Philip Morris International Inc. — Form 10-Q Summary
Business context and reporting period. PMI manufactures and sells cigarettes and other tobacco products in markets outside the United States, across four geographic segments. This unaudited filing covers the quarter and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods. Amounts are in U.S. dollars unless stated otherwise. Net revenues include excise taxes.
Financial performance
| Metric | Third quarter 2009 | Third quarter 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net revenues | $16.573B | $17.365B | $45.072B | $48.422B |
| Gross profit | $4.267B | $4.472B | $11.842B | $12.459B |
| Operating income | $2.850B | $2.890B | $7.599B | $8.022B |
| Net earnings attributable to PMI | $1.798B | $2.080B | $4.820B | $5.445B |
| Diluted EPS | $0.93 | $1.01 | $2.44 | $2.60 |
| Operating margin | 17.2% | 16.6% | 16.9% | 16.6% |
| Gross margin | 25.7% | 25.8% | 26.3% | 25.7% |
Margins are calculated using reported net revenues, which include excise taxes. For the nine months, cigarette shipment volume fell 1.0% to 645.8 billion units; excluding acquisitions, cigarette volume fell 2.1%. In Q3, volume fell 2.9%, or 4.0% excluding acquisitions. Higher pricing supported operating performance, while currency, lower volume/mix and higher manufacturing costs weighed on results.
Cash flow, balance sheet and capital returns
- Nine-month operating cash flow was $6.419B, down from $7.102B. Capital expenditures were $483M; operating cash flow less capital expenditures was approximately $5.936B, versus $6.278B in 2008.
- At September 30, cash and cash equivalents were $1.602B. Total debt was approximately $14.3B, up from $12.0B at December 31, 2008; long-term debt was $13.741B and current debt, including short-term borrowings, was $510M.
- Current assets were $14.277B and current liabilities were $9.838B. Committed credit lines totaled $6.4B, with no borrowings under those facilities. The company reported a 14.0-to-1.0 EBITDA-to-interest covenant ratio against a minimum of 3.5-to-1.0.
- PMI issued approximately $3.0B of long-term debt in 2009, including euro- and Swiss-franc-denominated notes. Net cash used in financing was $5.710B for the nine months.
- Nine-month dividends paid to public shareholders were $3.212B; declared dividends were $1.66 per share. The quarterly dividend was raised 7.4% to $0.58 per share, an annualized rate of $2.32. PMI repurchased approximately 102.9M shares for $4.2B during the nine months.
Material changes versus the prior comparable periods
- Nine-month reported net revenues fell 6.9%, operating income fell 5.3%, PMI-attributable earnings fell 11.5%, and diluted EPS fell 6.2%. Q3 reported net revenues fell 4.6%, operating income fell 1.4%, PMI-attributable earnings fell 13.6%, and diluted EPS fell 7.9%.
- Currency was a major drag: management attributed $1.4B of lower nine-month operating income and $445M of lower Q3 operating income to unfavorable exchange movements. Excluding currency, diluted EPS increased 13.8% for the nine months and 8.9% for Q3, according to management’s reconciliation.
- Net price increases were approximately $1.5B for the nine months and $590M for Q3, partly offsetting currency and lower volume/mix. Higher average debt levels increased net interest expense by $367M for the nine months and $152M for Q3.
- Segment operating companies income for the nine months increased in Asia ($1.933B versus $1.631B) and Latin America & Canada ($452M versus $282M), but declined in the European Union ($3.397B versus $3.779B) and EEMA ($1.982B versus $2.439B). Latin America & Canada benefited from the Rothmans acquisition and comparison with prior-year charges.
- Results include a $135M pre-tax charge for Colombia’s Investment and Cooperation Agreement in 2009; 2008 included a $124M RBH legal-settlement charge and a $61M charge related to a prior Canadian distribution agreement. Nine-month asset impairment and exit costs were $3M in 2009 versus $84M in 2008.
Outlook, management commentary and risks
- On October 22, 2009, PMI raised its full-year 2009 reported diluted EPS forecast to $3.20–$3.25. At then-current exchange rates, guidance included a $0.52 per-share unfavorable currency impact; excluding currency, management projected diluted EPS growth of approximately 12%–14%. Guidance includes the Colombia agreement charge and excludes potential future acquisitions, impairment and exit charges, and unusual events.
- Management cited the global recession, softer expected consumption and unfavorable product mix, while saying it had not observed broad-based global consumer down-trading. Higher excise taxes, economic weakness, currency changes, and market declines remain pressures.
- PMI recorded a $135M pre-tax charge for an agreement providing $200M of funding to Colombian governments over 20 years. Remaining exit-cost cash payments were estimated at approximately $67M, substantially payable by 2011. Pension contributions were $382M in the first nine months; management anticipated approximately $118M more in the remainder of 2009, subject to change.
- The company disclosed extensive tobacco-related litigation. Management said losses in pending tobacco cases were not considered probable and could not be reasonably estimated, so no provision was recorded; it cautioned that an adverse outcome could materially affect results, cash flows or financial position. Claims in some jurisdictions seek billions of dollars.
- A Thai customs and excise investigation included a proposed charge of approximately $2B for alleged underpayment during 2003–2007; a separate reported informal inquiry concerned approximately $1.8B for 2000–2003. PMI disputed the allegations and said it was seeking clarification. These are allegations, not recorded liabilities stated in the filing.
- Other material risks include regulation and restrictions on tobacco marketing, packaging and smoking; excise-tax increases; illicit trade and counterfeiting; competition and consumer down-trading; agricultural input costs; foreign exchange and tax exposure; and political or economic disruption. Fitch’s outlook was negative, while Moody’s and S&P outlooks were stable.
Most important facts for investors to verify
- Whether full-year EPS guidance of $3.20–$3.25 and the stated currency assumptions remain achievable, and how actual currency rates affect reported results.
- Whether pricing continues to offset declining shipment volumes, excise-tax increases, and shifts toward lower-priced products.
- Debt growth, interest expense, refinancing needs, credit ratings, and continued compliance with the 3.5-to-1.0 covenant requirement.
- Developments in the Thai tax investigation, tobacco litigation, Canadian and other governmental claims, and related potential financial exposure.
- Acquisition integration and returns, including Swedish Match South Africa and the proposed Protabaco purchase, which remained subject to approvals and due diligence.
- The sustainability of cash generation alongside dividends and share repurchases; at October 30, 2009, 1,904,684,732 common shares were outstanding.