Altria Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Altria’s principal businesses are U.S. smokeable and oral tobacco products, alongside investments and smoke-free initiatives.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net revenues | $5.719 billion | $5.892 billion; down 2.9% |
| Gross profit | $3.329 billion | $3.373 billion; down 1.3% |
| Operating income | $2.757 billion | $2.884 billion; down 4.4% |
| Net earnings | $1.787 billion | $1.959 billion; down 8.8% |
| Diluted EPS | $1.00 | $1.08; down 7.4% |
| Adjusted net earnings and diluted EPS (non-GAAP) | $2.118 billion; $1.18 | $2.047 billion; $1.12; up 3.5% and 5.4%, respectively |
| Operating cash flow | $2.984 billion | $3.075 billion |
| Cash used in investing / financing | $56 million / $3.045 billion | $34 million / $2.232 billion |
GAAP results included a $250 million non-cash loss on the disposition of Altria’s JUUL equity securities and $111 million of tobacco-related and other litigation charges, including a $98 million provision related to shareholder derivative litigation. Adjusted measures exclude specified items and are not GAAP measures.
At March 31, 2023, cash and cash equivalents were $3.913 billion. Debt was $25.387 billion ($1.339 billion current and $24.048 billion long-term), down from $26.680 billion at year-end, after repayment at maturity of $1.3 billion of Euro notes. The company had $3.0 billion available under its revolving credit agreement and reported compliance with its covenants; its rolling covenant EBITDA-to-interest ratio was 10.9x against a 4.0x minimum. Stockholders’ equity was a deficit of $3.826 billion. Q1 dividends paid were $1.683 billion; the annualized dividend rate was $3.76 per share.
Performance changes and business trends
- Smokeable products: Revenue was $5.090 billion, down 3.3%; segment OCI was $2.503 billion, down 2.2%. Cigarette shipments fell 11.4%, and cigarette retail share declined 1.1 percentage points to 47.0%. Management estimated U.S. cigarette industry volume declined 9%, adjusted for specified factors. Higher pricing partly offset lower volumes.
- Oral tobacco: Revenue was $628 million, up 2.4%; OCI was $416 million, up 2.2%. Shipment volume declined 1.8%. The on! pouch brand’s shipments rose 37.7%, while Copenhagen and Skoal shipments declined.
- Management attributed the GAAP earnings decline mainly to lower operating income and unfavorable investment results, partly offset by lower net interest expense. Adjusted earnings growth reflected higher ABI equity income, lower interest expense and fewer shares outstanding.
- The company cited inflation, pressure on consumers’ disposable income, discount-product competition, declining cigarette consumption, evolving product preferences, supply-chain disruption and regulatory developments as ongoing business factors.
Outlook, transactions and risks
- Altria forecast 2023 full-year adjusted diluted EPS of $4.98–$5.13, representing 3%–6% growth over its 2022 adjusted base of $4.84. The forecast includes planned smoke-free investments but excludes potential financial impacts of the NJOY transaction and certain unpredictable special items; it is not reconciled to a GAAP forecast.
- Altria agreed to acquire NJOY for about $2.75 billion in cash, plus up to $500 million contingent on regulatory outcomes for certain products. The deal remained subject to customary conditions, including FTC clearance, and had no financing condition.
- Altria transferred its JUUL equity securities in March in exchange for a non-exclusive, irrevocable global license to certain heated-tobacco intellectual property. The FTC’s challenge to Altria’s former JUUL investment remained pending after an administrative law judge dismissed the complaint; Altria’s motion to dismiss or stay was unresolved at the filing date.
- Altria expected about $1.7 billion plus interest from PMI by July 2023 under the IQOS rights agreement, following a $1.0 billion payment in 2022. The U.S. IQOS products had been removed from the market following an ITC exclusion order, affirmed on appeal in March 2023.
- Material risks include tobacco and JUUL-related litigation, regulatory restrictions and potential product standards, excise taxes, declining cigarette volumes, consumer trade-down, illicit trade, supply disruptions, investment volatility and execution or approval risks for strategic transactions. Management said pending litigation losses were generally not considered probable or reasonably estimable, while warning that adverse outcomes could materially affect results or cash flows.
- State settlement payments and FDA user fees were estimated to average about $4.0 billion annually over the next three years, excluding potential NPM adjustment items. Altria paid approximately $3.2 billion in April 2023 for 2022 accrued state settlement amounts.
Most important facts for investors to verify
- Whether NJOY received FTC clearance, closed on the stated terms, and achieved relevant product authorizations; confirm any contingent consideration.
- Progress against the $4.98–$5.13 adjusted EPS outlook and the assumptions behind cigarette volumes, pricing, consumer trade-down and smoke-free adoption.
- Developments in tobacco, JUUL and shareholder litigation, including the FTC proceeding and the shareholder derivative settlement provision.
- Resolution of the tax position related to the former JUUL investment: Altria expected to claim an approximately $6.5 billion ordinary loss for cash-tax purposes, while recording unrecognized tax benefits pending IRS review.
- Debt, cash generation, dividends and the timing and use of PMI’s expected payment; assess these alongside recurring settlement payments and the proposed NJOY purchase price.