Altria Group Inc. (MO), the manufacturer and seller of cigarettes, wine and other tobacco products, registered robust second quarter results of 2010 for the three-month period ending June 30, 2010.

Virginia-based Altria posted earnings of 50 cents a share in the quarter, flat compared with the prior-year quarter and in line with the Zacks Consensus Estimate. The quarter benefited from strong income across its tobacco and wine businesses, lower asset impairment and exit costs, and gains from a reversal of tax reserves and associated interest.

Following the quarter’s result, Altria lifted its fiscal 2010 adjusted earning range to $1.87 – $1.91 per share from $1.85 – $1.89, reflecting year-on-year growth of 7% – 9% from adjusted earnings of $1.75 per share delivered in fiscal 2009. The current Zacks Consensus Estimate of $1.87 remains at the low-end of the guidance range.

Also, the company modified fiscal 2010 GAAP earnings range to $1.81 – $1.85 per share from $1.78 – $1.82, portraying an annual growth of 18% – 20%.

Compared to the prior-year period, the quarterly total revenue sank 6.6% to $6.3 billion. Excluding excise taxes revenues dipped 5.5% to $4.3 billion. The results were impacted by lower cigarette volume and higher 2009 federal excise tax on tobacco products.

For the quarter under review, operating income decreased 8.8% year over year to $1.5 billion reflecting reduction of Kraft Foods Inc. (KFT), and Philip Morris International, Inc. (PM) receivables for tax liabilities, fully offset by a tax benefit associated with Kraft and Philip Morris. Also lower income from financial services partially offsets the overall increase in income.

Segment Details

Net revenue for the Cigarettes segment slipped 7.2% year over year to $5,589 million, indicating a decline in volume. However, adjusted operating income for the Cigarettes segment grew 1.7% to $1,495 million, certifying higher list prices and lower promotional spending, partially offset by lower volume and higher Food and Drug Administration (FDA) user fees.

On the basis of the year-ago quarter, net revenue for the Smokeless Products advanced 4.6% to $390 million in the reported quarter. However, adjusted operating income for the segment dipped 5.2% year over year to $202 million.

Attributing to higher volume and pricing, Cigars’ net revenues and adjusted operating income jumped 31.4% and 40.0% to $155 million and $56 million, respectively, in the quarter compared to a year earlier.

Based on higher volume, the Wine segment’s net revenues surged 12.8% to $106 million in the quarter. Also, the adjusted operating income soared 13.3% to $17 million versus the prior-year periods, portraying higher volume and lower restructuring and acquisition-related costs.

Revenue from the Financial Services plunged 69.1% year over year to $34 million in the quarter. Reported operating income decreased $44 million year over year to $39 million, reflecting lower gains on asset sales in 2010.

Cost Savings and Financial Update

During the quarter, Altria achieved cost savings of $129 million. The company is set to accomplish an additional cost saving of $290 million by fiscal 2011 for total anticipated cost reductions of $1.5 billion versus 2006.

Altria exited the quarter with cash and cash equivalents of $854 million, down significantly compared with $1,871 million at the end of fiscal 2009.

In the quarter, Altria issued $800 million of notes with a coupon of 4.125% maturing in September 2015. Altria also repaid $775 million of notes with a coupon of 7.125% that matured in June 2010.

Even in a slowly improving market, Altria remains optimistic about delivering stable growth. However, the company continues to invest in innovation, brand enhancement, together with productivity initiatives to gain market share. The company has been weighed down by several tobacco liability suits, which are likely to affect long-term profitability and creates volatility in Altria’s stock. The company faces intense price competition, changes in consumer preferences, consumer spending ability and unfavorable currency movements.
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