Altria Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Altria’s core businesses include U.S. smokeable and oral tobacco products, wine, and other activities; it also holds investments in ABI, JUUL and Cronos. Amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenues | $6.036 billion | $6.359 billion | Down 5.1% |
| Gross profit | $3.272 billion | $2.873 billion | Up 13.9% |
| Operating income | $2.690 billion | $2.336 billion | Up 15.2% |
| Net earnings attributable to Altria | $1.424 billion | $1.552 billion | Down 8.2% |
| Reported diluted EPS | $0.77 | $0.83 | Down 7.2% |
| Adjusted net earnings attributable to Altria | $1.983 billion | $2.034 billion | Down 2.5% |
| Adjusted diluted EPS | $1.07 | $1.09 | Down 1.8% |
| Cash provided by operating activities | $3.040 billion | $3.129 billion | Down $89 million |
| Capital expenditures | $26 million | $52 million | Down $26 million |
Gross profit margin, calculated as gross profit divided by reported net revenues, was approximately 54.2%, versus 45.2% in Q1 2020. This comparison reflects, in part, the prior-year wine inventory charges. Interest and other debt expense was $308 million, up from $275 million. The income tax provision was $516 million, versus $558 million.
Cash and cash equivalents were $5.792 billion at March 31, 2021. Total debt was $29.680 billion, comprising $1.500 billion current and $28.180 billion long-term. Current assets of $8.029 billion were below current liabilities of $10.004 billion; management said it expected to fund working-capital needs through operating cash flow and capital-market access. The $3.0 billion revolving credit facility was undrawn, and Altria reported covenant compliance, with a 9.2-to-1 EBITDA-to-interest ratio against a 4.0-to-1 minimum.
Dividends paid were $1.601 billion. The current annualized dividend rate was $3.44 per share. Altria repurchased approximately 6.9 million shares for $325 million during the quarter; $1.675 billion remained under its $2.0 billion repurchase authorization.
Segments and changes versus prior period
- Smokeable products: Revenue was $5.250 billion, down 6.4%; operating companies income (OCI) was $2.372 billion, essentially flat. Adjusted OCI was $2.375 billion, down 0.7%. Cigarette shipments declined 12.0% as reported; the company estimated a 3.5% decrease after adjusting for trade inventories, shipping days and other factors. Marlboro retail share rose 0.4 percentage point to 43.1%, while total cigarette share was unchanged at 49.0%.
- Oral tobacco products: Revenue was $626 million, up 4.2%; reported OCI fell 5.3% to $392 million, reflecting higher costs, including $37 million of acquisition-related costs. Adjusted OCI rose 3.1% to $429 million. Shipment volume increased 0.6%; category retail share fell 2.3 points to 48.1%, with growth in on! offset by share losses in established brands. on! was available in approximately 93,000 stores.
- Wine: Revenue was $150 million, up 2.7%. OCI improved to $18 million from a $379 million loss, principally because Q1 2020 included $392 million of strategic-reset charges, including inventory write-offs and grape commitment losses. Adjusted OCI rose to $19 million from $13 million.
Reported operating income benefited from the absence of the large 2020 wine charges. Reported earnings were weighed down by a $649 million pre-tax loss on early debt extinguishment and a $200 million non-cash loss from the fair-value decline in JUUL. Adjusted results exclude specified items and are non-GAAP measures.
Debt, investments and unusual items
- In February 2021, Altria issued $5.5 billion of long-term notes, with maturities from 2032 to 2061 and coupons from 2.450% to 4.000%. It used proceeds to fund tender offers for $4.042 billion principal amount of existing notes and redeemed $1.0 billion of 3.490% notes due 2022. The transactions reduced nearer-term maturities and lowered the weighted-average coupon on total long-term debt to 4.0% from 4.1%.
- The $649 million debt-extinguishment loss included $623 million of premiums and fees and $26 million of write-offs of unamortized discounts and issuance costs.
- Altria’s ABI investment had a carrying value of $17.4 billion but a fair value of $12.4 billion at quarter-end, approximately 28% below carrying value. Management considered the decline temporary and recorded no impairment; it cited ABI’s financial condition and recovery prospects. An impairment, if later deemed necessary, could materially affect earnings or financial position.
- Altria recorded a $200 million non-cash unrealized loss on JUUL, taking the investment’s carrying value to $1.505 billion. The valuation reflected lower projected U.S. revenues amid competition and a higher discount rate, as well as regulatory, litigation and market uncertainty.
- Altria recorded $110 million of non-cash Cronos-related derivative gains, compared with $137 million of losses in Q1 2020. Its Cronos equity-method share included a $67 million loss.
- Settlement charges recorded in cost of sales for state tobacco settlement agreements and FDA user fees were approximately $1.0 billion, compared with $1.1 billion. Altria estimated an average of $4.5 billion annually in such charges over the next three years, excluding potential NPM adjustment items.
Guidance, management commentary and risks
Altria forecast 2021 adjusted diluted EPS of $4.49–$4.62, growth of 3%–6% from its 2020 adjusted base of $4.36, and an adjusted effective tax rate of 24.5%–25.5%. Management expected adjusted EPS growth in the final three quarters of 2021. Guidance includes planned investment in non-combustible products, consumer engagement and research and development, and excludes certain items it said could be unusual, infrequent or difficult to predict. These are non-GAAP forecasts; the filing does not provide corresponding GAAP guidance.
Management said tobacco operations had not experienced material adverse effects from COVID-19 to date, while continuing to monitor consumer behavior, economic conditions, supply and distribution chains, and vaccine rollout. Wine and investee businesses were affected by pandemic-related conditions. Key business risks include declining cigarette consumption, shifts to non-combustible products, competition and discounting, excise taxes, FDA actions and product authorization, and litigation.
Legal and regulatory exposures include approximately 2,150 U.S. e-vapor lawsuits naming Altria and/or subsidiaries as of April 26, 2021, alongside JUUL; an FTC administrative challenge to Altria’s 35% JUUL investment, with trial scheduled for June 2021; and other antitrust, shareholder, product-liability and tobacco litigation. Management said it generally could not conclude that losses in pending cases were probable and reasonably estimable, while warning that adverse outcomes could materially affect results, cash flows or financial position. Tobacco settlement adjustment disputes and potential regulatory restrictions, including on flavors and menthol, are also significant uncertainties.
Subsequent event: In April 2021, Altria purchased the remaining 20% interest in the U.S. and Canada on! business, completing its acquisition of the global on! business; the disclosed total purchase price for the December 2020 and April 2021 transactions was approximately $250 million.
Important facts for investors to verify
- How cigarette shipment declines, pricing and promotional spending affect future smokeable-segment margins and share.
- Whether on! distribution and capacity expansion translate into sustained oral-product growth and improved segment share.
- The assumptions behind Altria’s JUUL fair value, its exposure to the FTC case and related litigation, and the status of product authorizations.
- Whether ABI’s market value recovers sufficiently to support management’s no-impairment conclusion.
- Future tobacco settlement and FDA user-fee charges, NPM dispute outcomes, and potential litigation cash requirements.
- Progress against 2021 adjusted EPS guidance, including the expected timing of growth and the non-GAAP exclusions.