Philip Morris International Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. PMI manufactures and sells cigarettes, other tobacco products, and nicotine products outside the United States; its products are sold in more than 180 markets.
Financial and operating results
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenues, including excise taxes | $80.106 billion | $80.029 billion | +0.1% |
| Net revenues, excluding excise taxes | $29.767 billion | $31.217 billion | -4.6% |
| Gross profit | $19.331 billion | $20.807 billion | -7.1% |
| Operating income | $11.702 billion | $13.515 billion | -13.4% |
| Net earnings attributable to PMI | $7.493 billion | $8.576 billion | -12.6% |
| Diluted EPS | $4.76 | $5.26 | -9.5% |
| Net cash from operating activities | $7.739 billion | $10.135 billion | -23.6% |
| Capital expenditures | $1.153 billion | $1.200 billion | -3.9% |
Operating margin was approximately 14.6% of reported net revenues, down from 16.9% in 2013. Reported net revenues include excise taxes, which were $50.339 billion in 2014. Operating cash flow less capital expenditures was approximately $6.586 billion, calculated from the figures above.
Quarterly data show fourth-quarter 2014 net revenues of $19.941 billion, net earnings attributable to PMI of $1.612 billion, and diluted EPS of $1.03, versus $20.390 billion, $1.987 billion, and $1.24, respectively, in fourth-quarter 2013.
Material changes and segment performance
- Total cigarette shipments declined 2.8% to 856.0 billion units; estimated international market share was 15.6%, versus 15.7% in 2013. Shipments of Marlboro also fell 2.8%.
- Currency reduced net revenues excluding excise taxes by approximately $2.1 billion and operating income by approximately $1.5 billion. Price increases contributed approximately $1.9 billion to net revenues excluding excise taxes, partly offsetting currency and unfavorable volume/mix.
- Operating companies income increased 9.1% in EEMA to $4.121 billion, supported by pricing and higher equity income. It fell 12.1% in the EU to $3.727 billion, 31.0% in Asia to $3.187 billion, and 9.2% in Latin America & Canada to $1.030 billion.
- 2014 included $535 million in pre-tax asset impairment and exit costs, compared with $309 million in 2013. The largest item was the Netherlands factory closure; production there ceased in September 2014.
- Total debt rose to $29.455 billion from $27.678 billion; long-term debt was $26.929 billion. Cash and cash equivalents were $1.682 billion, and stockholders’ deficit widened to $11.203 billion.
Liquidity, capital allocation, and outlook
PMI reported $8.0 billion of committed revolving credit facilities, all available at February 19, 2015, and no commercial paper outstanding at year-end. Its credit-facility EBITDA-to-interest covenant ratio was 12.2:1 against a minimum of 3.5:1. The company said operating cash flow, commercial paper capacity, and committed facilities should meet liquidity needs.
Cash used in financing activities was $6.839 billion. PMI paid $6.035 billion in dividends and repurchased $3.833 billion of shares during 2014. It announced no planned share repurchases in 2015, subject to review as currency conditions evolved. The quarterly dividend was increased to $1.00 per share in the third quarter; the annualized rate was $4.00.
Management forecast 2015 reported diluted EPS of $4.27–$4.37 at exchange rates prevailing when announced, including an estimated unfavorable currency impact of approximately $1.15 per share. Excluding that currency impact, the forecast represented 8%–10% growth versus 2014 adjusted diluted EPS of $5.02. The forecast includes increased iQOS spending and excludes future acquisitions, unanticipated impairment or exit charges, future currency changes, and unusual events. PMI expected 2015 capital expenditures of approximately $1.2 billion and an effective tax rate of approximately 29%.
Management commentary, risks, and contingencies
- Management attributed the decline in earnings primarily to unfavorable currency, lower volume/mix, higher manufacturing and marketing costs, and increased exit charges. Productivity savings exceeded the company’s approximately $300 million 2014 target.
- PMI was developing reduced-risk products, with iQOS pilots launched in Nagoya and Milan in November 2014. Scientific studies and regulatory review remained necessary before reduced-exposure or reduced-risk claims could be made. National expansion in Japan and Italy was planned for 2015.
- Key business risks include excise-tax increases, declining cigarette consumption, regulation of marketing and packaging, plain-packaging proposals, illicit trade, down-trading, intense competition, currency volatility, and political disruption, including developments in Russia, Ukraine, and the Middle East.
- Numerous tobacco-related cases and governmental investigations remained pending. Management said no loss was considered probable and reasonably estimable for pending tobacco litigation, so no estimated loss was accrued; it acknowledged an unfavorable outcome could materially affect results, cash flows, or financial position. The Thailand investigation included proposed allegations of approximately $2 billion in duties and taxes for 2003–2007, with criminal charges described as probable based on information available to PMI.
- The 2014 Netherlands closure program was expected to result in total pre-tax charges of approximately $547 million. Approximately $270 million of exit-cost cash payments remained at year-end, substantially expected to be paid by the end of 2015.
Investor verification priorities
- Verify the drivers and persistence of the large currency and volume/mix effects, including 2015 exchange-rate assumptions.
- Track cigarette shipment trends, market share, and pricing by region, especially in Asia, Russia, and the EU.
- Assess debt growth, cash generation, dividend coverage, and the decision to pause buybacks.
- Review the timing, cost, and regulatory and scientific milestones for iQOS and other reduced-risk products.
- Monitor tobacco litigation, the Thailand investigation, and implementation or legal challenges to major regulatory changes.
- Confirm the remaining cash costs of restructuring and the delivery of stated productivity and cost-base plans.