Philip Morris International Inc. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Swedish Match results are consolidated only from its November 11, 2022 acquisition date.
Business context
PMI sells cigarettes and smoke-free products, including heated tobacco, vapor and oral nicotine products, and is pursuing a transition toward a smoke-free portfolio. In November 2022 it acquired control of Swedish Match, adding the ZYN nicotine-pouch business. Smoke-free products were available in 73 markets at year-end. PMI also operates a Wellness and Healthcare segment.
Financial and operating performance
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net revenues | $31.762 billion | $31.405 billion | +1.1% reported; +8.0% excluding currency and acquisitions |
| Gross profit / margin | $20.360 billion / 64.1% | $21.375 billion / 68.1% | Margin compressed |
| Operating income / margin | $12.246 billion / 38.5% | $12.975 billion / 41.3% | Operating income down 5.6% reported; +6.7% excluding currency and acquisitions |
| Net earnings attributable to PMI | $9.048 billion | $9.109 billion | Down 0.7% |
| Diluted EPS | $5.81 | $5.83 | Down 0.3%; currency reduced EPS by $0.77, while operations contributed $0.57 of improvement |
| Operating cash flow | $10.803 billion | $11.967 billion | Down $1.2 billion, principally reflecting currency and working-capital needs |
| Capital expenditures | $1.077 billion | $748 million | Primarily smoke-free manufacturing investment |
| Total debt | $43.1 billion | $27.8 billion | Increase mainly associated with Swedish Match financing |
| Cash and cash equivalents | $3.207 billion | $4.496 billion | Lower year over year |
Reported revenue and profit comparisons were affected by substantial foreign-exchange headwinds, acquisitions and unusual items. PMI’s effective tax rate was 19.3%, versus 21.8% in 2021. The 2022 rate benefited in part from a deferred tax benefit associated with acquisition financing.
Smoke-free product revenue, including Wellness and Healthcare, was $10.190 billion, up from $9.338 billion. Combustible-product revenue was $21.572 billion, down from $22.067 billion. Cigarette shipments declined 0.5%, while heated tobacco unit shipments grew 14.9%; combined cigarette and heated tobacco shipments increased 1.6% to 731.1 billion units.
Liquidity indicators include current assets of $19.619 billion and current liabilities of $27.336 billion at year-end. PMI had $6.3 billion of committed revolving credit facilities, fully undrawn as of February 10, 2023. The filing reports a total debt figure of $43.1 billion; balance-sheet short-term borrowings and current and long-term debt together were approximately $43.1 billion.
Material changes versus FY2021
- Swedish Match was acquired for $14.46 billion in cash consideration at the acquisition date, net of acquired cash; PMI owned 94.81% at year-end. The acquisition added $13.3 billion of preliminary goodwill and substantially increased debt.
- PMI agreed to pay Altria $2.7 billion to regain U.S. IQOS commercialization rights. It paid $1.0 billion at signing; the remaining $1.7 billion plus 6% annual interest was due by July 2023. PMI expects to have full commercialization rights from May 1, 2024.
- Smoke-free products’ share of net revenues increased, while reported gross and operating margins declined. Management cited product mix, higher device volumes and costs, inflation, and acquisition-related accounting effects.
- Operating cash flow fell, and investing cash outflow rose to $15.679 billion, mainly due to the Swedish Match acquisition and the Altria payment. Financing cash flow turned positive as PMI borrowed to fund the acquisition.
- PMI suspended its share repurchase program in May 2022 following the Swedish Match offer. Dividends paid were $7.812 billion.
- PMI reorganized its geographical operations into four regions in January 2023 and said it would report under the new structure beginning in Q1 2023.
Outlook, management commentary, risks and unusual items
- Specified 2023 expectations: capital expenditures of approximately $1.3 billion and an effective tax rate of approximately 20.5%–21.5%, excluding discrete tax events. The filing text does not provide a clear company-wide 2023 revenue or EPS guidance figure.
- Management expects temporary margin dilution to continue as smoke-free products, particularly IQOS ILUMA, grow; device and consumable costs have not yet been fully optimized. Inflation in materials, wages, energy, logistics and financing costs may add pressure.
- Russia and Ukraine represented approximately 8% of 2022 net revenue. PMI recorded $151 million of pre-tax war-related charges. It suspended planned investment and scaled back manufacturing in Russia; its Ukrainian factory remained closed. Year-end assets were approximately $2.5 billion in Russia, including $578 million of cash held primarily in rubles, and approximately $414 million in Ukraine.
- Other material risks include tighter tobacco and nicotine regulation, excise-tax increases, restrictions on smoke-free products and claims, illicit trade, currency volatility, supply-chain constraints, litigation, and successful integration of acquisitions. The EU is set to ban characterizing flavors in heated tobacco products from October 23, 2023; management said it expects some consumer switching to non-flavored products to mitigate the effect.
- Pending tobacco litigation remains significant and uncertain. Management said it had not concluded that losses were probable or estimable for pending tobacco-related cases generally and had not accrued estimated losses for those cases. Canadian tobacco litigation is subject to a court stay; prior Quebec judgments have involved very large claimed damages.
- FY2022 notable charges and benefits included $151 million of Ukraine-war charges, $125 million of Swedish Match inventory step-up costs, $112 million of Wellness and Healthcare intangible impairment, and $116 million of Swedish Match offer-related costs. The acquisition purchase-price allocation remains preliminary.
- PMI announced a 15-year extension of its KT&G smoke-free product collaboration in January 2023. The agreement runs through January 29, 2038, with volume commitments reviewed in three-year cycles.
Important facts for investors to verify
- How quickly Swedish Match, especially ZYN, contributes to earnings and cash flow, and whether integration synergies offset added interest, amortization and acquisition costs.
- The refinancing or repayment plan for the $4.4 billion acquisition bridge borrowing due November 2023, and payment of the remaining Altria consideration due by July 2023.
- Whether smoke-free revenue growth can be sustained while improving margins, and the impact of the EU heated-tobacco flavor ban and other regulatory changes.
- How currency movements, inflation, working capital and Russia/Ukraine developments affect cash generation and debt reduction.
- Developments in major litigation and tax disputes, including the Canadian proceedings, Thailand cases and the German heated-tobacco excise surcharge.
- Acquisition accounting, including final Swedish Match intangible-asset valuations, and impairment risk in Wellness and Healthcare and Russia-related assets.