q2. ABI’s fair value was $1.1 billion below carrying value at June 30; management deemed the decline temporary and recorded no impairment. Currency movements, economic conditions and ABI’s exposure to Russia and Ukraine were cited as factors.
- Inflation, high fuel prices, supply-chain disruption, COVID-19 effects and the Russia-Ukraine conflict may pressure consumer purchasing, costs and availability of materials. Management noted increased discount-brand share and lower cigarette shipments. Estimated domestic cigarette industry volume declined 7.5% in the first half, adjusted for inventory movements and other factors.
- Regulatory risks include potential FDA product standards for menthol cigarettes, flavored cigars and nicotine levels in combustibles, as well as product authorization requirements. IQOS had been removed from the U.S. market following an ITC patent order.
- Litigation includes thousands of JUUL-related e-vapor cases and ongoing tobacco-related claims. The company stated that, outside specified matters, it had not concluded losses in pending cases were probable and could not estimate potential loss ranges. Outcomes could nevertheless materially affect results, cash flows or financial position.
- Other notable items: first-half income tax rate was 33.4%, versus 26.3% a year earlier, primarily reflecting valuation allowances associated with JUUL fair-value declines. The 2021 comparison also included a $649 million pre-tax debt-extinguishment loss, which did not recur in 2022.
Investor verification priorities
- Track the FDA’s additional review of JUUL’s applications, the status of the temporary stay, and JUUL’s liquidity and litigation exposure.
- Reconcile reported and adjusted earnings, particularly the treatment of JUUL and Cronos investment losses and related tax valuation allowances.
- Monitor cigarette and oral tobacco shipment and retail-share trends, discount-product mix, pricing, and whether pricing offsets volume declines.
- Review the assumptions behind the EPS guidance, including inflation, MSA payments, supply costs, smoke-free investment spending and IQOS availability.
- Assess cash generation against dividends, buybacks, debt maturities and settlement obligations; verify the expected repayment of $1.1 billion of notes due August 2022.
- Follow material litigation developments, including JUUL class certification and appeals, tobacco verdicts, and potential settlement or bonding requirements.