Altria Group, Inc. — 2018 Form 10-K Summary
Business context and reporting period
This is Altria’s annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. Altria’s principal businesses are U.S. smokeable and smokeless tobacco products and wine. In December, it discontinued Nu Mark’s MarkTen and Green Smoke e-vapor products and acquired a 35% economic interest in JUUL for $12.8 billion. The proposed Cronos investment was pending at year-end.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net revenues | $25.364 billion | $25.576 billion | Down 0.8% |
| Gross profit | $12.254 billion | $11.963 billion | Reported gross margin was approximately 48.3%, versus 46.8% |
| Operating income | $9.115 billion | $9.593 billion | Down 5.0%; operating margin approximately 35.9%, versus 37.5% |
| Net earnings attributable to Altria | $6.963 billion | $10.222 billion | Down 31.9%; 2017 included substantial tax benefits and a gain related to the AB InBev transaction |
| Diluted EPS | $3.68 reported; $3.99 adjusted | $5.31 reported | Reported diluted EPS down 30.7% |
| Operating cash flow | $8.391 billion | $4.901 billion | Increase chiefly reflected lower settlement and income-tax payments |
| Capital expenditures | $238 million | $199 million | Approximate operating cash flow less capex was $8.153 billion |
| Total debt at year-end | $25.746 billion | $13.894 billion | Increase principally funded the JUUL investment |
Year-end cash and cash equivalents were $1.333 billion. Altria reported a working-capital deficit, including significant debt maturities in 2019 and early 2020. It had a $3.0 billion undrawn revolving credit facility and said it expected to refinance maturities through capital markets. In February 2019, it issued dollar- and euro-denominated notes and repaid the $12.8 billion Term Loan Agreement balance. The company reported investment-grade ratings, although agencies lowered ratings or outlooks following the investment announcements.
Segment results were mixed: smokeable products revenue was $22.297 billion and operating companies income was $8.408 billion; smokeless products revenue was $2.262 billion and income was $1.431 billion; wine revenue was $691 million and income was $50 million. AB InBev equity earnings increased to $890 million from $532 million. Altria’s AB InBev investment had a $17.7 billion carrying value but a $13.1 billion fair value at year-end; management considered the decline temporary and recorded no impairment.
Material changes and fourth-quarter results
- Cigarette shipments declined 5.8% to 109.8 billion units; cigarette retail share fell to 50.1% from 50.7%. Marlboro share was 43.1%, down from 43.4%.
- Smokeless shipments fell 1.0%, while segment revenue rose 5.0% and operating companies income rose 9.6%, mainly due to pricing and lower promotional investment.
- Wine shipments fell 3.3%. Wine operating companies income declined 65.8%, reflecting lower volume, higher costs, and a $54 million Columbia Crest trademark impairment.
- Reported fourth-quarter revenue was $6.114 billion and net earnings attributable to Altria were $1.250 billion, or diluted EPS of $0.66. Fourth-quarter 2017 net earnings were $4.966 billion, or EPS of $2.60, substantially affected by tax-reform benefits; the quarters are therefore not directly comparable.
Outlook, commentary, risks, and unusual items
Management forecast 2019 adjusted diluted EPS growth of 4%–7% over the 2018 adjusted base of $3.99, excluding specified items, and an adjusted effective tax rate of approximately 23.5%–24.5%. It expected a mid-single-digit EPS decline in the first quarter and growth in the last three quarters. Guidance assumed little-to-no earnings or cash contribution from JUUL and Cronos, higher interest expense, lower AB InBev dividends, and savings from a cost-reduction program expected to reach approximately $575 million annualized by year-end 2019. The company anticipated U.S. cigarette industry volume declines of 3.5%–5% in 2019 and 4%–5% annually over 2019–2023.
- Altria recorded $538 million of pre-tax asset impairment, exit, implementation, and acquisition-related costs in 2018. It announced workforce and other cost reductions, including approximately 900 expected employee departures.
- Key risks include tobacco litigation and potentially large adverse judgments; regulation of tobacco and e-vapor products, including possible restrictions on flavors, menthol, or nicotine; excise taxes; declining cigarette volumes and competitive pressure; and regulatory or commercial uncertainty surrounding JUUL and Cronos.
- Pending tobacco litigation losses were generally not accrued where management concluded loss was not probable or could not be reasonably estimated. The filing warns that an adverse outcome could materially affect results, cash flow, or financial position.
- Altria increased its quarterly dividend twice in 2018; the year-end annualized rate was $3.20 per share, with a stated target payout ratio of approximately 80% of adjusted diluted EPS. Dividends remain subject to Board discretion.
Important facts for investors to verify
- Whether JUUL’s regulatory, commercial, and antitrust developments support the investment’s carrying value and expected benefits.
- Completion, financing, and eventual performance of the Cronos transaction, including the warrant and foreign-exchange exposure.
- Debt refinancing, interest expense, credit ratings, and liquidity after the 2018 investments.
- Delivery and timing of the $575 million cost savings, and progress against adjusted EPS guidance.
- Cigarette shipment and market-share trends, smokeless-category performance, and wine-segment recovery or further impairment risk.
- Developments in tobacco litigation, FDA rulemaking, settlement payments, and any associated cash or earnings effects.
- The sustainability of AB InBev equity earnings and dividends, given the reduced dividend and the investment’s fair value below carrying value.