10-QPeriod: Q2 FY2014

Philip Morris International Inc. Quarterly Report for Q2 Ended Jun 30, 2014

Filed July 31, 2014For Securities:PM

Summary

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 million 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%-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.

Financial Highlights

51 data points
Beta

Revenue

$21.05B

24.2% Gross Margin

Net Income

$1.85B

8.8% Net Margin

EPS (Diluted)

$1.17

Total Assets

$36.33B

Cash & Equivalents

$1.54B

Free Cash Flow

$2.45B

Financial Statements
Beta
Revenue$21.05B
Cost of Revenue$2.70B
Gross Profit$5.10B
Operating Income$2.87B
Net Income$1.85B
EPS (Basic)$1.17
EPS (Diluted)$1.17
Shares Outstanding (Basic)1.57B

Key Highlights

  • 1Net 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.
  • 2Operating 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.
  • 3Diluted 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.
  • 4The 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.
  • 5Cigarette 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.
  • 6The 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.
  • 7The company is actively developing Reduced-Risk Products (RRPs) and plans to commercialize its Platform 1 product, iQOS, in Japan and Italy in late 2014.

Frequently Asked Questions

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.

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.

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.

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.