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Altria Group Inc. (MO) posted adjusted earnings of 56 cents per share in the third quarter of 2011, in line with the Zacks Consensus Estimate. However, it was up 3.7% from the prior-year quarter. The quarter benefited from strong performance of its businesses, new share repurchase, and cost reduction initiatives.

Altria recorded net tax benefits both in the third quarter of 2011 and 2010 excluding the tax impact of the PMCC leveraged lease charge. Therefore, reported EPS increased 5.6% to 57 cents per share in the quarter. The increase was due to higher operating companies income (“OCI”) from financial services, smokeless products, cigars and wine, higher earnings from Altria's equity investment in SABMiller and shares outstanding. However, these were partially offset by lower OCI from cigarettes, higher general corporate expenses and higher net interest and other debt expense.

Quarter in Detail

Altria’s total revenue declined 4.6% to $6.1 billion, as opposed to the prior-year period. However, it exceeded the Zacks Consensus Estimate of $4.4 billion. The decline was attributable to lower net revenues from cigarettes, partially offset by higher net revenues from smokeless products, cigars, wine and financial services. Revenue net of excise taxes decreased 3.0% to $4.3 billion in the third quarter of 2011.

For the quarter under review, operating income increased 5.7% year over year to $1.9 billion.

Segment Details

Cigarettes Segment: Net revenue for the Cigarettes segment declined 7.0% year over year to $5.3 billion, primarily due to lower shipment volume, partially offset by higher list prices.

Furthermore, the adjusted OCI in the cigarettes segment fell 2.4% in the third quarter of 2011 to $1.5 billion. Adjusted operating income excludes restructuring costs related to the new cost reduction program for its tobacco and service company subsidiaries, but includes the impact of the Scott charge. Reported operating income in the quarter decreased 0.8% to $1.5 billion, primarily due to lower shipment volume and higher U.S. Food and Drug Administration (FDA) user fees, partially offset by higher list prices and lower asset impairment, exit and implementation costs.

Smokeless Products: On the basis of the year-ago quarter, net revenue in the Smokeless Products increased 9.5% to $426 million, primarily due to higher pricing.

Furthermore, adjusted operating income, which excludes restructuring and UST acquisition-related costs, grew a robust 15.5% year over year to $246 million. Reported operating income increased 16.7% year over year to $245 million in the quarter, primarily due to higher pricing and lower selling, general & administrative costs (SG&A).

Cigars: Net revenue for the Cigars segment jumped 15.0% year over year to $169 million, primarily due to higher volume, lower promotional spending and higher list prices.

Furthermore, both the adjusted (excluding integration costs) and the reported operating income growth increased 27.9% primarily due to lower promotional spending and higher volume.

Wine: Based on higher premium shipment volume, the Wine segment’s net revenues surged 23.4% to $132 million in the quarter. However, the adjusted operating income, excluding restructuring and UST acquisition-related costs, increased 41.2% year-over-year to $24 million. Reported operating income in the third quarter of 2011 increased 91.7% to $23 million, primarily due to lower restructuring costs and higher premium volume.

Financial Services: Reported and adjusted operating income for the financial services segment in the third quarter of 2011 primarily climbed to $83 million, due to a decrease in the allowance for losses and higher gains on asset sales.

Cost Savings, Share Repurchase and Financial Update

During the quarter, Altria completed its $1 billion cost reduction program of 2007 to 2011 on exceeding its $1.5 billion goal versus its 2006 cost base.

Altria has now initiated a new $1 billion cost reduction program for its tobacco and service company subsidiaries, reflecting Altria's objective to reduce cigarette-related infrastructure ahead of Philip Morris USA Inc.'s (PM USA) cigarette volume declines.

The new program is thus expected to deliver $400 million in annualized cost savings by the end of 2013. Altria estimates total pre-tax restructuring charges in connection with this new program of approximately $375 million, with approximately $340 million or 11 cents per share to be recorded in the fourth quarter of 2011, and the balance in 2012.

In addition, Altria successfully completed its previously announced 2011 share repurchase program of $1 billion during the third quarter. Under this program, Altria repurchased 37.6 million shares at an average price of $26.62, while in the third quarter of 2011, Altria repurchased 14.8 million shares at an average price of $25.93 for a total cost of $384 million.

Altria has again planned a new share repurchase program to return cash to its shareholders. On October 26, 2011, Altria's Board authorized a new $1 billion share repurchase program, which Altria intends to complete by the end of 2012.

In August 2011, Altria’s board also demanded an increase in the regular quarterly dividend by 7.9% to 41 cents per common share versus the previous rate of 38 cents per common share. The current annualized dividend rate is $1.64 per common share, and as of October 21, 2011, Altria's annualized dividend yield was 6.0%.

At the end of September 30, 2011, cash and cash equivalents were $3.04 billion versus $2.31 billion at the end of December 31, 2010. The company had long term debt of $13.1 billion.

Business Outlook

Altria revised its full-year 2011 guidance for reported EPS in the range of $1.60 to $1.66 from the previous range of $1.70 and $1.76, primarily due to fourth quarter 2011 charges associated with the new cost reduction program. This forecast includes estimated total net charges of 41 cents per share related to the previously disclosed Philip Morris Capital Corporation (PMCC) leveraged lease charge, the new cost reduction program, SABMiller plc (SABMiller) special items and tax items.

In addition, Altria reaffirms its 2011 full-year guidance for adjusted EPS, which excludes special items, to be in the range of $2.01 to $2.07, representing a growth rate of 6% to 9% from an adjusted base of $1.90 per share in 2010.

However, management at Altria stated that the business environment for the remaining 2011 is expected to remain challenging. This is because adult consumers remain under economic pressure and face high unemployment. In addition, Altria’s tobacco operating companies also face a number of fears as they near the fiscal year 2011.

Headquartered in Richmond, Virginia, Altria engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Also, it competes with Reynolds American Inc. (RAI) and Lorillard, Inc. (LO).
 
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