Philip Morris International Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited. PMI manufactures and sells cigarettes and other tobacco products outside the United States through four geographic segments.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenues, including excise taxes | $18.022 billion | $16.530 billion | +9.0% |
| Net revenues, excluding excise taxes | $7.448 billion | $6.791 billion | +9.7% |
| Operating income | $3.403 billion | $3.007 billion | +13.2% |
| Net earnings attributable to PMI | $2.161 billion | $1.919 billion | +12.6% |
| Diluted EPS | $1.25 | $1.06 | +17.9% |
| Operating cash flow | $1.898 billion | $2.395 billion | Down $497 million |
| Capital expenditures | $227 million | $159 million | Up $68 million |
Gross profit was $5.006 billion versus $4.496 billion; gross margin on reported net revenues was approximately 27.8% versus 27.2%. Operating margin on reported net revenues was approximately 18.9% versus 18.2%. Excise taxes were $10.574 billion, up 8.6%, and constitute a substantial portion of reported revenue.
Cigarette shipments rose 5.4% to 219.1 billion units. Excluding excise taxes, revenue growth reflected favorable volume/mix (+$370 million) and pricing (+$369 million), partly offset by unfavorable currency (-$92 million). Operating income benefited mainly from pricing and volume/mix, with higher marketing and manufacturing costs and unfavorable currency as offsets. Net interest expense was unchanged at $213 million. The effective tax rate increased to 30.0% from 28.9%.
Segments and material changes
- Asia: Operating companies income increased 28.7% to $1.407 billion; revenue excluding excise taxes rose 19.5%. Growth reflected volume/mix, pricing and favorable currency.
- Eastern Europe, Middle East & Africa: Operating companies income increased 12.2% to $810 million; revenue excluding excise taxes rose 8.8%, driven by pricing and volume/mix.
- European Union: Operating companies income increased 2.4% to $1.030 billion. Cigarette shipments declined 1.5%, and segment market share fell 0.5 percentage points to 37.3%.
- Latin America & Canada: Operating companies income decreased 5.6% to $237 million; revenue excluding excise taxes was nearly flat, up 0.4%. Currency and higher manufacturing costs weighed on results.
Currency reduced reported net revenues by $587 million and revenue excluding excise taxes by $92 million. Lower share count from repurchases contributed $0.05 to the year-over-year diluted EPS increase; operations contributed $0.16, while currency reduced EPS by $0.02. Prior-year tax items and asset-impairment charges also affected the comparison.
Cash, debt and liquidity
Cash and cash equivalents were $3.576 billion at March 31, 2012, up from $2.550 billion at year-end. Total debt was $20.8 billion, up from $18.5 billion; short-term borrowings were $4.085 billion and long-term debt, including its current portion, totaled $16.756 billion. The company reported total committed credit facilities of $6.0 billion with no borrowings outstanding under those facilities; $3.7 billion of commercial paper was outstanding. The covenant EBITDA-to-interest ratio was 16.2:1 against a 3.5:1 minimum. Operating cash flow fell primarily because of unfavorable working-capital movements, including timing of excise-tax payments.
Q1 financing included $1.5 billion of share repurchases and $1.338 billion of dividends paid. PMI announced a $6.0 billion 2012 repurchase target and had completed $9.9 billion of its three-year $12 billion program through March 31. The quarterly dividend was $0.77 per share. In March, PMI issued $1.25 billion of U.S. dollar notes; net proceeds were $1.220 billion.
Outlook, risks and contingencies
- On April 19, 2012, PMI forecast full-year 2012 reported diluted EPS of $5.20–$5.30 at prevailing exchange rates, versus $4.85 in 2011. Excluding forecast unfavorable currency impact of about $0.15, adjusted EPS was projected to grow approximately 10%–12% versus 2011 adjusted EPS of $4.88. Adjusted EPS is a non-GAAP measure.
- Management cautioned that Q2 comparisons would be difficult because of exceptional Japanese market conditions in 2011 following the tsunami. Guidance excludes potential acquisitions, unanticipated impairment/exit charges and unusual events.
- Management set a 2012 gross productivity and cost-savings target of approximately $300 million and expected modest tobacco-leaf price increases, with additional cost pressure from historical leaf purchases, cloves and other materials.
- Risks include excise-tax increases, regulation of marketing and products, plain packaging, illicit trade, currency fluctuations, competition, political and economic disruption, and tobacco litigation. Australia’s plain-packaging requirements were scheduled to take effect December 1, 2012; PMI was pursuing international arbitration and Australian court challenges. Brazil adopted a broad flavoring-ingredient restriction, with compliance scheduled by September 2013; PMI was evaluating available legal protections.
- PMI disclosed extensive tobacco-related litigation. Management did not consider losses probable and estimable for pending tobacco cases and recorded no estimated loss for them; it warned that an adverse outcome could materially affect results, cash flows or financial position. In Thailand, a proposed customs/excise case of approximately $2 billion had received a non-prosecution order from the Public Prosecutor, but was referred to the Attorney General after disagreement from the investigation agency; a separate inquiry cited approximately $1.8 billion.
- Tax examinations could change unrecognized tax benefits, interest or penalties within 12 months; PMI could not estimate the amount. The filing also reports $0.8 billion of guarantees, primarily related to excise taxes, with no associated balance-sheet liability.
Most important facts for investors to verify
- Whether volume, pricing and favorable product/geographic mix continue to offset currency pressure, excise-tax increases and weakness in selected markets.
- Progress against the $5.20–$5.30 reported EPS forecast, including the currency assumptions and the difficult Japanese comparison in Q2.
- Working-capital trends and the effect of excise-tax payment timing on operating cash flow.
- Debt growth, commercial-paper reliance, liquidity access and continued compliance with credit-facility covenants.
- Developments in tobacco litigation, the Thailand tax investigations, and regulatory challenges involving Australian packaging and Brazil’s ingredient restrictions.