excerpt from today's 10Q release.....................
Consolidated Results of Operations for the Three Months Ended March 31, 2008
The following discussion compares our consolidated operating results for the three months ended March 31, 2008, with the three months ended March 31, 2007.
Cigarette volume of 217.9 billion units increased 4.6 billion units or 2.2%. This increase was due primarily to acquisitions in Pakistan and Mexico. Excluding acquisitions, cigarette shipment volume was down 0.8% due primarily to lower volume in the European Union segment.
We achieved market share gains in a number of markets, including Argentina, Belgium, Egypt, Italy, Korea, Mexico, the Netherlands, Portugal, Russia, Spain and Ukraine.
Total cigarette shipments of Marlboro of 77.3 billion units were down 1.2%, with growth in Eastern Europe, Middle East and Africa, Asia and Latin America more than offset by a decline in the European Union. Total cigarette shipments of L&M of 23.8 billion units were down 8.0%, with a decline in Eastern Europe, Middle East and Africa, partially offset by growth in the European Union. Driven by a strong increase in shipments in Eastern Europe, Middle East and Africa, total cigarette shipments of Chesterfield grew 18.3% versus the prior-year quarter. Total cigarette shipments of Parliament recorded similar strong growth, up 18.8%, with gains in Eastern Europe, Middle East and Africa and Asia. Virginia Slims, led by shipments in Asia, grew 13.7%. Total shipment volume of other tobacco products (in cigarette equivalent units) surged more than 33.0%, fueled by strong growth in Germany and Poland.
Net revenues, which include excise taxes billed to customers, increased $2.3 billion or 17.6%. Excluding excise taxes, net revenues increased $781 million or 14.1% to $6.3 billion. This increase was due primarily to
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favorable currency ($482 million), net price increases ($292 million) and the impact of acquisitions ($46 million), partially offset by lower volume/mix ($39 million).
Excise taxes on products increased $1.6 billion (20.1%), due primarily to currency movements ($927 million), higher excise tax rates ($647 million) and acquisitions. As discussed under the caption "Business Environment," there is a trend toward governments' increasing excise taxes in all of the markets in which we operate. We expect excise taxes to continue to increase.
Cost of sales increased $178 million (8.4%), due primarily to currency movements ($153 million) and acquisitions ($8 million).
Marketing, administration and research costs decreased $45 million (3.7%), due primarily to the 2007 charges related to the termination of a distributor relationship in Indonesia ($30 million), lower marketing expenses ($36 million), lower general and administrative expenses ($34 million) and lower research and development costs ($16 million), partially offset by currency ($74 million) and acquisitions ($20 million).
Operating income increased $684 million or 32.1%. This increase was due primarily to net price increases ($279 million), favorable currency ($255 million), lower asset impairment and exit costs ($39 million), and lower marketing, administration and research costs, partially offset by lower volume/mix ($35 million).
Currency movements increased net revenues by $1.4 billion ($482 million, after excluding the impact of currency movements on excise taxes) and operating income by $255 million. These increases were due primarily to the weakness versus prior year of the U.S. dollar against the Euro, Turkish lira, Japanese yen and Russian ruble.
Interest expense, net, of $75 million increased $65 million, due primarily to higher average debt levels.
Our tax rate increased 0.5 percentage points to 29.6%. The tax rate is based on our full year geographical earnings mix projections and cash repatriation plans. Changes in earnings mix or in cash repatriation plans could have an impact on the effective tax rate which we monitor each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions. We are evaluating the impact of certain U.S. income tax regulations proposed in February 2008 and the ability to apply them to open tax years. If we can apply the proposed regulations retroactively, there may be a one-time tax benefit of between $140 million and $160 million. The evaluation is expected to be completed no later than the third quarter of 2008.
Net earnings of $1.9 billion increased $422 million or 29.2%. This increase was due primarily to higher operating income, partially offset by higher interest expense, net. Diluted and basic EPS of $0.89 increased by 29.0%.
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