01—Abstract
Summary
Summary of the 10-Q filed July 31, 2014. Cited figures are marked; the original filing is the authoritative source.
Philip Morris International Inc. (PM) reported mixed financial results for the period ending June 29, 2014.
While net revenues saw a slight increase year-over-year for the three-month period, they declined modestly for the six-month period. However, operating income experienced a significant decline in both periods, largely impacted by substantial asset impairment and exit costs related to factory closures in the Netherlands and Australia. These costs amounted to $512 milliona pre-tax for the six months and $489 million for the three months, negatively affecting diluted earnings per share by $0.25 and $0.24, respectively.
Despite these headwinds, the company's operational performance showed resilience, with favorable pricing actions and, in some segments, positive volume/mix contributing to earnings. The company also reaffirmed its full-year 2014 diluted EPS forecast on an adjusted basis, projecting a 6%b-8% increase, signaling management's confidence in future performance despite ongoing currency headwinds and regulatory challenges. The company continues its strategic focus on share repurchases and dividend payments to shareholders.
02—Key points
Key Highlights
- Net revenues for the three months ended June 30, 2014, increased by 2.8% to $21.1 billion, while for the six months ended June 30, 2014, net revenues decreased by 0.5% to $38.8 billion.
- Operating income significantly decreased by 13.4% for the six months ($5.8 billion) and 13.9% for the three months ($2.9 billion), primarily due to $512 million and $489 million, respectively, in pre-tax asset impairment and exit costs related to factory closures.
- Diluted Earnings Per Share (EPS) for the six months ended June 30, 2014, was $2.35, a decrease of 8.9% from $2.58 in the prior year. For the three months, diluted EPS was $1.17, down 10.0% from $1.30.
- The company reaffirmed its 2014 full-year adjusted diluted EPS forecast to increase by 6%-8% compared to adjusted diluted EPS of $5.40 in 2013, excluding certain charges and currency impacts.
- Cigarette shipment volume decreased by 3.5% for the six months and 2.7% for the three months, driven by various factors including market conditions and trade inventory movements across different segments.
- The company continued its return of capital to shareholders, with dividends declared of $1.88 per share for the six months, up from $1.70 in the prior year, and repurchased $2.25 billion of common stock in the first six months of 2014.
- The company is actively developing Reduced-Risk Products (RRPs) and plans to commercialize its Platform 1 product, iQOS, in Japan and Italy in late 2014.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2014, Philip Morris International Inc. kept $0.09.
- Revenue$21.05B100.0%
- Cost of revenue−$15.95B75.8%
- Gross profit$5.10B24.2%
- Operating costs−$2.23B10.6%
- Operating income$2.87B13.7%
- Interest, other & tax−$1.02B4.9%
- Net income$1.85B8.8%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2014filed July 31, 2014Financial Statements
Q2 FY2014 against Q2 FY2013
| Line item | Q2 FY2014Q2 FY2013 | Change |
|---|---|---|
| Revenue | $21.05B$20.48B | +2.8% |
| Cost of Revenue | $2.70B$2.70B | −0.2% |
| Gross Profit | $5.10B$5.22B | −2.2% |
| Operating Income | $2.87B$3.34B | −13.9% |
| Net Income | $1.85B$2.12B | −12.9% |
| EPS (Basic) | $1.17$1.30 | −10.0% |
| EPS (Diluted) | $1.17$1.30 | −10.0% |
| Shares Outstanding (Basic) | 1.57B1.63B | −3.7% |
05—Questions
Frequently Asked Questions
What were the main drivers behind the significant increase in asset impairment and exit costs?
The substantial increase in asset impairment and exit costs, totaling $512 million pre-tax for the six months and $489 million pre-tax for the three months ended June 30, 2014, was primarily related to the planned discontinuation of cigarette production at Philip Morris Holland B.V.'s factory in Bergen op Zoom, the Netherlands, and a factory closure in Australia. These costs include employee separation expenses and asset impairment charges.
How did currency fluctuations impact the company's financial performance?
Unfavorable currency movements had a significant negative impact on Philip Morris International's financial results. For the six-month period, currency movements decreased net revenues by $2.5 billion and operating income by $604 million. For the three-month period, currency movements decreased net revenues by $1.2 billion and operating income by $287 million. Key currencies contributing to this unfavorable impact included the Argentine peso, Australian dollar, Indonesian rupiah, Japanese yen, Russian ruble, Swiss franc, Turkish lira, and Ukraine hryvnia.
What is the company's outlook for the full year 2014, and what factors are influencing it?
Philip Morris International reaffirmed its 2014 full-year reported diluted EPS forecast to be in a range of $4.87 to $4.97, compared to $5.26 in 2013. On an adjusted basis, the company projects diluted EPS to increase by 6% to 8% versus adjusted diluted EPS of $5.40 in 2013. This forecast accounts for significant factors including planned asset impairment and exit costs, unfavorable currency impacts, and productivity and cost savings targets. The company noted that down-trading and heavy price discounting in Australia could place them at the lower end of their forecast range.
What is the company's strategy regarding Reduced-Risk Products (RRPs)?
Philip Morris International is prioritizing the development and commercialization of Reduced-Risk Products (RRPs). The company is investing in manufacturing facilities in Italy and plans to launch its Platform 1 product, 'iQOS', which uses a heated tobacco system, in Japan and Italy in late 2014. They are also developing other RRP platforms, including Platform 2 (heat-not-burn tobacco), Platform 3 (nicotine salt aerosol), and e-vapor products. The company is engaging with regulatory bodies globally to establish science-based regulatory frameworks for these products.
06—Continue