Altria Group, Inc. — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2013. Unaudited consolidated results compare with the three months ended March 31, 2012. Altria’s businesses include U.S. smokeable and smokeless tobacco products, wine, finance leases and a 26.8% equity-method investment in SABMiller.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenues | $5.528 billion | $5.647 billion |
| Gross profit | $2.674 billion | $2.202 billion |
| Operating income | $2.152 billion | $1.642 billion |
| Net earnings attributable to Altria | $1.385 billion | $1.195 billion |
| Basic and diluted EPS | $0.69 | $0.59 |
| Dividends declared per share | $0.44 | $0.41 |
| Operating cash flow | $1.793 billion | $1.837 billion |
Calculated gross margin was approximately 48.4% versus 39.0%; operating margin was approximately 38.9% versus 29.1%. These comparisons were significantly affected by the 2013 Master Settlement Agreement (MSA) credit described below. Revenues include excise taxes billed to customers.
- Cash and liquidity: Cash was $3.775 billion at quarter-end, up from $2.900 billion at December 31, 2012. Management reported a working capital deficit but said operating cash flow and short-term borrowing capacity were expected to fund it. The undrawn revolving credit facility was $3.0 billion, expiring June 30, 2016.
- Debt: Total debt was $13.9 billion, comprising $1.984 billion current and $11.894 billion long-term. The filing reports debt fair value of $17.6 billion. Credit-agreement leverage and interest-coverage ratios were 1.7x and 7.7x, respectively; required limits were no more than 3.0x and no less than 4.0x.
- Cash uses and capital returns: Investing cash flow was $188 million, including $203 million of finance-asset proceeds and $15 million of capital expenditures. Financing cash outflow was $1.106 billion, including $886 million of dividends paid and $91 million of share repurchases.
- Balance sheet items: Settlement-charge accruals rose to $4.143 billion from $3.616 billion. Pension-plan contributions were $358 million, including a voluntary $350 million contribution made in January.
Material changes and segment performance
- Operating income increased 31.1% and net earnings rose 15.9%. Management attributed the increase primarily to higher operating results in smokeable and smokeless products and lower interest expense, partly offset by lower SABMiller earnings.
- The main exceptional benefit was a $483 million pre-tax reduction in smokeable-product cost of sales from an MSA non-participating manufacturer (NPM) Adjustment settlement. Management’s reconciliation attributes approximately $311 million, or $0.15 per share, of net earnings to this item.
- Smokeable-product revenue declined 2.6% to $4.968 billion, while operating companies income increased to $1.920 billion from $1.439 billion, largely reflecting the MSA credit and pricing. Total smokeable shipment volume fell 5.3%; cigarette volume declined 5.2%. Marlboro retail share was 43.6%, up 0.2 percentage points, while Black & Mild share fell 3.1 points.
- Smokeless-product revenue increased 2.6% to $390 million and operating companies income rose 15.6% to $222 million. Shipment volume grew 3.4%; Copenhagen and Skoal combined volume grew 4.9%.
- Wine revenue increased 11.5% to $126 million and operating companies income rose 33.3% to $20 million, primarily on higher volume and pricing. Shipment volume increased 9.5%.
- SABMiller equity earnings were $256 million, down from $520 million. The 2012 comparison included a $342 million non-cash gain from strategic alliance transactions. Altria disclosed that its Q1 2012 financial statements were revised to include this previously omitted gain; the revision increased reported 2012 net earnings by $222 million and diluted EPS by $0.11, with no cash-flow impact.
- Operating cash flow declined $44 million year over year, primarily because of the timing of accrued-liability payments, partly offset by lower pension contributions. The company completed its prior $1.5 billion repurchase authorization in Q1 and announced a new $300 million program on April 24, 2013.
Guidance, risks and unusual items
- Outlook: In April, Altria raised its 2013 reported diluted EPS forecast to $2.49–$2.55 from $2.34–$2.40, reflecting the NPM settlement. It reaffirmed adjusted diluted EPS growth guidance of 6%–9% over 2012 adjusted EPS. Adjusted EPS is a non-GAAP measure; the filing cautions that its forecasts are subject to risks and assumptions.
- Management expects the 2011 cost-reduction program to deliver $400 million of annualized savings versus previously planned spending by year-end 2013. Approximately $20 million of related severance liability remained at March 31, substantially all expected to be paid by June 30.
- The company expects additional 2013 pension contributions of approximately $20–$40 million, subject to tax law, asset performance and interest-rate changes. It targets a dividend payout ratio of approximately 80% of adjusted diluted EPS; the annualized dividend rate was $1.76 per share.
- MSA uncertainty: The $483 million credit was received against the April 2013 MSA payment. Litigation by non-signatory states may challenge the settlement award; any further NPM adjustments are uncertain. The company estimated tobacco-agreement, FETRA and FDA-user-fee costs at approximately $4.5 billion in 2013 and $5 billion annually thereafter, including the Q1 credit, subject to volume, inflation and other factors.
- Litigation and regulation: Altria described extensive tobacco-related litigation, including Engle progeny cases, and said unfavorable outcomes could materially affect results, cash flows or financial position in a quarter or year. Management had not accrued for pending tobacco cases generally where loss was not considered probable and estimable. Tobacco risks also include FDA regulation, potential excise-tax increases, declining cigarette consumption, competitive and illicit trade, and restrictions on marketing and products.
- Other notable items include a $20 million reduction in the finance-asset loss allowance recorded as income and the completion of the prior share-repurchase program. Management stated that it expected to meet its credit-agreement covenants and that controls and procedures were effective.
Important facts for investors to verify
- Whether challenges by non-signatory states alter the MSA settlement, the $483 million credit, or future MSA payment estimates.
- How much of reported 2013 EPS growth reflects the one-time NPM credit versus underlying operating performance, and the assumptions behind adjusted EPS guidance.
- Trends in cigarette and cigar volumes, market share, pricing and discount-brand competition; note that retail-share data were moved to new tracking services and prior-period data were restated.
- Developments in tobacco litigation, including Engle-related verdicts and appeals, and the potential exposure not accrued in the financial statements.
- Debt maturities, working-capital needs, pension funding and the company’s capacity to sustain dividends and repurchases alongside tobacco-related payments.