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| MO > SEC Filings for MO > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
Description of the Company
At June 30, 2009, Altria Group, Inc.'s wholly-owned subsidiaries included Philip Morris USA Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; UST LLC ("UST"), which through its subsidiaries is engaged in the manufacture and sale of smokeless products and wine; and John Middleton Co. ("Middleton"), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary, maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held a 27.4% economic and voting interest in SABMiller plc ("SABMiller") at June 30, 2009. Altria Group, Inc.'s access to the operating cash flows of its subsidiaries consists principally of cash received from the payment of dividends by its subsidiaries.
As discussed in Note 2. UST Acquisition to the condensed consolidated financial statements ("Note 2"), on January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST, whose direct and indirect wholly-owned subsidiaries include U.S. Smokeless Tobacco Company LLC ("USSTC") and Ste. Michelle Wine Estates ("Ste. Michelle"). As a result of the acquisition, UST has become an indirect wholly-owned subsidiary of Altria Group, Inc.
Beginning with the first quarter of 2009, Altria Group, Inc. revised its reportable segments to reflect the change in the way in which Altria Group, Inc.'s management reviews the business as a result of the acquisition of UST. At June 30, 2009, Altria Group, Inc.'s reportable segments were cigarettes, smokeless products, cigars, wine, and financial services.
On March 28, 2008, Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. ("PMI") to Altria Group, Inc.'s stockholders in a tax-free distribution. Altria Group, Inc. has reflected the results of PMI prior to the distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows.
Executive Summary
The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.
During the first six months of 2009, Altria Group, Inc. completed the acquisition of UST and began to integrate it into its family of companies. In addition, Altria Group, Inc. issued $4.2 billion of long-term notes and completed all long-term financing related to the acquisition of UST.
Consolidated Operating Results for the Six Months Ended June 30, 2009 - The changes in Altria Group, Inc.'s earnings from continuing operations and diluted earnings per share ("EPS") from continuing operations attributable to Altria Group, Inc. for the six months ended June 30, 2009, from the six months ended June 30, 2008, were due primarily to the following (in millions, except per share data):
Diluted EPS
Earnings from from
Continuing Continuing
Operations Operations
For the six months ended June 30, 2008 $ 1,544 $ 0.73
2008 Exit, implementation and integration costs 196 0.09
2008 Gain on sale of corporate headquarters building (263 ) (0.12 )
2008 Loss on early extinguishment of debt 256 0.12
Subtotal 2008 items 189 0.09
2009 Exit, implementation and integration costs (162 ) (0.08 )
2009 UST acquisition-related costs (121 ) (0.06 )
2009 SABMiller intangible asset impairments (73 ) (0.04 )
2009 SABMiller gains on issuances of common stock 114 0.06
Subtotal 2009 items (242 ) (0.12 )
Change in tax rate (3 )
Fewer shares outstanding 0.01
Operations 111 0.06
For the six months ended June 30, 2009 $ 1,599 $ 0.77
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See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.
Shares Outstanding - Fewer shares outstanding during the six months ended June 30, 2009 compared with the prior year period were due primarily to shares repurchased by Altria Group, Inc. during the second quarter of 2008 under its share repurchase program, which was suspended in January 2009.
Operations - The increase of $111 million shown in the table above was due primarily to the following:
• Acquisition of UST, which is reflected in the smokeless products and wine segments (see Note 2);
• Higher income from cigarettes and financial services; and
• Lower general corporate expenses;
partially offset by:
Consolidated Operating Results for the Three Months Ended June 30, 2009 - The changes in Altria Group, Inc.'s net earnings and diluted EPS attributable to Altria Group, Inc. for the three months ended June 30, 2009, from the three months ended June 30, 2008, were due primarily to the following (in millions, except per share data):
Net Earnings Diluted EPS
For the three months ended June 30, 2008 $ 930 $ 0.45
2008 Exit, implementation and integration costs 24 0.01
2009 Exit, implementation and integration costs (57 ) (0.03 )
2009 UST acquisition-related costs (4 )
2009 SABMiller intangible asset impairments (73 ) (0.04 )
2009 SABMiller gains on issuances of common stock 114 0.06
Subtotal 2009 items (20 ) (0.01 )
Change in tax rate (6 )
Operations 82 0.04
For the three months ended June 30, 2009 $ 1,010 $ 0.49
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See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.
Operations - The increase of $82 million shown in the table above was due primarily to the following:
• Acquisition of UST, which is reflected in the smokeless products and wine segments (see Note 2);
• Higher income from cigarettes and financial services; and
• Lower general corporate expenses;
partially offset by:
• Higher interest and other debt expense, net, due to the issuance of senior unsecured long-term notes in November and December 2008, and February 2009 to finance the acquisition of UST.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.
2009 Forecasted Results - In July 2009, Altria Group, Inc. raised its 2009 full-year guidance for reported diluted EPS from continuing operations from a range of $1.47 to $1.52 to a range of $1.51 to $1.56, reflecting higher projected earnings from continuing operations as well as a $0.02 net gain in SABMiller related items. This revised forecast includes estimated net charges of $0.21 per share as detailed in the table below, as compared with 2008 full-year reported diluted EPS from continuing operations of $1.48, which includes $0.17 per share of net charges as detailed in the table below. Anticipated 2009 full-year adjusted diluted EPS from continuing operations, which exclude the net charges in the table below, represent a growth rate of 4% to 7% over 2008 full-year adjusted diluted EPS from continuing operations. The 2009 forecast reflects higher tobacco excise taxes, investment spending on smokeless tobacco brands, ongoing cost reduction initiatives, increased pension expenses and no share repurchases. The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.
Net Charges Included in Reported Diluted EPS from Continuing Operations
2009 2008
Exit, integration and implementation costs $ 0.17 $ 0.15
Gain on sale of corporate headquarters building (0.12 )
Loss on early extinguishment of debt 0.12
Tax items (0.03 )
UST acquisition-related costs 0.06 0.02
SABMiller gains on issuances of common stock (0.06 )
SABMiller intangible asset impairments 0.04 0.03
$ 0.21 $ 0.17
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Adjusted diluted EPS from continuing operations is a financial measure that is not consistent with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Certain income and expense items that management believes are not part of underlying operations are excluded from adjusted diluted EPS because such items can obscure underlying business trends. Management believes it is appropriate to disclose this non-GAAP financial measure to help investors analyze underlying business performance and trends. This adjusted measure is regularly provided to management for use in the evaluation of segment performance and allocation of resources. This information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.
Discussion and Analysis
Consolidated Operating Results
See pages 107-110 for a discussion of Cautionary Factors That May Affect Future
Results.
For the Six Months Ended For the Three Months Ended
June 30, June 30,
2009 2008 2009 2008
(in millions)
Net revenues:
Cigarettes $ 9,920 $ 9,149 $ 6,024 $ 4,916
Smokeless products 671 373
Cigars 233 192 118 101
Wine 169 94
Financial services 249 123 110 37
Net revenues $ 11,242 $ 9,464 $ 6,719 $ 5,054
Excise taxes on products:
Cigarettes $ 2,732 $ 1,650 $ 2,052 $ 859
Smokeless products 36 24
Cigars 60 31 44 16
Wine 8 5
Excise taxes on products $ 2,836 $ 1,681 $ 2,125 $ 875
Operating income:
Operating companies income:
Cigarettes $ 2,569 $ 2,377 $ 1,426 $ 1,337
Smokeless products 175 177
Cigars 90 91 36 50
Wine 10 9
Financial services 203 104 83 30
Amortization of intangibles (9 ) (3 ) (3 ) (1 )
Gain on sale of corporate
headquarters
building 404
General corporate expenses (103 ) (170 ) (50 ) (73 )
UST transaction costs (60 )
Corporate exit costs (7 ) (248 ) (1 ) (1 )
Operating income $ 2,868 $ 2,555 $ 1,677 $ 1,342
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As discussed in Note 12. Segment Reporting to the condensed consolidated financial statements, management reviews operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.
The following events that occurred during the six and three months ended June 30, 2009 and 2008, affected the comparability of statement of earnings amounts.
• Acquisition of UST - In January 2009, Altria Group, Inc. acquired UST, the results of which are reflected in the smokeless products and wine segments (see Note 2).
• Exit, Implementation and Integration Costs - For the six and three months ended June 30, 2009 and 2008, pre-tax exit, implementation and integration costs consisted of the following (in millions):
For the Six Months Ended June 30, 2009
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 34 $ 50 $ - $ 84
Smokeless products 123 28 151
Cigars 7 7
Wine 2 2 4
General corporate 7 7
Total $ 166 $ 50 $ 37 $ 253
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For the Six Months Ended June 30, 2008
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 29 $ 32 $ - $ 61
Cigars 3 3
General corporate 248 248
Total $ 277 $ 32 $ 3 $ 312
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For the Three Months Ended June 30, 2009
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 15 $ 32 $ - $ 47
Smokeless products 22 13 35
Cigars 4 4
Wine 1 1
General corporate 1 1
Total $ 38 $ 32 $ 18 $ 88
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For the Three Months Ended June 30, 2008
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 18 $ 17 $ - $ 35
Cigars 1 1
General corporate 1 1
Total $ 19 $ 17 $ 1 $ 37
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For further details on exit, implementation and integration costs, see Note 3. Exit, Implementation and Integration Costs to the condensed consolidated financial statements ("Note 3").
Altria Group, Inc. continues to have company-wide cost management programs, which include the restructuring programs discussed in Note 3. For the six and three months ended June 30, 2009, Altria Group, Inc. achieved $165 million and $25 million, respectively, in cost savings for a total cost savings of $805 million since January 1, 2007. Altria Group, Inc. expects to achieve approximately $695 million in additional cost savings by 2011, for total cost reductions of $1.5 billion versus 2006, as shown in the table below.
Cost Reduction Initiatives
Cost Savings Achieved
Additional
For the Six Cost Total
For the Years Ended Months Ended Savings Cost
December 31, June 30, Expected by Savings
2007 and 2008 2009 2011 Expected
(in millions)
Corporate expense and selling,
general and administrative $ 640 $ 165 $ 507 $ 1,312
Manufacturing optimization
program 188 188
Total cost reduction initiatives $ 640 $ 165 $ 695 $ 1,500
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Altria Group, Inc. expects to generate an estimated $300 million in UST integration cost savings by 2011. These integration cost savings are included in the "Corporate expense and selling, general and administrative" line item above.
The manufacturing optimization program is expected to entail capital expenditures of approximately $230 million. Capital expenditures for the program of $52 million and $27 million were made during the six months and three months ended June 30, 2009, respectively, for a total of $173 million since inception.
• UST Acquisition-Related Costs - In connection with the acquisition of UST, Altria Group, Inc. incurred pre-tax charges consisting of the following:
¡ Transaction costs of $60 million, incurred in the first quarter of 2009, which consisted primarily of investment banking and legal fees. These amounts are included in marketing, administration and research costs on Altria Group, Inc.'s condensed consolidated statements of earnings.
¡ Increased cost of sales as shown in the table below, relating to the fair value purchase accounting adjustment of UST's inventory at the acquisition date that was sold during the periods:
For the Six Months Ended For the Three Months Ended
June 30, 2009 June 30, 2009
(in millions)
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• SABMiller Intangible Asset Impairments - Altria Group, Inc.'s second quarter 2009 earnings from its equity investment in SABMiller included pre-tax intangible asset impairment charges of $112 million.
• SABMiller Gains on Issuances of Common Stock - In accordance with Emerging Issues Task Force Issue No. 08-6, "Equity Method Investment Accounting Considerations," Altria Group, Inc.'s second quarter 2009 earnings from its equity investment in SABMiller included pre-tax gains of $175 million due primarily to the issuance of 60 million shares of common stock by SABMiller in connection with its acquisition of the remaining minority interest in its Polish subsidiary.
• Income Taxes - The income tax rate of 37.7% for the six months ended June 30, 2009 increased 0.7 percentage points from 37.0% for the six months ended June 30, 2008, due primarily to certain costs incurred in 2009 related to the acquisition of UST that are not deductible for tax purposes.
• Sales to PMI - Subsequent to the PMI spin-off, during the six months and three months ended June 30, 2008, PM USA recorded net revenues of $110 million and $107 million respectively, from contract volume manufactured for PMI under an agreement that terminated in the fourth quarter of 2008. For periods prior to the PMI spin-off, PM USA did not record contract volume manufactured for PMI in net revenues, but recorded the related profit which was immaterial, for the six months ended June 30, 2008, in marketing, administration and research costs. These amounts are reflected in the cigarettes segment.
• Gain on Sale of Corporate Headquarters Building - In March 2008, Altria Group, Inc. sold its corporate headquarters building in New York City for $525 million and recorded a pre-tax gain on sale of $404 million.
• Loss on Early Extinguishment of Debt - In connection with the spin-off of PMI, in the first quarter of 2008, Altria Group, Inc. recorded a pre-tax loss of $393 million on the early extinguishment of debt. See Note 8. Debt to the condensed consolidated financial statements ("Note 8") for further details.
Consolidated Results of Operations for the Six Months Ended June 30, 2009
The following discussion compares consolidated operating results for the six months ended June 30, 2009, with the six months ended June 30, 2008.
Net revenues, which include excise taxes billed to customers, increased $1,778 million (18.8%), due primarily to higher revenues from the cigarettes, financial services and cigars segments, and the acquisition of UST. Cigarettes and cigars revenues increased, reflecting higher pricing related primarily to the federal excise tax ("FET") increase, partially offset by lower volume. In addition, 2008 net revenues included contract volume manufactured for PMI under an agreement that terminated in the fourth quarter of 2008.
Excise taxes on products increased $1,155 million (68.7%), due primarily to the impact of the April 1, 2009 FET increase and the acquisition of UST, partially offset by lower volume in the cigarettes segment.
Cost of sales decreased $147 million (3.6%), due primarily to lower cigarettes volume and the termination of contract volume manufactured for PMI, partially offset by the acquisition of UST, and higher leaf and material costs.
Marketing, administration and research costs increased $158 million (12.2%), due primarily to the acquisition of UST (including transaction and integration costs), partially offset by lower marketing, research and general corporate expenses. The lower general corporate expenses reflect the cost reduction initiatives discussed above.
Operating income increased $313 million (12.3%), due primarily to higher operating results from the cigarettes and financial services segments, operating results from UST in 2009, lower general corporate expenses, and 2008 charges related to the corporate headquarters relocation, partially offset by the 2008 gain on the sale of the corporate headquarters building and 2009 expenses related to the acquisition of UST.
Interest and other debt expense, net, increased $621 million (100+%), due primarily to the issuance of senior unsecured long-term notes in November and December 2008, and February 2009 to finance the UST acquisition.
Earnings from Altria Group, Inc.'s equity investment in SABMiller increased $33 million (11.4%), due primarily to pre-tax gains of $175 million resulting from the issuances of common stock by SABMiller, partially offset by pre-tax intangible asset impairment charges of $112 million.
Altria Group, Inc.'s income tax rate increased 0.7 percentage points to 37.7%, due primarily to certain costs incurred in 2009 related to the acquisition of UST that are not deductible for tax purposes.
Earnings from continuing operations of $1,600 million increased $56 million (3.6%), due primarily to higher operating income, higher earnings from Altria . . .
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