Altria Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in millions of dollars except per-share data. Altria’s businesses include U.S. tobacco products and wine, alongside significant equity investments in ABI, JUUL and Cronos.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenues | $6,367 | $6,619 | $12,726 | $12,247 |
| Gross profit | $3,287 | $3,319 | $6,160 | $6,130 |
| Operating income | $2,796 | $2,717 | $5,132 | $4,955 |
| Net earnings attributable to Altria | $1,943 | $1,996 | $3,495 | $3,116 |
| Diluted EPS attributable to Altria | $1.04 | $1.07 | $1.88 | $1.66 |
| Adjusted diluted EPS (non-GAAP) | $1.09 | $1.08 | $2.18 | $2.01 |
Q2 reported net revenue declined 3.8% and reported diluted EPS declined 2.8%; six-month revenue rose 3.9% and reported diluted EPS rose 13.3%. Calculated operating margin was approximately 43.9% in Q2 versus 41.0% a year earlier. Adjusted EPS is a company-defined non-GAAP measure and is not a substitute for GAAP results.
- Cash flow: Six-month operating cash flow was $4,946, versus $2,392 in 2019. Investing activities used $63, compared with $1,976 used in 2019, primarily reflecting the prior-year Cronos investment. Financing activities used $2,149.
- Liquidity: Cash and cash equivalents were $4,826 at June 30, up from $2,117 at year-end 2019. Current assets were $7,004 and current liabilities $9,400; management reported a working capital deficit and said it expected to fund needs through operating cash flow and capital-market access. The $3.0 billion revolving credit facility was fully repaid in June, leaving it available.
- Debt: Total debt was $29.0 billion, up from $28.0 billion at year-end. Altria issued $2.0 billion of notes in May and repaid $1.0 billion of notes at maturity in January. It reported covenant compliance and a 9.1-to-1.0 EBITDA-to-interest ratio against a 4.0-to-1.0 minimum.
- Dividends: $3,126 was paid in the first half. On July 27, the board declared a 2.4% increase to $0.86 quarterly per share, or $3.44 annualized; future payments remain at the board’s discretion.
Material changes and business trends
- Smokeable products: Six-month segment revenue increased 3.9% and adjusted operating companies income (OCI) rose 10.9%, supported by pricing and lower costs. Q2 segment revenue fell 4.3%; cigarette shipments declined 8.8% as reported, while management estimated a 2% decline after adjustments for trade inventory and other factors. Six-month cigarette shipments fell 1.9%, and cigarette retail share declined 0.8 percentage points.
- Oral tobacco: Six-month revenue grew 10.4% and adjusted OCI grew 10.5%. Reported shipment volume rose 2.8%, but segment retail share fell 2.9 percentage points. The on! pouch brand expanded to more than 40,000 stores by quarter-end.
- Wine: Six-month revenue declined 12.3%. Ste. Michelle recorded $394 in charges, principally a $292 inventory write-off and $100 estimated losses on non-cancelable grape commitments; segment reported OCI was a loss of $366, versus income of $34 in 2019. It expects approximately $25 of additional charges in 2020. The reset is expected to generate annual pre-tax cost savings of about $15 and cash savings of about $40 by 2021.
- Investments: Equity-investment earnings fell to $9 in Q2 from $447, and to $166 for the half from $533, reflecting lower ABI and Cronos contributions and special items. Altria recorded no impairment for ABI, JUUL or Cronos at June 30. ABI’s fair value was $9.7 billion against a $16.9 billion carrying value; Cronos fair value was approximately 7% below its $1.0 billion carrying value. JUUL’s carrying value remained $4.2 billion.
Outlook, commentary, risks and unusual items
- Altria reinstated 2020 adjusted diluted EPS guidance of $4.21–$4.38, implying 0%–4% growth over its 2019 adjusted base of $4.21, and forecasts an adjusted effective tax rate of 24%–26%. Guidance excludes specified special items; the filing does not provide a corresponding GAAP forecast or reconciliation.
- Management said tobacco operations and supply chains had not experienced material adverse effects from COVID-19 to date, but cited continuing uncertainty in consumer behavior, economic conditions, operations and investees. It planned to maintain a higher-than-normal cash balance. COVID-19 special charges were $50 in the first half.
- Altria expects to record in Q3 its share of ABI’s second-quarter Africa goodwill impairment and Australia-sale effects, with potentially material amounts not yet determined. ABI cut its final 2019 dividend by 50% and withdrew 2020 guidance; Altria reduced expectations for ABI earnings and dividends.
- Key exposures include tobacco-product regulation and taxation, declining cigarette volumes and changing consumer preferences, and substantial tobacco litigation. The FTC challenged Altria’s JUUL investment; the administrative trial was scheduled for April 2021. The filing listed 621 U.S. e-vapor cases in which Altria and/or subsidiaries were named, and noted related investigations and shareholder litigation.
- Other significant contingencies include non-cancelable grape commitments payable over five years, pending tobacco and health litigation, and disputes over Master Settlement Agreement adjustments. Management said losses in most pending litigation could not be reasonably estimated; adverse outcomes could materially affect results, cash flows or financial position.
Investor verification priorities
- Track ABI’s market value versus carrying value, subsequent impairment accounting and the effect on Altria’s equity earnings and dividend receipts.
- Monitor JUUL-related FTC, private antitrust, regulatory and product litigation developments, including potential effects on Altria’s investment and strategic rights.
- Assess whether the wine reset addresses excess inventory and grape commitments, and whether further charges or cash outflows arise.
- Compare full-year adjusted EPS guidance with realized results, while separating special items from GAAP earnings and cash generation.
- Review cigarette and oral-tobacco volume, retail-share trends, pricing, settlement payments and the sustainability of liquidity and dividends amid debt and litigation obligations.