Philip Morris International Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited interim results; amounts are in U.S. dollars unless otherwise noted. PMI sells cigarettes and nicotine products, including reduced-risk products (RRPs), outside the United States.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenues | $7.699B | $7.726B | $14.450B | $14.622B |
| Operating income | $3.187B | $3.093B | $5.237B | $5.519B |
| Net earnings attributable to PMI | $2.319B | $2.198B | $3.673B | $3.754B |
| Diluted EPS | $1.49 | $1.41 | $2.36 | $2.41 |
| Operating cash flow | Not separately provided | Not separately provided | $4.683B | $5.373B |
| Capital expenditures | Not separately provided | Not separately provided | $502M | $774M |
Q2 gross margin was approximately 65.4% versus 64.5%; operating margin was approximately 41.4% versus 40.0%. For the six-month periods, gross margin was approximately 64.5% versus 63.3%, while operating margin was approximately 36.2% versus 37.7%. Margins are calculated from reported net revenue and income figures.
At June 30, 2019, cash and cash equivalents were $4.008B; current assets were $17.163B and current liabilities $18.046B. Total debt was approximately $29.9B, including $4.762B of current long-term debt and $269M of short-term borrowings. PMI reported stockholders’ deficit of $9.409B. It had $8.0B in committed revolving credit facilities, all undrawn, and no commercial paper outstanding. The company reported an 11.0-to-1.0 covenant ratio against a minimum of 3.5-to-1.0.
Changes versus prior comparable periods
- Reported net revenue declined 0.3% in Q2 and 1.2% in the first half. Excluding unfavorable currency, revenue increased 5.4% and 4.4%, respectively; the reported figures also reflect RBH’s deconsolidation.
- Q2 operating income rose 3.0% and diluted EPS rose 5.7%. First-half operating income fell 5.1% and diluted EPS fell 2.1%. PMI said first-half EPS increased 11.2% after excluding specified currency, litigation, RBH, impairment and tax items.
- First-half RRP net revenue increased 26.2% to $2.709B; combustible-product revenue fell 5.9% to $11.741B. Q2 RRP revenue rose 43.7% to $1.466B, while combustible revenue declined 7.1% to $6.233B.
- First-half cigarette shipments declined 1.9%; heated tobacco unit shipments increased 29.2%. Q2 cigarette shipments declined 3.6%, while heated tobacco unit shipments rose 37.0%.
- Operating cash flow fell $690M year over year. Management attributed the decrease primarily to unfavorable currency and working-capital requirements, including cash used for receivables. First-half operating cash flow less capital expenditures was approximately $4.181B, compared with $4.599B in 2018.
Management outlook, risks and unusual items
- Management estimated a full-year 2019 effective tax rate of approximately 23%, excluding specified discrete tax events and the RBH deconsolidation loss. It expected 2019 capital expenditures of approximately $1.1B.
- PMI recorded first-half charges of $194M for Canadian tobacco litigation, $239M for the loss on deconsolidating RBH, and $43M for asset impairment and exit costs. These charges were included in marketing, administration and research costs. The filing identifies additional Colombia plant-closure exit costs of approximately $30M expected in the remainder of 2019.
- Following RBH’s March 22, 2019 filing for creditor protection under Canada’s CCAA, PMI deconsolidated RBH and recognized its continuing investment at a fair value of $3.280B. PMI said developments in the CCAA process could materially change that investment’s fair value. Canadian tobacco litigation is stayed through October 4, 2019; the length and outcome of the proceedings remain uncertain.
- PMI reported that management had not concluded a loss was probable, or estimable, for pending tobacco-related cases generally, and therefore had not accrued losses for those cases, except as specifically discussed. It warned that an adverse outcome could materially affect results, cash flows or financial position. Separate Thai customs/tax criminal proceedings seek fines originally stated at approximately $2.62B and $641M; PMI disputes the allegations and notes that a 2017 Thai law substantially limits potential fines.
- Key risks include declining cigarette consumption, excise-tax increases, regulation and restrictions on tobacco and RRPs, illicit trade, currency movements, competition, litigation, and the uncertain pace of RRP adoption. PMI also cited supply-chain and product-quality risks for RRPs. The FDA authorized U.S. sale of Platform 1 on April 30, 2019; its application for modified-risk claims remained under review.
- Management said disclosure controls were effective and there were no quarterly changes in internal control over financial reporting that materially affected, or were reasonably likely to materially affect, those controls.
Investor facts to verify
- Track whether RRP growth and pricing can offset declining cigarette shipments and adverse currency effects, particularly in East Asia & Australia and Latin America & Canada.
- Monitor RBH’s CCAA proceedings, the Canadian litigation stay and any changes to the $3.280B carrying value of PMI’s continuing investment.
- Review cash conversion, receivables and the use of receivables sales: $5.1B of receivables were sold in the first half, and $0.6B remained outstanding with financial institutions at June 30.
- Assess debt maturities, liquidity and dividend funding. PMI paid $3.557B in dividends in the first half and reported a $4.56 annualized dividend rate per share.
- Follow the stated tax-rate and capital-spending estimates, remaining Colombia exit costs, and material litigation or regulatory developments, including the unresolved MRTP review and Thai proceedings.