Altria Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited. Altria’s principal businesses include U.S. smokeable and smokeless tobacco, wine, and investments in ABI, JUUL and Cronos.
Financial performance
- Q2 revenue and earnings: Net revenue was $6.619 billion, up 5.0% year over year; gross profit was $3.319 billion; operating income was $2.717 billion, up 8.8%. Net earnings attributable to Altria were $1.996 billion, up 6.4%, and diluted EPS was $1.07, up 8.1%.
- First-half results: Net revenue was $12.247 billion, down 1.3%; operating income was $4.955 billion, up 2.9%. Net earnings attributable to Altria fell 17.3% to $3.116 billion, and diluted EPS declined 16.6% to $1.66.
- Margins: Q2 gross margin was approximately 50.1% versus 49.8% a year earlier; operating margin was approximately 41.0% versus 39.6%. First-half gross and operating margins were approximately 50.1% and 40.5%, respectively, versus 49.0% and 38.8% in 2018.
- Cash flow: First-half operating cash flow was $2.392 billion, down from $3.850 billion, primarily due to higher settlement payments and lower ABI dividends. Investing cash outflow was $1.976 billion, including $1.832 billion for Cronos. Financing cash outflow was $13 million. Cash and cash equivalents were $1.796 billion at June 30.
- Debt and liquidity: Total debt was approximately $29.2 billion, versus $25.7 billion at year-end 2018; no short-term borrowings were outstanding. Altria had $3.0 billion available under its revolving credit facility and reported covenant EBITDA-to-interest coverage of 9.5x, against a 4.0x minimum. Management said liquidity and capital-market access were adequate for foreseeable needs.
- Shareholder returns: First-half dividends declared were $1.60 per share; dividends paid totaled $3.001 billion. The annualized dividend rate was $3.20 per share. Altria completed its prior $2 billion repurchase program in June and announced a new $1 billion authorization in July.
Changes versus prior comparable periods
- Q2 operating results improved, led by higher smokeable and smokeless segment income, pricing and lower spending. First-half revenue declined amid lower smokeable sales volume, while operating income increased.
- First-half GAAP earnings were weighed down by a $691 million loss on Cronos-related financial instruments and higher interest expense following the JUUL- and Cronos-related borrowing. The company reported $544 million of net pre-tax Cronos-related special-item losses for the first half, including the offsetting share of Cronos earnings.
- First-half operating cash flow fell substantially, particularly reflecting $1.435 billion of cash payments for accrued settlement charges. The company also issued long-term notes and repaid the $12.8 billion term loan used to finance the JUUL investment.
- Smokeable segment first-half operating companies income rose 1.5%, while reported cigarette shipments fell 7.0%; total cigarette retail share declined 0.6 percentage points to 49.8%. Smokeless income increased 8.8%, despite a 2.9% shipment-volume decline. Wine income fell 22.7% for the first half.
Outlook, risks and unusual items
- Guidance: Altria reaffirmed 2019 adjusted diluted EPS growth of 4%–7% over its 2018 adjusted base of $3.99, and an adjusted effective tax rate of 23.5%–24.5%. Guidance excludes specified special items and has no corresponding GAAP reconciliation because their future effects cannot be estimated. Management assumed little-to-no adjusted earnings or cash contributions from JUUL and Cronos.
- Management expected cost-reduction savings to reach an annualized approximately $575 million by year-end 2019, alongside increased interest costs and investment in PM USA’s IQOS lead-market plans. The estimated 2019 cigarette-industry volume decline was revised to 5%–6%; the estimated annual decline through 2023 was widened to 4%–6%.
- Key uncertainties include tobacco litigation and settlement obligations; FDA actions and product-authorization requirements; possible restrictions on flavored products, menthol and nicotine; rising taxes; declining tobacco consumption and illicit trade; and the ability to realize value from JUUL and Cronos. Altria held a 35% economic interest in JUUL, subject to antitrust clearance for conversion of its non-voting shares, and a 45% interest in Cronos.
- Management said pending tobacco litigation losses were not considered probable or reasonably estimable, except for specified accrued matters; accordingly, many potential losses were not accrued. Unfavorable outcomes could materially affect results, cash flows or financial position. The filing also describes newly filed JUUL-related lawsuits.
- Other notable items: the cost-reduction program and product-effort refocus generated restructuring and implementation charges; the first-half income-tax rate was 24.3%; adoption of the new lease standard was not material.
Investor verification priorities
- Track cigarette and smokeless volume, retail share and pricing to assess whether pricing offsets category declines.
- Review JUUL’s regulatory, litigation and antitrust developments, and Cronos investment performance and valuation volatility.
- Monitor debt, interest costs, settlement cash payments and operating cash flow, as well as dividend coverage and execution of the new buyback authorization.
- Follow tobacco litigation and NPM adjustment disputes, including potential payments or recoveries that are uncertain or not accrued.
- Compare reported GAAP EPS with adjusted guidance and scrutinize the special items excluded from management’s outlook.