Altria’s 2010 full-year reported diluted EPS increased 21.4 percent to $1.87 versus $1.54 in the prior-year period. Reported full-year results increased due primarily to higher OCI from cigarettes and smokeless products, which included lower asset impairment, exit, integration and implementation costs. These factors were partially offset by lower OCI from financial services and cigars. Full-year comparisons were also impacted by higher 2009 corporate asset impairment and exit costs, and higher net tax benefits in 2010, as well as 2009 transaction costs and financing fees related to the acquisition of UST LLC (UST). Altria’s 2010 full-year adjusted diluted EPS increased 8.6 percent to $1.90, as shown in Table 1 below.
“Altria successfully navigated a challenging economic environment in 2010 and delivered strong results to our shareholders,” said Michael E. Szymanczyk, Chairman and Chief Executive Officer of Altria. “Altria grew its adjusted diluted earnings per share by nearly 9 percent in 2010, and increased its quarterly dividend rate by 11.8 percent, reflecting the underlying financial strength of our businesses. Altria’s total shareholder return in 2010 was 32.9 percent, outpacing the S&P 500’s total return of 14.8 percent for the eleventh straight year.”
The UST acquisition was accretive to Altria’s 2010 adjusted diluted earnings per share. Altria completed the acquisition of UST and its subsidiaries, U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), in January 2009.
Cost Management and Restructuring Charges
Altria and its companies achieved cost savings of $65 million in the fourth quarter of 2010 and $317 million for the full year of 2010. Altria expects to achieve approximately $145 million in additional cost savings by the end of 2011 for total anticipated cost reductions of $1.5 billion versus 2006, as shown in Table 2 below.
In the fourth quarter of 2010, Altria incurred pre-tax charges of $21 million for integration and implementation costs, UST acquisition-related costs and corporate exit costs. For the full year of 2010, Altria incurred pre-tax charges of $153 million primarily associated with Philip Morris USA Inc.’s (PM USA) Manufacturing Optimization Program for asset impairment, exit and implementation costs, as well as costs related to the UST acquisition and integration.
In the fourth quarter of 2009 and 2010, Altria recorded net tax benefits of $50 million and $31 million, respectively, primarily from the reversal of tax accruals that are no longer required and the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, and the closure of a state audit. These net tax benefits are reflected in Schedule 1, “Provision for income taxes.”
For the full year of 2010, Altria recorded net tax benefits of $279 million, primarily from the reversal of tax reserves and associated interest related to the closure of various federal and state audits, the expiration of statutes of limitations and tax accruals that are no longer required. Income taxes in 2010 included the reversal of tax reserves and interest of $169 million related to Altria’s former subsidiaries, Kraft Foods Inc. (Kraft) and Philip Morris International Inc. (PMI), in the second quarter of 2010, which is reflected in Schedule 3, “Provision for income taxes.” This $169 million tax benefit was fully offset by reductions of corresponding receivables from Kraft and PMI, which are also reflected in Schedule 3, “Reduction of Kraft and PMI tax-related receivables.”
Full-year income tax comparisons also reflect 2009 tax events, consisting primarily of a $53 million benefit from the utilization of net operating losses and the reversal of $88 million of tax reserves and interest related to Kraft, which is reflected in Schedule 3, “Provision for income taxes.” This $88 million tax benefit was fully offset by a reduction of a corresponding receivable from Kraft, which is also reflected in Schedule 3, “Reduction of Kraft and PMI tax-related receivables.”
Excluding the tax events during 2009 and 2010, Altria’s full-year effective tax rate on operations was 36.7 percent and 35.6 percent, respectively. The 2010 rate was lower due primarily to an increase in the domestic manufacturing deduction effective January 1.
Altria anticipates that its 2011 full-year effective tax rate on operations will be approximately 35.3 percent.
Pension Plans Contribution
In January 2011, Altria made a voluntary $200 million pre-tax contribution to its pension plans. At the end of 2010, Altria’s pension plans were 81 percent funded on a Projected Benefit Obligation (PBO) basis.
Share Repurchase Program
On January 26, 2011, Altria’s Board of Directors authorized a new $1 billion one-year share repurchase program. Stock repurchases under this program depend upon marketplace conditions and other factors. The share repurchase program remains subject to the discretion of the Board and replaces the previous 2008 to 2010 share repurchase program that was suspended in September 2009.
2011 Full-Year Guidance
The business environment for 2011 is likely to remain challenging, as adult consumers remain under economic pressure and face high unemployment. Altria’s tobacco operating companies face a number of uncertainties as they enter 2011. In the cigarettes segment, PM USA is continuing to see significant competitive activity and is cautious about the outlook for state excise tax increases. In the smokeless products segment, USSTC is just beginning to execute its plans for Skoal and, in the cigars segment, John Middleton Co. (Middleton) faces an especially challenging business environment.
Altria forecasts that 2011 full-year guidance for reported diluted EPS will be in the range of $2.00 to $2.06. This forecast includes estimated net charges of $0.01 per share related to SABMiller plc (SABMiller) special items, partially offset by estimated gains on sales of land and buildings.
Altria forecasts that 2011 full-year guidance for adjusted diluted EPS, which excludes these special items, will be in the range of $2.01 to $2.07, representing a growth rate of 6 percent to 9 percent from an adjusted base of $1.90 in 2010. Due to cigarette trade inventory movements and the timing of new tobacco product launches in 2010, as well as the uncertainties discussed above, Altria expects the first half of 2011 to be more challenging for income growth comparison purposes than the second half of 2011. Altria expects adjusted diluted earnings per share growth to build and accelerate as the year progresses.
The factors described in the Forward-Looking and Cautionary Statements section of this release represent continuing risks to this forecast.
Altria also anticipates that in 2011 capital expenditures will be approximately $200 million, and ongoing depreciation and amortization will be approximately $250 million.