Business context and reporting period
Philip Morris International Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The company manufactures and sells cigarettes, other tobacco products and nicotine-containing products outside the United States, across four geographic segments.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net revenues | $17.352 billion | $17.779 billion; down 2.4% |
| Net revenues excluding excise taxes | $6.616 billion | $6.917 billion; down 4.4% |
| Gross profit | $4.387 billion | $4.543 billion; reported gross margin 25.3% vs. 25.5% |
| Operating income | $2.871 billion | $2.951 billion; down 2.7% |
| Net earnings attributable to PMI | $1.795 billion | $1.875 billion; down 4.3% |
| Diluted EPS | $1.16 | $1.18; down 1.7% |
| Operating cash flow | $(375) million | $715 million |
| Capital expenditures | $203 million | $256 million |
| Cash and cash equivalents | $1.524 billion | $1.682 billion at December 31, 2014 |
| Total debt | $30.6 billion | $29.5 billion at December 31, 2014 |
| Dividends declared per share | $1.00 | $0.94 |
Operating cash flow less capital expenditures was approximately $(578) million. Management attributed the operating cash outflow primarily to unfavorable currency movements and higher working-capital requirements, including less cash generated from inventory and receivables. Current assets were $14.275 billion against current liabilities of $14.980 billion. The company reported a stockholders’ deficit of $12.246 billion.
Material changes and segment results
- Currency was a major headwind: it reduced net revenues by $2.4 billion and diluted EPS by $0.31. Excluding the EPS currency impact, diluted EPS increased 24.6%, according to the company.
- Price increases contributed $552 million to net revenues excluding excise taxes and helped offset currency pressure. Shipment volume was up 1.4% excluding acquisitions, but down 0.5% excluding acquisitions and inventory movements.
- Operating companies income declined in the European Union to $913 million from $978 million and in EEMA to $880 million from $927 million. Asia increased to $934 million from $915 million; Latin America & Canada increased to $230 million from $202 million.
- Net interest expense rose $7 million to $275 million, principally due to higher average debt, partly offset by lower average interest rates. The effective tax rate rose to 30.2% from 28.9%; a $58 million impact from changed repatriation assertions contributed to the increase.
- Other comprehensive losses were $1.289 billion, largely reflecting currency translation losses; this reduced comprehensive earnings attributable to PMI to $531 million.
Outlook, management commentary and risks
On April 16, 2015, PMI raised its full-year reported diluted EPS forecast to $4.32–$4.42 at exchange rates then prevailing, compared with $4.76 reported in 2014. The forecast included an estimated $1.15-per-share unfavorable currency impact. Excluding that impact, the company projected 9%–11% growth versus 2014 adjusted diluted EPS of $5.02. The forecast assumes no share repurchases in 2015 and includes additional iQOS spending, weighted toward the second half. It excludes future acquisitions, unanticipated impairment or exit charges, future currency changes and unusual events. Management estimated a full-year 2015 effective tax rate of approximately 29%.
PMI is expanding its Reduced-Risk Product program, including planned national iQOS expansion in Japan and Italy during 2015. The company cautioned that it may not substantiate reduced-risk claims and that regulators may not permit such claims. Its stated principal business risks include declining cigarette consumption, excise-tax increases, regulation of products and marketing, illicit trade, competition, foreign-exchange volatility, geopolitical disruption, litigation and governmental investigations.
Tobacco-related cases remained unresolved. Management said it had not concluded a loss was probable in pending cases and could not estimate a possible loss or range; accordingly, no estimated loss was accrued. The Thai investigation concerns alleged customs and excise underpayments of approximately $2 billion for 2003–2007; PMI said criminal charges were probable, disputed the allegations and cited a related WTO decision. The filing also describes a separate informal Thai inquiry concerning approximately $1.8 billion for 2000–2003.
Committed credit facilities totaled $8.0 billion and were fully available; commercial paper outstanding was $2.6 billion. The company reported a 12.0-to-1.0 covenant ratio against a minimum 3.5-to-1.0. Credit ratings were stable. PMI announced it did not plan share repurchases in 2015; the quarterly dividend rate was $1.00 per share.
Important facts for investors to verify
- Whether currency movements, pricing and volume trends support the full-year EPS forecast, and how results compare with the forecast’s stated exchange-rate assumptions.
- Whether working capital reverses and operating cash flow recovers, given the first-quarter cash outflow and continued dividend commitments.
- Debt maturities, borrowing needs and access to commercial-paper and credit markets; verify current debt and available liquidity beyond quarter-end figures.
- Developments in tobacco litigation and the Thai investigations, including any change in the probability or estimability of potential losses.
- Regulatory and commercial progress for iQOS and other Reduced-Risk Products, including launch costs, scientific evidence and required approvals.