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| MO > SEC Filings for MO > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
Description of the Company
At September 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 27.3% economic and voting interest in SABMiller plc ("SABMiller") at September 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 September 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 nine months of 2009, Altria Group, Inc. completed the acquisition of UST and substantially completed the integration of UST into Altria Group, Inc.'s family of companies. During the same period, Altria Group, Inc. issued $4.2 billion of long-term notes and completed all long-term financing related to the acquisition of UST. In addition, as it continues to reduce cigarette infrastructure ahead of volume declines, on July 29, 2009, PM USA ceased production at its Cabarrus, North Carolina cigarette manufacturing facility and completed the consolidation of manufacturing capacity into its Richmond, Virginia facility.
Consolidated Operating Results for the Nine Months Ended September 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 nine months ended September 30, 2009, from the nine months ended September 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 nine months ended September 30, 2008 $ 2,411 $ 1.15
2008 Exit, implementation and integration costs 223 0.10
2008 Gain on sale of corporate headquarters building (263 ) (0.12 )
2008 Loss on early extinguishment of debt 256 0.12
2008 SABMiller special items 54 0.03
2008 Financing fees 3
Subtotal 2008 items 273 0.13
2009 Exit, implementation and integration costs (279 ) (0.14 )
2009 UST acquisition-related costs (126 ) (0.06 )
2009 SABMiller special items 16 0.01
2009 Tax items 31 0.01
Subtotal 2009 items (358 ) (0.18 )
Fewer shares outstanding 0.01
Operations 155 0.08
For the nine months ended September 30, 2009 $ 2,481 $ 1.19
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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 nine months ended September 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 $155 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, financial services and cigars; 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.
Consolidated Operating Results for the Three Months Ended September 30, 2009- The changes in Altria Group, Inc.'s net earnings and diluted EPS attributable to Altria Group, Inc. for the three months ended September 30, 2009, from the three months ended September 30, 2008, were due primarily to the following (in millions, except per share data):
Net Earnings Diluted EPS
For the three months ended September 30, 2008 $ 867 $ 0.42
2008 Exit, implementation and integration costs 27 0.01
2008 SABMiller special items 54 0.03
2008 Financing fees 3
Subtotal 2008 items 84 0.04
2009 Exit, implementation and integration costs (117 ) (0.06 )
2009 UST acquisition-related costs (5 )
2009 SABMiller special items (25 ) (0.01 )
2009 Tax items 31 0.01
Subtotal 2009 items (116 ) (0.06 )
Operations 47 0.02
For the three months ended September 30, 2009 $ 882 $ 0.42
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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 $47 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 financial services, cigarettes and cigars;
• Lower general corporate expenses; and
• Higher equity earnings from SABMiller;
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 October 2009, Altria Group, Inc. narrowed its 2009 full-year guidance for reported diluted EPS from continuing operations to a range of $1.53 to $1.56. Altria Group, Inc. previously forecasted that its 2009 full-year guidance for reported diluted EPS from continuing operations would be in the range of $1.51 to $1.56. 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. Altria Group, Inc. narrowed its 2009 full-year guidance for adjusted diluted EPS from continuing operations, which exclude the net charges in the table below, to a growth rate of 5% 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 (0.01 ) (0.03 )
UST acquisition-related costs 0.06 0.02
SABMiller special items (0.01 ) 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 112-115 for a discussion of Cautionary Factors That May Affect Future
Results.
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
2009 2008 2009 2008
(in millions)
Net revenues:
Cigarettes $ 15,546 $ 14,233 $ 5,626 $ 5,084
Smokeless products 1,023 352
Cigars 386 290 153 98
Wine 271 102
Financial services 316 179 67 56
Net revenues $ 17,542 $ 14,702 $ 6,300 $ 5,238
Excise taxes on products:
Cigarettes $ 4,631 $ 2,533 $ 1,899 $ 883
Smokeless products 62 26
Cigars 114 45 54 14
Wine 11 3
Excise taxes on products $ 4,818 $ 2,578 $ 1,982 $ 897
Operating income:
Operating companies income:
Cigarettes $ 3,902 $ 3,746 $ 1,333 $ 1,369
Smokeless products 302 127
Cigars 139 128 49 37
Wine 22 12
Financial services 260 97 57 (7 )
Amortization of intangibles (16 ) (5 ) (7 ) (2 )
Gain on sale of corporate
headquarters building 404
General corporate expenses (138 ) (236 ) (35 ) (66 )
Reduction of Kraft Foods Inc.
receivable (88 ) (88 )
UST transaction costs (60 )
Corporate exit costs (61 ) (250 ) (54 ) (2 )
Operating income $ 4,262 $ 3,884 $ 1,394 $ 1,329
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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 nine and three months ended September 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 - Pre-tax exit, implementation and integration costs consisted of the following (in millions):
For the Nine Months Ended September 30, 2009
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 86 $ 94 $ - $ 180
Smokeless products 146 33 179
Cigars 7 7
Wine 3 3 6
Financial services 3 3
General corporate 61 61
Total $ 299 $ 94 $ 43 $ 436
For the Nine Months Ended September 30, 2008
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 44 $ 48 $ - $ 92
Cigars 12 12
General corporate 250 250
Total $ 294 $ 48 $ 12 $ 354
For the Three Months Ended September 30, 2009
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 52 $ 44 $ - $ 96
Smokeless products 23 5 28
Wine 1 1 2
Financial services 3 3
General corporate 54 54
Total $ 133 $ 44 $ 6 $ 183
For the Three Months Ended September 30, 2008
Implementation Integration
Exit Costs Costs Costs Total
Cigarettes $ 15 $ 16 $ - $ 31
Cigars 9 9
General corporate 2 2
Total $ 17 $ 16 $ 9 $ 42
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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 nine and three months ended September 30, 2009, Altria Group, Inc. achieved $241 million and $76 million, respectively, in cost savings for a total cost savings of $881 million since January 1, 2007. Altria Group, Inc. expects to achieve approximately $619 million in additional cost savings by 2011, for total anticipated cost reductions of $1.5 billion versus 2006, as shown in the table below.
Cost Reduction Initiatives
Cost Savings Achieved
Additional
For the Nine Cost Total
For the Years Ended Months Ended Savings Cost
December 31, September 30, Expected by Savings
2007 and 2008 2009 2011 Expected
(in millions)
Corporate expense and
selling, general and
administrative $ 640 $ 241 $ 431 $ 1,312
Manufacturing
optimization program 188 188
Total cost reduction
initiatives $ 640 $ 241 $ 619 $ 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.
PM USA's manufacturing optimization program, as discussed in Note 3, is expected to entail capital expenditures of approximately $230 million. Capital expenditures for the program of $64 million and $12 million were made during the nine months and three months ended September 30, 2009, respectively, for a total of $185 million since the inception of the program in 2007.
• 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 Nine Months Ended For the Three Months Ended
September 30, 2009 September 30, 2009
(in millions)
Smokeless products $ 14 $ 1
Wine 15 5
Total $ 29 $ 6
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• SABMiller Special Items - Altria Group, Inc.'s earnings from its equity investment in SABMiller for the nine months ended September 30, 2009 included gains on the issuance of 60 million shares of common stock by SABMiller in connection with its acquisition of the remaining noncontrolling interest in its Polish subsidiary, partially offset by intangible asset impairment charges and costs for SABMiller's "business change programs."
Altria Group, Inc.'s earnings from its equity investment in SABMiller for the three months ended September 30, 2009 included costs for the business change programs mentioned above. Altria Group, Inc.'s earnings from its equity investment in SABMiller for the nine and three months ended September 30, 2008 included intangible asset impairment charges.
• Income Taxes - The income tax rate of 34.7% and 28.5% for the nine months and three months ended September 30, 2009, respectively was impacted by lower state taxes and the reversal of tax reserves and associated interest resulting from the execution of a closing agreement with the Internal Revenue Service ("IRS") discussed in Note 13. Income Taxes ("Note 13") to the condensed consolidated financial statements. The income tax rate for the nine months ended September 30, 2009 was further impacted by certain costs incurred in the first quarter of 2009 related to the acquisition of UST that are not deductible for tax purposes.
The benefit from the execution of the closing agreement with the IRS was offset by a reduction in a corresponding receivable from Kraft Foods Inc. ("Kraft"), included in marketing, administration and research costs on Altria Group, Inc.'s condensed consolidated statement of earnings. As a result, there was no impact on Altria Group, Inc.'s net earnings.
• Sales to PMI - Subsequent to the PMI spin-off, during the nine months and three months ended September 30, 2008, PM USA recorded net revenues of $207 million and $97 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 nine months ended September 30, 2008, in marketing, administration and research costs on Altria Group, Inc.'s condensed consolidated statement of earnings. 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.
• PMCC Allowance for Losses - During the second quarter of 2009, PMCC increased its allowance for losses by $15 million as a result of assessing its portfolio, including its exposure to Motors Liquidation Company, formerly known as General Motors Corporation ("GM"). PMCC increased its allowance for losses by $50 million, during the third quarter of 2008, as a result of credit rating downgrades of certain lessees and financial market conditions.
Consolidated Results of Operations for the Nine Months Ended September 30, 2009
The following discussion compares consolidated operating results for the nine months ended September 30, 2009, with the nine months ended September 30, 2008.
Net revenues, which include excise taxes billed to customers, increased $2,840 million (19.3%), due primarily to higher revenues from the cigarettes, financial services and cigars segments, and the acquisition of UST. Cigarettes and cigars . . .
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