Philip Morris International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited and prepared under U.S. GAAP. PMI sells cigarettes and reduced-risk products primarily outside the United States, and is expanding into wellness and healthcare.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenues | $8.032 billion | $8.122 billion | $23.610 billion | $23.301 billion |
| Operating income | $2.968 billion | $3.455 billion | $9.322 billion | $10.028 billion |
| Net earnings attributable to PMI | $2.087 billion | $2.426 billion | $6.651 billion | $7.016 billion |
| Diluted EPS | $1.34 | $1.55 | $4.27 | $4.48 |
| Operating margin | 36.9% | 42.5% | 39.5% | 43.0% |
Operating margins are calculated from reported net revenues and operating income. Q3 net revenues decreased 1.1% as reported, but increased 6.7% excluding currency and acquisitions. Nine-month revenues increased 1.3% as reported and 8.1% excluding currency and acquisitions. Management cited favorable pricing and volume/mix, particularly heated tobacco unit (HTU) growth, alongside substantial unfavorable currency effects.
- Product mix and volumes: Nine-month net revenues were $16.432 billion from combustible products, down 0.9%, and $6.979 billion from reduced-risk products, up 3.8%. Total cigarette and HTU shipments rose 1.7% for the nine months; cigarette shipments rose 0.3%, while HTU shipments rose 10.9%. Q3 total shipments rose 0.6%, with HTUs up 17.1% and cigarettes down 1.7%.
- Cash flow: Nine-month operating cash flow was $7.710 billion, down from $7.935 billion. Investing cash use was $151 million versus $2.018 billion, mainly because the prior-year period included acquisition spending. Financing cash use was $6.071 billion versus $8.176 billion. Capital expenditures were $730 million.
- Liquidity and debt: Cash and cash equivalents were $5.368 billion at September 30. Total debt was $27.2 billion, compared with $27.8 billion at year-end 2021; reported short-term borrowings were $2.818 billion and long-term debt, including current portion, was $24.403 billion. Current assets of $19.035 billion were below current liabilities of $20.772 billion. The company had $6.3 billion of committed revolving credit facilities, entirely undrawn, and $2.6 billion of commercial paper outstanding.
- Shareholder distributions: PMI paid $5.839 billion in dividends during the nine-month period. The quarterly dividend was increased 1.6% to $1.27 per share, or an annualized $5.08. The share repurchase program was suspended in May 2022 following the Swedish Match offer.
Material changes and unusual items
- Reported nine-month operating income fell 7.0%, and PMI-attributable earnings fell 5.2%; diluted EPS declined 4.7%. Q3 operating income fell 14.1%, PMI-attributable earnings fell 14.0%, and diluted EPS declined 13.5%. Currency reduced nine-month diluted EPS by $0.58 and Q3 diluted EPS by $0.19, according to management.
- Results included $266 million of nine-month costs associated with the Swedish Match offer, including $227 million in Q3. The offer also drove rating outlook reviews or negative/watch designations from Moody’s, S&P and Fitch.
- PMI recorded $128 million of pre-tax charges related to the war in Ukraine for the first nine months, including inventory and machinery write-downs, receivable allowances and humanitarian support. A further $112 million pre-tax impairment of acquired Wellness and Healthcare intangible assets reflected lower estimated future cash flows.
- Comparability benefited from prior-year charges: $246 million related to Saudi Arabia customs assessments, $170 million of restructuring and exit costs, and a $51 million OtiTopic asset acquisition charge. These items partly explain the reported operating-income trend.
- Wellness and Healthcare reported nine-month revenue of $199 million and an operating loss of $216 million, versus a $51 million loss in the comparable 2021 period. The business includes Vectura, Fertin Pharma and OtiTopic.
Outlook, commentary and risks
- Management estimated a full-year 2022 effective tax rate of 21%–22%, excluding discrete tax events, and expected 2022 capital expenditures of approximately $1.0 billion. The filing does not provide a clear full-year EPS or revenue guidance figure in the supplied text.
- Management said inflation in materials, wages, energy and transportation could increase further, and that higher manufacturing and logistics costs were pressuring margins. It also noted that RRP growth, particularly IQOS ILUMA, could remain temporarily margin-dilutive as device and consumable costs are optimized.
- PMI had suspended planned investment and scaled down manufacturing in Russia, and said it was exploring an orderly exit. Ukraine operations remained disrupted, including the continued suspension of the Kharkiv factory. The company warned that the conflict could materially affect operations, cash flows and asset values; Russian and Ukrainian operations represented about 8% of nine-month net revenues and nearly 10% in Q3.
- Swedish Match offer: PMI increased its recommended cash offer to SEK 116 per share on October 20, after the quarter-end. The company expected completion in Q4 2022, subject to offer conditions. Financing facilities for the transaction were undrawn at September 30; the company warned acquisition debt could increase leverage and financing costs.
- Subsequent event: On October 20, PMI announced an agreement to end Altria’s U.S. IQOS commercialization relationship on April 30, 2024, after which PMI expects full U.S. commercialization rights. The $2.7 billion cash consideration included $1.0 billion paid at agreement inception and $1.7 billion plus 6% interest due by July 2023. PMI was evaluating the financial-statement impact.
- Key exposures include extensive tobacco-related litigation and regulation, including potentially significant claims in Canada, Brazil and Nigeria; patent disputes affecting IQOS; changing tobacco taxes and product rules; illicit trade; currency and inflation volatility; supply constraints for RRP devices and components; and uncertainty in integrating acquired healthcare businesses. Management generally had not accrued losses for pending tobacco litigation where loss was not assessed as probable and estimable.
Most important facts for investors to verify
- Whether currency headwinds, inflation and higher manufacturing costs continue to offset underlying pricing, volume and HTU growth.
- Progress, acceptance conditions, final funding and resulting leverage or credit-rating effects of the Swedish Match transaction.
- The financial-statement treatment and cash-flow impact of the $2.7 billion IQOS U.S. agreement with Altria.
- Developments in Russia and Ukraine, including the feasibility and value of a Russian exit, asset impairment risks and any further charges.
- Whether Wellness and Healthcare can improve profitability after the impairment and ongoing R&D and integration costs.
- Changes in significant litigation, product authorizations and regulation, particularly for IQOS and other reduced-risk products.