Other Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)
| | | | | | | | | | | | | | | | | | | | | Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages (PM USA) | Appeal Status | Duignan | February 2020(2)(2) | PM USA and R.J. Reynolds(3) | Pinellas | $3 million | $12 million | Defendants’ post-trial motionsAppeal by defendants to Second District Court of Appeal pending. | Cuddihee | January 2020 | PM USA | Duval | $3 million | $0 | Defendant’s post-trial motionsAppeal by plaintiff and defendant to First District Court of Appeal pending. | Rintoul (Caprio)(Caprio) | November 2019(2)(2) | PM USA and R.J. Reynolds | Broward | $9 million ($5 million PM USA) | $74 million | Defendants’ post-trial motion pending. | Gloger | November 2019(2)
| PM USA and R.J. Reynolds | Miami-Dade | $15 million ($5 million PM USA) | $11 million | Appeal by defendants to Third District Court of Appeal pending. | McCall | March 2019 | PM USA | Broward | <$1 million (<$1 million PM USA) | <$1 million | New trial ordered on punitive damages. | Neff | March 2019 | PM USA and R.J. Reynolds | Broward | $4 million | $2 million | Appeals by plaintiff and defendants to Fourth District Court of Appeal pending. | FrogelGloger | November 2019 (2) | PM USA and R.J. Reynolds | Miami-Dade | $15 million | $11 million | Appeal by defendants to Third District Court of Appeal pending. | McCall | March 2019 | PM USA | Palm BeachBroward | <$1 million (<$1 million PM USA) | $0 | Appeals by plaintiff and defendant to Fourth District Court of Appeal pending. |
Other Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)
New trial ordered on punitive damages. | Neff | March 2019 | | | | | | Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1)
| Punitive Damages (PM USA) | Appeal Status | Mahfuz | February 2019 | PM USA and R.J. Reynolds | Broward | $124 million | $102 million | Appeals by plaintiff and defendants to Fourth District Court of Appeal pending. | HollimanMahfuz | February 2019 | PM USA | Miami-Dade | $3 million | $0 | Defendant’s appeal to Third District Court of Appeal pending. | Chadwell | September 2018 | PM USA | Miami-Dade | $2 million | $0 | Appeals by defendant and plaintiff to Third District Court of Appeal pending. | Kaplan | July 2018 | PM USA and R.J. Reynolds | Broward | $212 million | $210 million | Appeals by defendants and plaintiff to Fourth District Court of Appeal pending. | Landi | June 2018 | PM USA and R.J. Reynolds | Broward | $8 million | $5 million | Appeals by plaintiff and defendants to Fourth District Court of Appeal pending. | Holliman | February 2019 | PM USA | Miami-Dade | $3 million | $0 | Defendant’s appeal to Third District Court of Appeal pending. | Chadwell | September 2018 | PM USA | Miami-Dade | $2 million | $0 | Third District Court of Appeal affirmed the compensatory damages award. PM USA petitioned Florida Supreme Court for review. Case stayed pending Florida Supreme Court decision in Prentice. (3) | Kaplan | July 2018 | PM USA and R.J. Reynolds | Broward | $2 million | $2 million | Fourth District Court of Appeal affirmed the verdict. Defendants’ motion for rehearing pending. |
| | | | | | | | | | | | | | | | | | | | | Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages (PM USA) | Appeal Status | R. Douglas | November 2017 | PM USA | Duval | <$1 million | $0 | Awaiting entry of final judgment by the trial court. | Sommers | April 2017 | PM USA | Miami-Dade | $1 million | $0 | Third District Court of Appeal affirmed compensatory damages award and granted new trial on punitive damages. Defendant petitioned Florida Supreme Court denied PM USA’s petition for review. | Santoro | March 2017 | PM USA, R.J. Reynolds and Liggett Group(3)
| Broward | $2 million | $0 | Trial court set aside punitive damages award; appeals by plaintiff and defendants to Fourthreview of the Third District Court of Appeal pending.Appeal’s decision. PM USA paid approximately $1 million for the compensatory damages award and awaits the new trial on punitive damages. (4) | Cooper (Blackwood) | September 2015 | PM USA and R.J. Reynolds | Broward | $5 million
(<$1 million PM USA) | $0 | Fourth District Court of Appeal affirmed judgment and granted a new trial on punitive damages. | D. Brown | January 2015 | PM USA | Federal Court - Middle District of Florida | $8 million | $9 million | Appeal by defendant to U.S. Court of Appeals for the Eleventh Circuit pending. | Kerrivan | October 2014 | PM USA and R.J. Reynolds | Federalstayed pending Florida Supreme Court - Middle District of Florida | $16 million | $16 million | U.S. Court of Appeals for the Eleventh Circuit affirmed the judgment. Defendants’ motion for rehearing pending. | Harris | July 2014 | PM USA, R.J. Reynolds and Lorillarddecision in Prentice. (3)
| Federal Court - Middle District of Florida | $2 million (<$ 1 million PM USA) | $0 | Appeals by plaintiff and defendants to U.S. Court of Appeals for the Eleventh Circuit pending. |
(1)PM USA’s portion of the compensatory damages award is noted parenthetically where the court has ruled that comparative fault applies. (2) Plaintiff’s verdict following a retrial of an initial verdict in favor of plaintiff. (3) References PM USA is not a defendant in Prentice. (4) Plaintiff was granted an award of approximately $3 million in fees, costs and interest that PM USA appealed. The Florida Third District Court of Appeals affirmed the award and PM USA paid the award amount in March 2021.
Engle Cases Concluded Within Past 12 Months (1) (rounded to “R.J. Reynolds,” “Liggett Group” and “Lorillard” are to R.J. Reynolds Tobacco Company, Liggett Group, LLC and Lorillard Tobacco Company, respectively.nearest $ million) Engle Cases Concluded Within Past 12 Months(1)
(rounded to nearest $ million)
| | | | | | | | Plaintiff | Verdict Date | Defendant(s) | Court | Accrual Date | Payment Amount (if any)
| Payment Date | TheisBerger (Cote) (2)
| May 2018September 2014 | PM USA and R.J. Reynolds | Sarasota | First quarter of 2020 | $17 million | February 2020 | Alvarez Del Real | September 2019 | PM USA | Miami-Dade | Fourth quarter of 2019 | <$1 million | October 2019 |
Engle Cases Concluded Within Past 12 Months(1)
(rounded to nearest $ million)
| | | | | | | | Plaintiff | Verdict Date | Defendant(s) | Court | Accrual Date | Payment Amount
(if any)
| Payment Date | Zingaro | May 2019 | PM USA and R.J. Reynolds | Broward | Third quarter of 2019 | <$1 million | October 2019 | Bryant | December 2017 | PM USA | Escambia | Second quarter of 2019 | <$1 million | July 2019 | Wallace | October 2017 | PM USA and R.J. Reynolds | Brevard | Second quarter of 2019 | $26 million | May 2019 | J. Brown | February 2017 | PM USA and R.J. Reynolds | Pinellas | First quarter of 2019 | $4 million | April 2019 | L. Martin | May 2017 | PM USA | Miami-Dade | First quarter of 2019 | $2 million | April 2019 | Danielson | November 2015 | PM USA | Escambia | First quarter of 2019 | $3 million | March 2019 | S. Martin | November 2016 | PM USA and R.J. Reynolds | Broward | First quarter of 2019 | $5 million | March 2019 | Searcy | April 2013 | PM USA and R.J. Reynolds | Federal Court - Middle District of Florida | Fourth quarter of 2018 and first quarter of 2021 | $29 million | February 2021 | Santoro (3) | March 2017 | PM USA, R.J. Reynolds and Liggett Group | Broward | Second quarter of 2020 and first quarter of 2021 | $1 million | January 2021 | Dean (Kerrivan) (4) | October 2014 | PM USA and R.J. Reynolds | Federal Court - Middle District of Florida | Third quarter of 20182020 | $226 million | March 2019August 2020 | BoatrightLandi (5) | November 2014June 2018 | PM USA and Liggett GroupR.J. Reynolds | PolkBroward | Second quarter of 20182020 | $4210 million | March 2019 | M. BrownJuly 2020(3)
| May 2015 | PM USA | Duval | Second quarter of 2018 | $8 million | March 2019 | Jordan(4)
| August 2015 | PM USA | Duval | Second quarter of 2018 | $11 million | March 2019 | Pardue | December 2016 | PM USA and R.J. Reynolds | Alachua | Second and Third quarters of 2018 | $11 million | March 2019 | McKeever | February 2015 | PM USA | Broward | Fourth quarter of 2017 | $21 million | March 2019 |
(1)In two4 cases in which PM USA paid the judgments more than a year ago, Naugle, Gore, M. Brown and GoreJordan, plaintiffs were awarded approximately $8 million, $2 million, $8 million and approximately $2$4 million in fees and other costs, respectively. In both cases, PM USA has appealed.appealed in all of these cases. In (2) In February 2020, M. Brown, in March 2021 the Florida SecondFirst District Court of Appeal deniedAppeals affirmed the fee award and reversed the pre-judgment interest award and, in April 2021, PM USA’s petition for review.USA paid $8.2 million in satisfaction of the fee award and post-judgment interest.
(2) In January 2021, the Eleventh Circuit Court of Appeals affirmed the punitive damages award. As a result, in the first quarter of 2021, PM USA recorded a pre-tax provision of approximately $21 million, including interest, for the judgment and in February 2021 paid this amount plus an amount reflecting a pre-tax provision recorded in the fourth quarter of 2018 of approximately $6 million, including interest, for compensatory damages. Also in February 2021, PM USA paid additional fees in the amount of approximately $1.5 million. (3) In January 2021, the Florida Supreme Court denied defendants’ appeal of the punitive damages award. As a result, in the first quarter of 2021, PM USA recorded a pre-tax provision of approximately $0.2 million, including interest, for the judgment and in January 2021 paid this amount plus an amount reflecting a pre-tax provision recorded in the second quarter of 2020 of approximately $0.8 million, including interest, for compensatory damages. (4) In August 2020, the U.S. Court of Appeals for the Eleventh Circuit denied the defendants’ petition for rehearing. As a result, in the third quarter of 2020, PM USA recorded a pre-tax provision of approximately $17$26 million, reflecting its portion of the judgment plus interest, and paid this amount in August 2020. (5) In June 2020, the Fourth District Court of Appeal affirmed the compensatory damages award. As a result, in the second quarter of 2020, PM USA recorded a pre-tax provision of approximately $10 million for the judgment plus interest which was subsequentlyand paid this amount in the first quarter ofJuly 2020. (3) The trial court also awarded plaintiff approximately $9 million in fees, interest and costs. PM USA and plaintiff have appealed.
(4) The trial court also awarded plaintiff approximately $4 million in fees and costs. PM USA and plaintiff have appealed.
Florida Bond Statute
Statute: In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs have been unsuccessful in various challenges to the bond cap statute in Florida state court.
No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.
From time to time, legislation has been presented to the Florida legislature that would repeal the bond cap statute; however to date, no legislation repealing the statute has passed.
Other Smoking and Health Class ActionsActions:
Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 61 smoking and health class actions involving PM USA in Arkansas (1), California (1), Delaware (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1). See Certain Other Tobacco-Related
Litigation below for a discussion of “Lights” and “Ultra Lights” class action cases and medical monitoring class action cases pending against PM USA.
As of April 27, 2020,January 25, 2021, PM USA and Altria are named as defendants, along with other cigarette manufacturers, in 7 class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (2 separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants’ cigarettes. In March 2019, all of these class actions were
stayed as a result of 3 Canadian tobacco manufacturers (none of which is related to Altria or its subsidiaries) seeking protection under Canada’s Companies’ Creditors Arrangement Act (which is similar to Chapter 11 bankruptcy in the U.S.). The companies entered into these proceedings following a Canadian appellate court upholding 2 smoking and health class action verdicts against those companies totaling approximately CAD $13 billion. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI, which provides for indemnities for certain liabilities concerning tobacco products.
Health Care Cost Recovery Litigation
Overview
Overview: In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Although there have been some decisions to the contrary, most judicial decisions in the U.S. have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five federal circuit courts of appeal.
In addition to the cases brought in the U.S., health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria, in Canada (10 cases), and other entities have stated that they are considering filing such actions.
Since the beginning of 2008, the Canadian Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in the British Columbia and Quebec cases, while both Altria and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia cases. The Nunavut Territory and Northwest Territory have passed legislation permitting similar claims, but lawsuits based on this legislation have not been filed. All of these cases have been stayed pending resolution of proceedings in Canada involving 3 tobacco manufacturers (none of which are affiliated with Altria or its subsidiaries) under the Companies’ Creditors Arrangement Act discussed above. See Smoking and Health Litigation - Other Smoking and Health Class Actions above for a discussion of these proceedings. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Settlements of Health Care Cost Recovery Litigation
Litigation: In November 1998, PM USA and certain other tobacco product manufacturers entered into the MSA1998 Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia and certain U.S. territories to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers or “OPMs” (now PM USA, and R.J. Reynolds and, with respect to certain brands, ITG Brands, LLC (“ITG”)) make annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the OPMs are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million. For the three months ended March 31, 2021 and 2020, and
2019, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $1.1$0.9 billion and $0.9$1.1 billion, respectively. These amounts include PM USA’s estimate of amounts related to NPM Adjustments discussed below.
NPM Adjustment DisputesDisputes:
PM USA is participating in proceedings regarding the NPM Adjustment for 2003-2019.2003-2020. The “NPM Adjustment” is a reduction in MSA payments made by the OPMs and those manufacturers that are subsequent signatories to the MSA (collectively, the “participating manufacturers” or “PMs”) that applies if the PMs collectively lose at least a specified level of market share to non-participating manufacturers since 1997, subject to certain conditions and defenses. The independent auditor (the “IA”) appointed under the MSA calculates the maximum amount of the NPM Adjustment, if any, for each year.
NPM Adjustment Disputes - Settlement with 36 States and Territories and SettlementSeparate Settlements with Montana and New York.
PM USA has entered into 23 settlements of NPM Adjustment disputes with a total of 3738 states and territories, one with 36 states and territories (the “multi-state settlement”) and the other, one with the State of New York.York and one with the State of Montana. In the multi-state settlement, PM USA, by the end of October 2017, had settled the NPM Adjustment disputes for 2003-2015 with 26 states in exchange for a total of $740 million. In 2018, there were 2 principal developments with respect to this settlement. First, PM USA agreed to settle the NPM Adjustment disputes for 2016 and 2017 with the 26 states mentioned above. Second,above and PM USA settled the NPM Adjustment disputes for 2004-2017 with 10 additional states. As a result of these 2 developments, PM USA will receive approximately $248 million, $68 million of which it received in April 2018, $121 million of which it received in April 2019, and $47 million of which it received in April 2020.2020 and $8 million of which it received in April 2021. In connection with these 2 developments, PM USA recorded a reduction to cost of sales in the amount of $39 million in 2017 and in the amount of $209 million in 2018. In the first quarter of 2019, PM USA also recorded a reduction to cost of sales in the amount of $52 million for its estimate of the 2018 NPM Adjustment settlement credit it expectsexpected to receive under the multi-state settlement.
In the first quarter of 2020, the PMs agreed that certain conditions set forth in the multi-state settlement by the 10 states that settled the NPM Adjustment in 2018 had been met. As a result, PM USA’s and the other PMs’ settlement with Pennsylvania was extended to include NPM Adjustments for 2018-2024,2018-2024. In the third quarter of 2020, PM USA and settlementsthe other PMs also agreed with the other 935 states were extendedto extend the settlement with those states to include NPM Adjustments for 2018-2019.2018-2022. As a result of this development,these two developments, PM USA will receive approximately $43$361 million in credits to offset PM USA’s MSA payments over nine years.
through 2029.
In the NPM Adjustment settlement with New York, which was entered into in 2015, PM USA has received approximately $317$373 million for 2004-2018. PM USA and the other participating manufacturers are involved in a proceeding pursuant to the New York settlement in which an independent investigator will determine the amounts due to the participating manufacturers from New York for 2019 and 2020.2004-2019. PM USA expects to receive suchcash amounts annually, pursuant to the NPM Adjustment settlement with New York. As discussed below, in April 2021November 2020, PM USA and April 2022, respectively.other PMs reached a resolution with Montana with respect to NPM adjustments for 2005-2019. Both theThe New York settlement, the Montana settlement and the multi-state settlement also contain provisions resolving certain disputes regarding the application of the NPM Adjustment going forward.
2003 and Subsequent NPM Adjustments - Continuing Disputes with States that have not Settled.
▪2003 NPM Adjustment. In September 2013, an arbitration panel issued rulings regarding the 15 states and territories that remained in the arbitration, ruling that 6 of them did not establish valid defenses to the NPM Adjustment for 2003. In June 2014, 2 of these 6 states joined the multi-state settlement discussed above. With respect to the remaining 4 states, following the outcome of challenges in state courts, PM USA ultimately recorded $74 million primarily as a reduction to cost of sales, with the final adjustment being recorded in the third quarter of 2017. Subsequently, another one of the 6 states joined the multi-state settlement. NaN potential disputes remain outstanding regarding the amount of interest due to PM USA and there is no assurance that PM USA will prevail in either of these disputes.
| | ▪ | ▪2004 and Subsequent NPM Adjustments. PM USA has continued to pursue the NPM Adjustments for 2004 and subsequent years in multi-state arbitrations against the states that did not join the settlements discussed above. In September 2019, a New Mexico state appellate court affirmed a trial court’s order compelling New Mexico to arbitrate the 2004 NPM Adjustment claims in the multi-state arbitration with the other states. In November 2019, the New Mexico Supreme Court declined to review that decision. The arbitration hearing for New Mexico has been scheduled for October 2021. 2003 NPM Adjustment. In September 2013, an arbitration panel issued rulings regarding the 15 states and territories that remained in the arbitration, ruling that 6 of them did not establish valid defenses to the NPM Adjustment for 2003. In June 2014, 2 of these 6 states joined the multi-state settlement discussed above. With respect to the remaining 4 states, following the outcome of challenges in state courts, PM USA ultimately recorded $74 million primarily as a reduction to cost of sales. Subsequently, another one of the 6 states joined the multi-state settlement. NaN potential disputes remain outstanding regarding the amount of interest due to PM USA and there is no assurance that PM USA will prevail in either of these disputes.
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| | ▪ | 2004 and Subsequent NPM Adjustments. PM USA has continued to pursue the NPM Adjustments for 2004 and subsequent years in multi-state arbitrations against the states that did not join either of the settlements discussed above. In September 2019, a New Mexico state appellate court affirmed a trial court’s order compelling New Mexico to arbitrate the 2004 NPM Adjustment claims in the multi-state arbitration with the other states. In November 2019, the New Mexico Supreme Court declined to review that decision. The arbitration hearing has not yet been scheduled. The Montana state courts ruled that Montana may litigate its claims in state court, rather than participate in a multi-state arbitration and the PMs have agreed not to contest the applicability of the 2004 NPM Adjustment to Montana. In April 2020, the State of Montana filed a motion in Montana state court against the PMs, including PM USA, and a Nat
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Sherman affiliate, claiming that Montana’s share of the NPM Adjustment amounts should behave been paid to the state in advance of the resolution of disputes over the applicability of those adjustments. Montana’s share of the amounts PM USA and the Nat Sherman affiliate have been placing the disputed NPM Adjustment amountsplaced in the disputed payments account established pursuant to the terms of the MSA. Montana seeksMSA on account of the NPM Adjustment disputes was approximately $13.8 million. The matter was resolved by agreement in November 2020 resulting in a totalsettlement payment from PM USA of approximately $43$4 million, which was recorded to cost of sales in the fourth quarter of 2020, and the release to Montana of its share of PM USA’s money in the disputed payments from all defendants combined, as well as treble and punitive damages.
The hearings in a 2004 multi-state arbitration with allaccount for the NPM Adjustment disputes. As part of the states that haveagreement, the PMs agreed not settled otherto contest the application of the NPM Adjustment to Montana for 2005-2030.
Other than Montana and New Mexico, concludedall of the non-settling states participated in July 2019.a 2004 multi-state arbitration. As of April 27, 2020,29, 2021, no decisions have resulted from the arbitration.
The PMs have reached an agreement with the states that have not settled (with the exception of Missouri) that the next round of NPM arbitrations will encompass three years, 2005-2007, and the parties have selected an arbitration panel for the 2005-2007 arbitration. Missouri is participating in the arbitration, but has agreed to arbitrate only one year, 2005, before the panel. The hearings in this arbitration have not yet been scheduled. No assurance can be given as to when proceedings for 20052008 and subsequent years will be scheduled or the precise form those proceedings will take.
The IA has calculated that PM USA’s share of the maximum potential NPM Adjustments for 2004-20182004-2020 is (exclusive of interest or earnings): $388 million for 2004; $181 million for 2005; $154 million for 2006; $185 million for 2007; $250 million for 2008; $211 million for 2009; $218 million for 2010; $166 million for 2011; $214 million for 2012; $224 million for 2013; $258 million for 2014; $313 million for 2015; $305$292 million for 2016; $297$302 million for 2017; $340$325 million for 20182018; $444 million for 2019 and $441$572 million for 2019.2020. These maximum amounts will be reduced, likely substantially, to reflect the NPM Adjustment settlements with the signatory states and New York,discussed above, and potentially for current and future calculation disputes and other developments. Finally, PM USA’s recovery of these amounts, even as reduced, is dependent upon subsequent determinations regarding state-specific defenses and disputes with other PMs.
Other Disputes Under the State Settlement AgreementsAgreements:
The payment obligations of the tobacco product manufacturers that are parties to the State Settlement Agreements, as well as the allocations of any NPM Adjustments and related settlements, have been and may continue to be affected by R.J. Reynolds’s acquisition of Lorillard in 2015 and its related sale of certain cigarette brands to ITG (the “ITG transferred brands”). In particular, both R.J. Reynolds and ITG have asserted that they do not have to make payments on the ITG transferred brands under the Florida, Minnesota and Texas State Settlement Agreements or include the ITG transferred brands for purposes of certain calculations under the State Settlement Agreements. PM USA believes that R.J. Reynolds’s and ITG’s position violatespositions violate the State Settlement Agreements and applicable law. PM USA further believes that these actions: (i) improperly increased PM USA’s payments for 2015-2019;2015-2020; (ii) may improperly increase PM USA’s payments for subsequent years; (iii) improperly decreased PM USA’s share of the 2015-20192015-2020 NPM Adjustments and of the settlements of related disputes; and (iv) may improperly decrease PM USA’s share of NPM Adjustments and related settlements for subsequent years.
In January 2017, PM USA and the State of Florida each filed a motion in Florida state court against R.J. Reynolds and ITG seeking to enforce the Florida State Settlement Agreement. In August 2018, the Florida trial court entered final judgment ruling that R.J. Reynolds (and not ITG) must make settlement payments under the Florida State Settlement Agreement on the ITG transferred brands, and ordering R.J. Reynolds to pay PM USA approximately $9.8 million (inclusive of interest) for the 2015-2017 period. Both R.J. Reynolds and PM USA have each filed notices of appeal and, in July 2020, the Florida Fourth District Court of Appeal affirmed the trial court’s decision, which proceedings may result in further modifications to PM USA’s settlement payments underdecision. In September 2020, the Florida State Settlement Agreement.
Fourth District Court of Appeal denied R.J. Reynolds’s motions for rehearing. In October 2020, R.J. Reynolds petitioned the Florida Supreme Court to review the appellate court decision; the petition was denied in December 2020.
In March 2018, PM USA and the State of Minnesota filed pleadings in Minnesota state court asserting claims against R.J. Reynolds and ITG, similar to those made in Florida, and seeking to enforce the Minnesota State Settlement Agreement. In September 2019, the Minnesota court granted the State of Minnesota’s and PM USA’s motions to enforce the agreement against R.J. Reynolds. The Minnesota court concluded, however, that it could not yet resolve the question of ITG’s liability under the Minnesota State Settlement Agreement. An evidentiary hearing on the question of ITG’s potential liability is to bewas held in the third quarter of 2020.
In March 2021, the parties resolved these disputes and agreed, among other requirements, that ITG would (i) be considered a party to the Minnesota State Settlement Agreement for the ITG transferred brands and (ii) assume the payment obligations under the Minnesota State Settlement Agreement for the ITG transferred brands beginning with the payment for the 2020 calendar year. The parties also resolved issues relating to payments due with respect to the ITG transferred brands and issues relating to the allocation of the profit adjustment with respect to the ITG transferred brands under the Minnesota State Settlement Agreement. At the parties’ request, the Minnesota court so ordered the parties’ resolution and dismissed the pending motions to enforce under the Minnesota State Settlement Agreement.
In December 2018, PM USA filed a motion in Mississippi state court seeking to enforce the Mississippi State Settlement Agreement against R.J. Reynolds and ITG with respect to the accuracy of certain submissions made by R.J. Reynolds and ITG concerning the calculation of payments relating to the ITG transferred brands. A hearing in the case is currently scheduled for August 2021. In December 2019, in a separate matter, the State of Mississippi filed a motion in Mississippi state court seeking to enforce the Mississippi State Settlement Agreement against PM USA, R.J. Reynolds and ITG concerning the tax rates used in the annual calculation of the April 2019 payments.
net operating profit adjustment payments starting in 2018. A hearing is scheduled for October 2021.
In January 2019, PM USA and the State of Texas each filed a motion in federal court in the Eastern District of Texas asserting claims against R.J. Reynolds and ITG, similar to those made in Florida and Minnesota, seeking to enforce the Texas State Settlement Agreement. OnIn February 25, 2020, the Texas court granted the State of Texas’Texas’s and PM USA’s motions to enforce the settlement agreement against R.J. Reynolds. The Texas court, however, deferred the ultimate resolution of the motions to
enforce against ITG, because it concluded that question was dependent upon the outcome of separate litigation pending between
ITG and R.J. Reynolds in the Delaware Court of Chancery. In August 2020, R.J. Reynolds appealed the Eastern District of Texas’s ruling to the U.S. Court of Appeals for the Fifth Circuit. ITG and the State of Texas also have filed notices of appeal, each of which is limited to the issue of how payments of statutory fees are treated under the Eastern District of Texas’s ruling. The appeals remain pending.
In January 2021, PM USA and other PMs reached an agreement with several MSA states to waive the PMs’ claim under the most favored nation provision of the MSA in connection with a settlement between those MSA states and a non-participating manufacturer, S&M Brands, Inc. (“S&M Brands”), under which the states released certain claims against S&M Brands in exchange for receiving a portion of the funds S&M Brands had deposited into escrow accounts in those states pursuant to the states’ escrow statutes. In consideration for waiving its most favored nation claim, PM USA received approximately $32 million from the escrow funds paid to those MSA states under their settlement with S&M Brands. Such funds were received in January 2021 and were recorded in the financials for the first quarter of 2021 as a reduction to cost of sales.
Federal Government’s Lawsuit
Lawsuit: In 1999, the United States government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria, asserting claims under three federal statutes. The case ultimately proceeded only under the civil provisions of RICO. In August 2006, the district court held that certain defendants, including Altria and PM USA, violated RICO and engaged in seven of the eight “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:
▪defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;
| | ▪ | defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking; |
| | ▪ | defendants hid from the public that cigarette smoking and nicotine are addictive; |
| | ▪ | defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction; |
| | ▪ | defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes; |
| | ▪ | defendants falsely denied that they intentionally marketed to youth; |
| | ▪ | defendants publicly and falsely denied that ETS is hazardous to non-smokers; and |
| | ▪ | defendants suppressed scientific research. |
▪defendants hid from the public that cigarette smoking and nicotine are addictive;
▪defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction; ▪defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes; ▪defendants falsely denied that they intentionally marketed to youth; ▪defendants publicly and falsely denied that ETS is hazardous to non-smokers; and ▪defendants suppressed scientific research. The court did not impose monetary penalties on defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes;” (iv) an injunction against conveying any express or implied health message or health descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to ETS; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the FTC for a period of 10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the U.S.; and (ix) payment of the government’s costs in bringing the action.
Following several years of appeals relating to the content of the corrective statements remedy described above, in October 2017, the district court approved the parties’ proposed consent order implementing corrective statements in newspapers and on television. The corrective statements began appearing in newspapers and on television in the fourth quarter of 2017. In April 2018, the parties reached agreement on the implementation details of the corrective statements on websites and onserts. The corrective statements began appearing on websites in the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018.
In 2014 and 2019, Altria and PM USA recorded provisions totaling $31approximately $36 million for the estimated costs of implementing the corrective communications remedy. In the fourth quarter of 2019, PM USA updated its estimate and recorded approximately $5 million for additional costs to finish implementing the corrective communications remedy.
The requirements related to corrective statements at point-of-sale remain outstanding. In May 2014, the district court ordered further briefing on the issue, which was completed in June 2014. In May 2018, the parties submitted a joint status report and additional briefing on point-of-sale signage to the district court. In May 2019, the district court ordered a hearing on the point-of-sale signage issue. The hearing is currently scheduled for July 2021.
In June 2020, the United States government filed a motion with the district court asking for clarification as to whether the court-ordered injunction that applies to cigarettes also applies to HeatSticks, a heated tobacco product used with the IQOS electronic device. In August 2020, Altria and PM USA filed an opposition to the government’s motion and, in the alternative, a motion to modify the injunction to make clear it does not apply to HeatSticks. Regardless of the district court’s decisions on the pending motions, the government has indicated it will not oppose a modification to the injunction that permits PM USA to use the Modified Risk Tobacco Product claim authorized by the United States Food and Drug Administration for HeatSticks.
E-vapor Product Litigation
As of April 27, 2020,26, 2021, Altria and/or its subsidiaries, including PM USA, were named as defendants in 2447 class action lawsuits relating to JUUL e-vapor products. JUUL is an additional named defendant in each of these lawsuits. The theories of recovery include violation of RICO, fraud, failure to warn, design defect, negligence and unfair trade practices. Plaintiffs also are seekingsought to add antitrust claims due to the recent actionadministrative complaint filed by the FTC. Although the MDL court denied this request in the class action lawsuits, the individual antitrust claims remain pending before the same court. See Antitrust Litigation below for further discussion. Plaintiffs seek various remedies, including compensatory and punitive damages and an injunction prohibiting product sales. The 47 class action lawsuits include 21 cases involving plaintiffs whose claims were previously included in other class action complaints but were refiled as separate stand-alone class actions for procedural and other reasons
.
Altria and/or its subsidiaries, including PM USA, also have been named as defendants in other lawsuits involving JUUL e-vapor products, including 1701,980 individual lawsuits, 5123 “third party” lawsuits, filed bywhich include school districts, state orand local governments, including the states of Alaska, Hawaii and 3 lawsuits filed by school districts.Minnesota, and tribal and healthcare organization lawsuits. JUUL is an additional named defendant in each of these lawsuits.
The majority of the individual and class action lawsuits mentioned above were filed in federal court. In October 2019, the United States Judicial Panel on Multidistrict Litigation ordered the coordination or consolidation of these lawsuits in the U.S. District Court for the Northern District of California for pretrial purposes.
Altria and its subsidiaries filed motions to dismiss certain claims in the class action and school district cases, including the federal RICO claim. In October 2020, the U.S. District Court for the Northern District of California granted the motion to dismiss the RICO class action claim without prejudice. Although it otherwise denied the motion, the court found that plaintiffs had not sufficiently alleged standing or causation with respect to their claim under California law. The court also granted the motion to dismiss the RICO claim in the cases filed by various school districts, but denied the motion in all other respects. The court gave plaintiffs the opportunity to amend their complaints to attempt to cure the deficiencies the court identified and plaintiffs filed their amended complaints in November 2020. In January 2021, Altria and its subsidiaries filed a renewed motion to dismiss the RICO claim, which the court denied in April 2021.
An additional group of cases is pending in California state courts. In January 2020, the Judicial Council of California determined that this group of cases was appropriate for coordination and assigned the group to the Superior Court of California, Los Angeles County, for pretrial purposes.
Neither Altria nor any of its subsidiaries has filed a response in any of these cases, and 0NaN case in which Altria or any of its subsidiaries is named has been set for trial.
JUUL also is named in a significant number of additional individual and class action lawsuits to which neither Altria nor any of its subsidiaries is currently named.
Certain Other Tobacco-Related Litigation
IQOS Litigation
In April 2020, RAI Strategic Holdings, Inc. and R.J. Reynolds Vapor Co., which are affiliates of R.J. Reynolds, filed a lawsuit against Altria, PM USA, Altria Client Services LLC, PMI and its affiliate, Philip Morris Products S.A., in the United States District Court for the Eastern District of Virginia. The lawsuit asserts claims of patent infringement based on the sale of the IQOS electronic device and HeatSticks in the United States. Plaintiffs seek various remedies, including preliminary and permanent injunctive relief, treble damages and attorneys’ fees. Altria and PMI have been dismissed from the lawsuit. In June 2020, the remaining defendants filed a motion to dismiss certain of plaintiffs’ claims and also filed counterclaims against the plaintiffs for infringement of various patents owned by the remaining defendants. The case was stayed in December 2020 due to the COVID-19 pandemic; however, the stay was lifted with respect to defendants’ counterclaims in February 2021.
Also in April 2020, a related action was filed against the same defendants by the same plaintiffs, as well as R.J. Reynolds, with the United States International Trade Commission (“ITC”). There, the plaintiffs also allege patent infringement, but the remedies sought include a prohibition on the importation of the IQOS electronic device, HeatSticks and component parts into the United States. No damages are recoverable in the proceedings before the ITC. A hearing before an administrative law judge was held in January 2021. The administrative law judge has set an initial determination date in May 2021.
“Lights/Ultra Lights” Cases and Other Smoking and Health Class ActionsAn additional patent infringement case regarding the IQOS
Plaintiffs have sought certification electronic device was filed in November 2020 in the United States District Court for the Northern District of their cases as class actions, alleging among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and have sought injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been broughtGeorgia against PM USA and in certain instances, Altria or its other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. NaN state courts in 23 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA. As of April 27, 2020, 2 “Lights/Ultra Lights” class actions are pending in U.S. state court. Neither case is active.
As of April 27, 2020, 2 smoking and health cases alleging personal injury orPhilip Morris Products S.A. seeking court-supervised programs or ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, are pending in their respective U.S. state courts. Neither case is active.
UST Litigation
UST and/or its tobacco subsidiaries have been named in a number of individual tobacco and health lawsuits over time. Plaintiffs’ allegations of liability in these cases have been based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs have typically sought various forms of relief, including compensatory and punitive damages and certain equitable relief, including but not limitedrelief. In February 2021, defendants filed a motion to disgorgement. Defenses raised in these cases include lackdismiss the lawsuit.
Antitrust Litigation
In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act of 1890 (“Sherman Act”) and Section 5 of the Federal Trade Commission Act of 1914 (“FTC Act”), and substantially lessened competition in violation of Section 7 of the Clayton Antitrust Act (“Clayton Act”). If the FTC’s challenge is successful, the FTC may order a broad range of remedies, including divestiture of Altria’s minority investment in JUUL, rescission of the transaction and all associated agreements, and prohibition against any officer or director of either Altria or JUUL serving on the other party’s board of directors or attending meetings of the other party’s board of directors. The administrative trial will take place before an FTC administrative law judge and is currently scheduled to begin March 11,in June 2021. Any ruling by the FTCThe administrative law judge’s decision is subject to review by the FTC Commissioners and subsequently, by a federalon its own motion or at the request of any party. The FTC then issues its ruling, which is subject to appellate court.
review.
Also as of April 27, 2020, 326, 2021, 16 putative class action lawsuits werehave been filed against Altria and JUUL in the United States District Court for the Northern District of California. The lawsuits initially named, in addition to the two companies, certain senior executives and certain members of the board of directors of both companies as defendants; however, those individuals currently or formerly affiliated with Altria were later dismissed. In November 2020 these lawsuits were consolidated into 3 complaints (one on behalf of direct purchasers, one on behalf of indirect purchasers and one on behalf of indirect resellers). The consolidated lawsuits, as amended, cite the FTC administrative complaint and allege that Altria and JUUL violated Sections 1, and 2 and/or 3 of the Sherman Act and Section 7 of the Clayton Act and various state antitrust, consumer protection and unjust enrichment laws by restraining trade and/or substantially lessening competition in the U.S. closed-system electronic cigarette market. Plaintiffs seek various remedies, including treble damages, attorneys’ fees, a declaration that the agreements between Altria and JUUL are invalid, divestiture of Altria’s minority investment in JUUL and rescission of the transaction. Altria filed a motion to dismiss these lawsuits in January 2021.
Neither the FTC nor the private plaintiffs has soughtIn November 2020, Altria exercised its rights to preliminarily enjoin Altria from converting Altria’sconvert its non-voting JUUL shares to voting shares or appointingshares. However, pending the outcome of the FTC administrative complaint, Altria currently does not intend to exercise its additional governance rights obtained upon the conversion, including the right to elect directors to JUUL’s board or to vote its JUUL shares other than as a passive investor. For further discussion of Altria’s rights in the JUUL boardevent of directors. As of April 30, 2020, Altria has not exercised these rights.
share conversion, see Note 3. Investments in Equity Securities - Investment in JUUL.
Shareholder Class Actions
Action and Shareholder Derivative Lawsuits
In October and December 2019, 2 purported Altria shareholders filed putative class action lawsuits against Altria, Howard A. Willard III, Altria’s former Chairman and Chief Executive Officer, and William F. Gifford, Jr., Altria’s former Vice Chairman and Chief Financial Officer and current Chief Executive Officer, in the United States District Court for the Eastern District of New York. In December 2019, the court consolidated the 2 lawsuits into a single proceeding. The consolidated lawsuit was subsequently transferred to the United States District Court for the Eastern District of Virginia. The lawsuit asserts claims under Sections 10(b) and 20(a) and under Rule 10b-5 of the Exchange Act. In April 2020, JUUL, its founders and some of its current and former executives were added to the lawsuit. The claims involve allegedlyallege false and misleading statements and omissions relating to Altria’s investment in JUUL. Plaintiffs seek various remedies, including damages and attorneys’ fees. A responseIn July 2020, the defendants filed motions to dismiss plaintiffs’ claims, which the district court denied in March 2021. In August 2020, 2 purported Altria shareholders filed separate derivative lawsuits in the United States District Court for the Northern District of California on behalf of themselves and Altria, against Mr. Willard, Mr. Gifford, JUUL and certain of its executives and officers. These derivative lawsuits relate to Altria’s investment in JUUL, and assert claims of breach of fiduciary duty by the Altria defendants and aiding and abetting in that alleged breach of fiduciary duty by the remaining defendants. In March 2021, the United States District Court for the Northern District of California granted defendants’ motion to transfer both lawsuits to the United States District Court for the Eastern District of Virginia. A third derivative lawsuit haswas filed in September 2020 in the Circuit Court for Henrico County, Virginia against Mr. Willard, Mr. Gifford, Kevin C. Crosthwaite (Altria’s former Chief Growth Officer and current JUUL Chief Executive Officer) and certain members of Altria’s Board of Directors. This suit asserts a claim for breach of fiduciary duty. Plaintiffs seek various remedies, including damages, disgorgement of profits, reformation of Altria’s corporate governance and internal procedures, and attorneys’ fees. The fourth, fifth and sixth derivative lawsuits were filed in October 2020, January 2021 and March 2021, respectively, in the United States District Court for the Eastern District of Virginia against Mr. Willard, Mr. Gifford, Mr. Crosthwaite, certain members of Altria’s Board of Directors, JUUL, its founders and some of its current and former executives. These suits assert various claims, including breach of fiduciary duty, unjust enrichment, waste of corporate assets and violations of certain federal securities laws. The remedies sought in these lawsuits are similar to those sought by plaintiffs in the Virginia lawsuit. In April 2021, the court consolidated the 5 cases pending in the Eastern District of Virginia into a single action.
Certain Other Tobacco-Related Litigation “Lights/Ultra Lights” Cases and Other Smoking and Health Class Actions: Plaintiffs have sought certification of their cases as class actions, alleging among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and have sought injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria or its other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. Twenty-one state courts in 23 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA. As of April 26, 2021, 2 “Lights/Ultra Lights” class actions are pending in U.S. state court. Neither case is active. As of April 26, 2021, 1 smoking and health case alleging personal injury or seeking court-supervised programs or ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, is pending in a U.S. state court. The case is currently inactive. UST Litigation:UST and/or its tobacco subsidiaries have been named in a number of individual tobacco and health lawsuits over time. Plaintiffs’ allegations of liability in these cases have been based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs have typically sought various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not yet been filed.
limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. As of April 26, 2021, there is 1 case pending against USSTC.
Environmental Regulation
Altria and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the U.S.: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.
Altria provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or
circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria’s consolidated results of operations, capital expenditures, financial position or cash flows.
Guarantees and Other Similar Matters
In the ordinary course of business, certain subsidiaries of Altria have agreed to indemnify a limited number of third parties in the event of future litigation. At March 31, 2020,2021, Altria and certain of its subsidiaries (i) had $50$49 million of unused letters of credit obtained in the ordinary course of business; (ii) were contingently liable for guarantees related to their own performance, including $27$25 million for surety bonds; and (iii) had a redeemable noncontrolling interest of $38$40 million recorded on its condensed consolidated balance sheet. In addition, from time to time, subsidiaries of Altria issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria’s liquidity.
Under the terms of a distribution agreement between Altria and PMI (the “Distribution Agreement”), entered into as a result of Altria’s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria does not have a related liability recorded on its condensed consolidated balance sheet at March 31, 20202021 as the fair value of this indemnification is insignificant. PMI has agreed not to seek indemnification with respect to the IQOS patent litigation discussed above under Certain Other Tobacco-Related Litigation - IQOS Litigation, excluding the patent infringement case filed with the United States District Court for the Northern District of Georgia.
As more fully discussed in Note 12. Condensed Consolidating Financial Information, PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under its $3.0 billion Credit Agreement and amounts outstanding under its commercial paper program.
Note 12. Condensed Consolidating Financial Information:
PM USA, which is a 100% owned subsidiary of Altria Group, Inc., has guaranteed Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that PM USA guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.
The obligations of PM USA under the Guarantees are limited to the maximum amount as will not result in PM USA’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
PM USA will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
| | ▪ | the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor; |
| | ▪ | the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA; |
| | ▪ | the payment in full of the Obligations pertaining to such Guarantees; and |
| | ▪ | the rating of Altria Group, Inc.’s long-term senior unsecured debt by Standard & Poor’s Ratings Services of A or higher. |
At March 31, 2020, the respective principal 100% owned subsidiaries of Altria Group, Inc. and PM USA were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following sets forth the condensed consolidating balance sheets as of March 31, 2020 and December 31, 2019, condensed consolidating statements of earnings and comprehensive earnings for the three months ended March 31, 2020 and 2019, and condensed consolidating statements of cash flows for the three months ended March 31, 2020 and 2019 for Altria Group, Inc., PM USA and, collectively, Altria Group, Inc.’s other subsidiaries that are not guarantors of Altria Group, Inc.’s debt instruments (the “Non-Guarantor Subsidiaries”).
The financial information may not necessarily be indicative of results of operations or financial position had PM USA and the Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. and PM USA account for investments in their subsidiaries under the equity method of accounting.
Condensed Consolidating Balance Sheets
March 31, 2020
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Assets | | | | | | | | | | | Cash and cash equivalents | | $ | 5,548 |
| | $ | 1 |
| | $ | 67 |
| | $ | — |
| | $ | 5,616 |
| Receivables | | — |
| | 17 |
| | 130 |
| | — |
| | 147 |
| Inventories: | | | | | | | | | | | Leaf tobacco | | — |
| | 508 |
| | 387 |
| | — |
| | 895 |
| Other raw materials | | — |
| | 123 |
| | 70 |
| | — |
| | 193 |
| Work in process | | — |
| | 6 |
| | 461 |
| | — |
| | 467 |
| Finished product | | — |
| | 87 |
| | 364 |
| | — |
| | 451 |
| | | — |
| | 724 |
| | 1,282 |
| | — |
| | 2,006 |
| Due from Altria Group, Inc. and subsidiaries | | 91 |
| | 5,660 |
| | 1,361 |
| | (7,112 | ) | | — |
| Other current assets | | 301 |
| | 23 |
| | 68 |
| | (226 | ) | | 166 |
| Total current assets | | 5,940 |
| | 6,425 |
| | 2,908 |
| | (7,338 | ) | | 7,935 |
| Property, plant and equipment, at cost | | — |
| | 2,970 |
| | 2,133 |
| | — |
| | 5,103 |
| Less accumulated depreciation | | — |
| | 2,186 |
| | 920 |
| | — |
| | 3,106 |
| | | — |
| | 784 |
| | 1,213 |
| | — |
| | 1,997 |
| Goodwill | | — |
| | — |
| | 5,177 |
| | — |
| | 5,177 |
| Other intangible assets, net | | — |
| | 2 |
| | 12,666 |
| | — |
| | 12,668 |
| Investments in equity securities | | 18,453 |
| | — |
| | 5,408 |
| | — |
| | 23,861 |
| Investment in consolidated subsidiaries | | 18,905 |
| | 2,867 |
| | — |
| | (21,772 | ) | | — |
| Due from Altria Group, Inc. and subsidiaries | | 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
| Other assets | | 71 |
| | 950 |
| | 567 |
| | (608 | ) | | 980 |
| Total Assets | | $ | 48,159 |
| | $ | 11,028 |
| | $ | 27,939 |
| | $ | (34,508 | ) | | $ | 52,618 |
|
Condensed Consolidating Balance Sheets (Continued)
March 31, 2020
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Liabilities | | | | | | | | | | | Short-term borrowings | | $ | 3,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,000 |
| Accounts payable | | 1 |
| | 136 |
| | 141 |
| | — |
| | 278 |
| Accrued liabilities: | | | | | | | | | | | Marketing | | — |
| | 391 |
| | 76 |
| | — |
| | 467 |
| Settlement charges | | — |
| | 4,410 |
| | 9 |
| | — |
| | 4,419 |
| Other | | 312 |
| | 343 |
| | 377 |
| | — |
| | 1,032 |
| Income taxes | | 6 |
| | 508 |
| | 105 |
| | (226 | ) | | 393 |
| Dividends payable | | 1,565 |
| | — |
| | — |
| | — |
| | 1,565 |
| Due to Altria Group, Inc. and subsidiaries | | 6,278 |
| | 587 |
| | 247 |
| | (7,112 | ) | | — |
| Total current liabilities | | 11,162 |
| | 6,375 |
| | 955 |
| | (7,338 | ) | | 11,154 |
| Long-term debt | | 26,971 |
| | — |
| | — |
| | — |
| | 26,971 |
| Deferred income taxes | | 3,228 |
| | — |
| | 2,571 |
| | (608 | ) | | 5,191 |
| Accrued pension costs | | 196 |
| | — |
| | 231 |
| | — |
| | 427 |
| Accrued postretirement health care costs | | — |
| | 1,076 |
| | 722 |
| | — |
| | 1,798 |
| Due to Altria Group, Inc. and subsidiaries | | — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
| Other liabilities | | 59 |
| | 90 |
| | 253 |
| | — |
| | 402 |
| Total liabilities | | 41,616 |
| | 7,541 |
| | 9,522 |
| | (12,736 | ) | | 45,943 |
| Contingencies | |
|
| |
|
| |
|
| |
|
| |
|
| Redeemable noncontrolling interest | | — |
| | — |
| | 38 |
| | — |
| | 38 |
| Stockholders’ Equity | | | | | | | | | | | Common stock | | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
| Additional paid-in capital | | 5,959 |
| | 3,310 |
| | 27,566 |
| | (30,876 | ) | | 5,959 |
| Earnings reinvested in the business | | 36,528 |
| | 393 |
| | (7,441 | ) | | 7,048 |
| | 36,528 |
| Accumulated other comprehensive losses | | (2,533 | ) | | (216 | ) | | (1,849 | ) | | 2,065 |
| | (2,533 | ) | Cost of repurchased stock | | (34,346 | ) | | — |
| | — |
| | — |
| | (34,346 | ) | Total stockholders’ equity attributable to Altria Group, Inc. | | 6,543 |
| | 3,487 |
| | 18,285 |
| | (21,772 | ) | | 6,543 |
| Noncontrolling interests | | — |
| | — |
| | 94 |
| | — |
| | 94 |
| Total stockholders’ equity | | 6,543 |
| | 3,487 |
| | 18,379 |
| | (21,772 | ) | | 6,637 |
| Total Liabilities and Stockholders’ Equity | | $ | 48,159 |
| | $ | 11,028 |
| | $ | 27,939 |
| | $ | (34,508 | ) | | $ | 52,618 |
|
Condensed Consolidating Balance Sheets
December 31, 2019
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Assets | | | | | | | | | | | Cash and cash equivalents | | $ | 2,022 |
| | $ | — |
| | $ | 95 |
| | $ | — |
| | $ | 2,117 |
| Receivables | | — |
| | 30 |
| | 122 |
| | — |
| | 152 |
| Inventories: | | | | | | | | | | | Leaf tobacco | | — |
| | 494 |
| | 380 |
| | — |
| | 874 |
| Other raw materials | | — |
| | 120 |
| | 72 |
| | — |
| | 192 |
| Work in process | | — |
| | 4 |
| | 692 |
| | — |
| | 696 |
| Finished product | | — |
| | 119 |
| | 412 |
| | — |
| | 531 |
| | | — |
| | 737 |
| | 1,556 |
| | — |
| | 2,293 |
| Due from Altria Group, Inc. and subsidiaries | | 88 |
| | 4,005 |
| | 1,359 |
| | (5,452 | ) | | — |
| Other current assets | | 133 |
| | 64 |
| | 114 |
| | (49 | ) | | 262 |
| Total current assets | | 2,243 |
| | 4,836 |
| | 3,246 |
| | (5,501 | ) | | 4,824 |
| Property, plant and equipment, at cost | | — |
| | 2,956 |
| | 2,118 |
| | — |
| | 5,074 |
| Less accumulated depreciation | | — |
| | 2,166 |
| | 909 |
| | — |
| | 3,075 |
| | | — |
| | 790 |
| | 1,209 |
| | — |
| | 1,999 |
| Goodwill | | — |
| | — |
| | 5,177 |
| | — |
| | 5,177 |
| Other intangible assets, net | | — |
| | 2 |
| | 12,685 |
| | — |
| | 12,687 |
| Investments in equity securities | | 18,071 |
| | — |
| | 5,510 |
| | — |
| | 23,581 |
| Investment in consolidated subsidiaries | | 19,312 |
| | 2,831 |
| | — |
| | (22,143 | ) | | — |
| Due from Altria Group, Inc. and subsidiaries | | 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
| Other assets | | 58 |
| | 951 |
| | 603 |
| | (609 | ) | | 1,003 |
| Total Assets | | $ | 44,474 |
| | $ | 9,410 |
| | $ | 28,430 |
| | $ | (33,043 | ) | | $ | 49,271 |
|
Condensed Consolidating Balance Sheets (Continued)
December 31, 2019
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Liabilities | | | | | | | | | | | Current portion of long-term debt | | $ | 1,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,000 |
| Accounts payable | | — |
| | 146 |
| | 179 |
| | — |
| | 325 |
| Accrued liabilities: | | | | | | | | | | | Marketing | | — |
| | 320 |
| | 73 |
| | — |
| | 393 |
| Settlement charges | | — |
| | 3,340 |
| | 6 |
| | — |
| | 3,346 |
| Other | | 570 |
| | 482 |
| | 481 |
| | — |
| | 1,533 |
| Income taxes | | 6 |
| | — |
| | 55 |
| | (49 | ) | | 12 |
| Dividends payable | | 1,565 |
| | — |
| | — |
| | — |
| | 1,565 |
| Due to Altria Group, Inc. and subsidiaries | | 4,693 |
| | 514 |
| | 245 |
| | (5,452 | ) | | — |
| Total current liabilities | | 7,834 |
| | 4,802 |
| | 1,039 |
| | (5,501 | ) | | 8,174 |
| Long-term debt | | 27,042 |
| | — |
| | — |
| | — |
| | 27,042 |
| Deferred income taxes | | 3,099 |
| | — |
| | 2,593 |
| | (609 | ) | | 5,083 |
| Accrued pension costs | | 197 |
| | — |
| | 276 |
| | — |
| | 473 |
| Accrued postretirement health care costs | | — |
| | 1,078 |
| | 719 |
| | — |
| | 1,797 |
| Due to Altria Group, Inc. and subsidiaries | | — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
| Other liabilities | | 80 |
| | 87 |
| | 178 |
| | — |
| | 345 |
| Total liabilities | | 38,252 |
| | 5,967 |
| | 9,595 |
| | (10,900 | ) | | 42,914 |
| Contingencies | |
|
| |
|
| |
|
| |
|
| |
|
| Redeemable noncontrolling interest | | — |
| | — |
| | 38 |
| | — |
| | 38 |
| Stockholders’ Equity | | | | | | | | | | | Common stock | | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
| Additional paid-in capital | | 5,970 |
| | 3,310 |
| | 27,565 |
| | (30,875 | ) | | 5,970 |
| Earnings reinvested in the business | | 36,539 |
| | 352 |
| | (6,997 | ) | | 6,645 |
| | 36,539 |
| Accumulated other comprehensive losses | | (2,864 | ) | | (219 | ) | | (1,877 | ) | | 2,096 |
| | (2,864 | ) | Cost of repurchased stock | | (34,358 | ) | | — |
| | — |
| | — |
| | (34,358 | ) | Total stockholders’ equity attributable to Altria Group, Inc. | | 6,222 |
| | 3,443 |
| | 18,700 |
| | (22,143 | ) | | 6,222 |
| Noncontrolling interests | | — |
| | — |
| | 97 |
| | — |
| | 97 |
| Total stockholders’ equity | | 6,222 |
| | 3,443 |
| | 18,797 |
| | (22,143 | ) | | 6,319 |
| Total Liabilities and Stockholders’ Equity | | $ | 44,474 |
| | $ | 9,410 |
| | $ | 28,430 |
| | $ | (33,043 | ) | | $ | 49,271 |
|
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
For the Three Months Ended March 31, 2020
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Net revenues | | $ | — |
| | $ | 5,359 |
| | $ | 1,008 |
| | $ | (8 | ) | | $ | 6,359 |
| Cost of sales | | — |
| | 1,532 |
| | 649 |
| | (8 | ) | | 2,173 |
| Excise taxes on products | | — |
| | 1,267 |
| | 46 |
| | — |
| | 1,313 |
| Gross profit | | — |
| | 2,560 |
| | 313 |
| | — |
| | 2,873 |
| Marketing, administration and research costs | | 22 |
| | 387 |
| | 128 |
| | — |
| | 537 |
| Operating income (expense) | | (22 | ) | | 2,173 |
| | 185 |
| | — |
| | 2,336 |
| Interest and other debt expense (income), net | | 237 |
| | (18 | ) | | 56 |
| | — |
| | 275 |
| Net periodic benefit (income) cost, excluding service cost | | — |
| | (22 | ) | | (5 | ) | | — |
| | (27 | ) | Earnings from equity investments | | (134 | ) | | — |
| | (23 | ) | | — |
| | (157 | ) | Loss on Cronos-related financial instruments | | — |
| | — |
| | 137 |
| | — |
| | 137 |
| Earnings (losses) before income taxes and equity earnings of subsidiaries | | (125 | ) | | 2,213 |
|
| 20 |
|
| — |
|
| 2,108 |
| Provision (benefit) for income taxes | | (32 | ) | | 550 |
| | 40 |
| | — |
| | 558 |
| Equity earnings of subsidiaries | | 1,645 |
| | 126 |
| | — |
| | (1,771 | ) | | — |
| Net earnings | | 1,552 |
| | 1,789 |
| | (20 | ) | | (1,771 | ) | | 1,550 |
| Net (earnings) losses attributable to noncontrolling interests | | — |
| | — |
| | 2 |
| | — |
| | 2 |
| Net earnings attributable to Altria | | $ | 1,552 |
| | $ | 1,789 |
| | $ | (18 | ) | | $ | (1,771 | ) | | $ | 1,552 |
| | | | | | | | | | | | | | | | | | | | | | | Net earnings | | $ | 1,552 |
| | $ | 1,789 |
| | $ | (20 | ) | | $ | (1,771 | ) | | $ | 1,550 |
| Other comprehensive earnings (losses), net of deferred income taxes | | 331 |
| | 3 |
| | 28 |
| | (31 | ) | | 331 |
| Comprehensive earnings | | 1,883 |
| | 1,792 |
| | 8 |
| | (1,802 | ) | | 1,881 |
| Comprehensive (earnings) losses attributable to noncontrolling interests | | — |
| | — |
| | 2 |
| | — |
| | 2 |
| Comprehensive earnings attributable to Altria | | $ | 1,883 |
| | $ | 1,792 |
| | $ | 10 |
| | $ | (1,802 | ) | | $ | 1,883 |
|
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
For the Three Months Ended March 31, 2019
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Net revenues | | $ | — |
| | $ | 4,725 |
| | $ | 913 |
| | $ | (10 | ) | | $ | 5,628 |
| Cost of sales | | — |
| | 1,340 |
| | 248 |
| | (10 | ) | | 1,578 |
| Excise taxes on products | | — |
| | 1,185 |
| | 54 |
| | — |
| | 1,239 |
| Gross profit | | — |
| | 2,200 |
| | 611 |
| | — |
| | 2,811 |
| Marketing, administration and research costs | | 35 |
| | 384 |
| | 114 |
| | — |
| | 533 |
| Asset impairment and exit costs | | 1 |
| | 35 |
| | 4 |
| | — |
| | 40 |
| Operating income (expense) | | (36 | ) | | 1,781 |
| | 493 |
| | — |
| | 2,238 |
| Interest and other debt expense (income), net | | 355 |
| | (25 | ) | | 54 |
| | — |
| | 384 |
| Net periodic benefit (income) cost, excluding service cost | | 1 |
| | — |
| | (2 | ) | | — |
| | (1 | ) | Earnings from equity investments | | (86 | ) | | — |
| | — |
| | — |
| | (86 | ) | Loss on Cronos-related financial instruments | | — |
| | — |
| | 425 |
| | — |
| | 425 |
| Earnings (losses) before income taxes and equity earnings of subsidiaries | | (306 | ) | | 1,806 |
| | 16 |
| | — |
| | 1,516 |
| Provision (benefit) for income taxes | | (75 | ) | | 459 |
| | 11 |
| | — |
| | 395 |
| Equity earnings of subsidiaries | | 1,351 |
| | 95 |
| | — |
| | (1,446 | ) | | — |
| Net earnings | | 1,120 |
| | 1,442 |
| | 5 |
| | (1,446 | ) | | 1,121 |
| Net (earnings) losses attributable to noncontrolling interests | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | Net earnings attributable to Altria | | $ | 1,120 |
| | $ | 1,442 |
| | $ | 4 |
| | $ | (1,446 | ) | | $ | 1,120 |
| | | | | | | | | | | | | | | | | | | | | | | Net earnings | | $ | 1,120 |
| | $ | 1,442 |
| | $ | 5 |
| | $ | (1,446 | ) | | $ | 1,121 |
| Other comprehensive earnings (losses), net of deferred income taxes | | (170 | ) | | 5 |
| | 23 |
| | (28 | ) | | (170 | ) | Comprehensive earnings | | 950 |
| | 1,447 |
| | 28 |
| | (1,474 | ) | | 951 |
| Comprehensive (earnings) losses attributable to noncontrolling interests | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | Comprehensive earnings attributable to Altria | | $ | 950 |
| | $ | 1,447 |
| | $ | 27 |
| | $ | (1,474 | ) | | $ | 950 |
|
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2020
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Cash Provided by (Used In) Operating Activities | | | | | | | | | | | Net cash provided by (used in) operating activities | | $ | 1,515 |
| | $ | 3,351 |
| | $ | 437 |
| | $ | (2,174 | ) | | $ | 3,129 |
| Cash Provided by (Used in) Investing Activities | | | | | | | | | | | Capital expenditures | | — |
| | (15 | ) | | (37 | ) | | — |
| | (52 | ) | Investment in consolidated subsidiaries | | (1 | ) | | — |
| | — |
| | 1 |
| | — |
| Other, net | | — |
| | — |
| | — |
| | — |
| | — |
| Net cash provided by (used in) investing activities | | (1 | ) | | (15 | ) | | (37 | ) | | 1 |
| | (52 | ) | Cash Provided by (Used in) Financing Activities | | | | | | | | | | | Proceeds from short-term borrowings | | 3,000 |
| | — |
| | — |
| | — |
| | 3,000 |
| Long-term debt repaid | | (1,000 | ) | | — |
| | — |
| | — |
| | (1,000 | ) | Dividends paid on common stock | | (1,563 | ) | | — |
| | — |
| | — |
| | (1,563 | ) | Changes in amounts due to/from Altria Group, Inc. and subsidiaries | | 1,584 |
| | (1,582 | ) | | (1 | ) | | (1 | ) | | — |
| Cash dividends paid to parent | | — |
| | (1,748 | ) | | (426 | ) | | 2,174 |
| | — |
| Other, net | | (9 | ) | | — |
| | (1 | ) | | — |
| | (10 | ) | Net cash provided by (used in) financing activities | | 2,012 |
| | (3,330 | ) | | (428 | ) | | 2,173 |
| | 427 |
| Cash, cash equivalents and restricted cash (1): | | | | | | | | | | | Increase (decrease) | | 3,526 |
| | 6 |
| | (28 | ) | | — |
| | 3,504 |
| Balance at beginning of period | | 2,022 |
| | 43 |
| | 95 |
| | — |
| | 2,160 |
| Balance at end of period | | $ | 5,548 |
| | $ | 49 |
| | $ | 67 |
| | $ | — |
| | $ | 5,664 |
|
| | (1) | Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 11. Contingencies.
|
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2019
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| Cash Provided by (Used In) Operating Activities | | | | | | | | | | | Net cash provided by (used in) operating activities | | $ | 1,642 |
| | $ | 2,520 |
| | $ | 166 |
| | $ | (2,039 | ) | | $ | 2,289 |
| Cash Provided by (Used in) Investing Activities | | | | | | | | | | | Capital expenditures | | — |
| | (9 | ) | | (29 | ) | | — |
| | (38 | ) | Investment in Cronos | | — |
| | — |
| | (1,831 | ) | | — |
| | (1,831 | ) | Investment in consolidated subsidiaries | | (1,947 | ) | | — |
| | — |
| | 1,947 |
| | — |
| Other, net | | (3 | ) | | — |
| | (78 | ) | | — |
| | (81 | ) | Net cash provided by (used in) investing activities | | (1,950 | ) | | (9 | ) | | (1,938 | ) | | 1,947 |
| | (1,950 | ) | Cash Provided by (Used in) Financing Activities | | | | | | | | | | | Repayment of short-term borrowings | | (12,800 | ) | | — |
| | — |
| | — |
| | (12,800 | ) | Long-term debt issued | | 16,265 |
| | — |
| | — |
| | — |
| | 16,265 |
| Repurchases of common stock | | (151 | ) | | — |
| | — |
| | — |
| | (151 | ) | Dividends paid on common stock | | (1,502 | ) | | — |
| | — |
| | — |
| | (1,502 | ) | Changes in amounts due to/from Altria Group, Inc. and subsidiaries | | 657 |
| | (771 | ) | | 2,061 |
| | (1,947 | ) | | — |
| Cash dividends paid to parent | | — |
| | (1,737 | ) | | (302 | ) | | 2,039 |
| | — |
| Other | | (120 | ) | | — |
| | (9 | ) | | — |
| | (129 | ) | Net cash provided by (used in) financing activities | | 2,349 |
| | (2,508 | ) | | 1,750 |
| | 92 |
| | 1,683 |
| Cash, cash equivalents and restricted cash (1): | | | | | | | | | | | Increase (decrease) | | 2,041 |
| | 3 |
| | (22 | ) | | — |
| | 2,022 |
| Balance at beginning of period | | 1,277 |
| | 100 |
| | 56 |
| | — |
| | 1,433 |
| Balance at end of period | | $ | 3,318 |
| | $ | 103 |
| | $ | 34 |
| | $ | — |
| | $ | 3,455 |
|
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 11. Contingencies.
Note 13.11. New Accounting Guidance Not Yet Adopted:
Adopted
The following table provides a description of issued accounting guidance applicable to, but not yet adopted by, Altria: | | | | | | | | | | | | Standards | Description | Effective Date for Public Entity | Effect on Financial Statements | ASU 2019-122020-06 Simplifying the Accounting for Income Taxes (Topic 740)Convertible Instruments and Contracts in an Entity’s Own Equity | The guidance removessimplifies the accounting for certain exceptions for investments, intraperiod allocationsfinancial instruments with characteristics of liabilities and interimequity, including convertible instruments and contracts in an entity’s own equity. Key provisions of the guidance include reducing the number of accounting models, simplifying the earnings per share calculations and adds guidanceexpanding the disclosures related to reduce complexity in accounting for income taxes.convertible instruments. | The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including adoption in any interim period.2021. | Altria is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures. | ASU 2020-01 Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
| The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. | The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including adoption in any interim period. | Altria is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Description of the Company
When used in this Quarterly Report on Form 10-Q (“Form 10-Q”), the terms "Altria," "we," "us"“Altria,” “we” and "our" refers“our” refer to Altria Group, Inc. and its subsidiaries, unless otherwise specified or unless otherwise required.
the context requires otherwise.
For a description of Altria, see Background in Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Part I, Item 1. Financial Statements of this Form 10-Q (“Item 1”).
In the first quarterFor a detailed description of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment. Altria’s reportable segments, are smokeable products, oral tobacco products and wine. The financial services and the innovative tobacco products businesses are included in an all other category duesee Note 8. Segment Reporting to the continued reduction of the lease portfolio of Philip Morris Capital Corporation and the relativecondensed consolidated financial contribution of Altria’s innovative tobacco products businesses to Altria’s consolidated results.statements in Item 1 (“Note 8”).
Executive Summary
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, Altria refers to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted operating companies incomeOCI margins; adjusted net earnings attributable to Altria andAltria; adjusted diluted earnings per share (“EPS”) attributable to Altria (“EPS”).Altria; and adjusted effective tax rates. These adjusted financial measures are not required by, or calculated in accordance with, United States generally accepted accounting principles (“GAAP”) and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Except as noted in the 2021 Forecasted Results section below, when Altria provides a non-GAAP measure in this Form 10-Q, it also provides a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure. OCI for the segments is defined as operating income before general corporate expenses and amortization of intangibles. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below.
COVID-19
Pandemic
The recent outbreak of the novel coronavirus, COVID-19 which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and createdcontinues to create economic uncertainty.uncertainty even as COVID-19 vaccines have been and continue to be administered in 2021. Although much uncertainty still surrounds the pandemic, including its duration and ultimate overall impact on U.S and global economies, ourAltria and its subsidiaries’ operations and those of ourits investees, Altria iscontinues to monitor the macroeconomic risks of the COVID-19 pandemic and continues to carefully evaluatingevaluate potential outcomes and workingwork to mitigate risks. Specifically, Altria isremains focused on any potential impact to ourits liquidity, operations, supply and distribution chains and on economic conditions.
In terms of Altria’s liquidity, despite some volatility in the commercial paper marketmarkets in March 2020, Altria believes it is inhas not experienced a solid financial position and, for the coming quarters, expectsmaterial impact to maintain a higher cash balance than normal to preserve its financial flexibility. As a precautionary measure, in March 2020, Altria borrowed the entire $3.0 billion available under its senior unsecured 5-year revolving credit agreement, dated August 1, 2018 (as amended, the “Credit Agreement”). In addition, Altria did not repurchase any shares in the first quarter of 2020 under its current $1.0 billion share repurchase program, and in April 2020, Altria’s Board of Directors (the “Board of Directors”) rescinded the $500 million remaining in the share repurchase program.liquidity.
As with so many other companies throughout the U.S. and globally, Altria’s operations have been affected by COVID-19.the COVID-19 pandemic. To date, Altria believes its tobacco businesses have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but continues to monitor these factors. Altria has implemented remote working for many employees and aligned with the recommended social distancing protocols fromrecommended by public health authorities. To date,authorities for employees working at Altria believes itfacilities. Altria continues to believe that remote working due to the
COVID-19 pandemic has experiencedhad minimal impact to productivity due to the remote working and itson productivity. Also, Altria’s critical information technology systems have remained operational. Although Altria temporarilyAltria’s tobacco businesses previously suspended operations temporarily at Philip Morris USA Inc.’s (“PM USA”) Richmond, Virginia-area manufacturing facilities, John Middleton Co.’s (Middleton) Kingseveral of Prussia, Pennsylvania manufacturing facility, as well as U.S. Smokeless Tobacco Company LLC’s (“USSTC”) Nashville, Tennessee-areatheir manufacturing facilities in March 2020, Altriathe businesses resumed operations at those facilities under enhanced safety protocols in April 2020 and all of Altria’s manufacturing facilities are currently operational. In addition, Helix Innovations LLC (“Helix”)operational under enhanced safety protocols. Altria continues to build domestic manufacturing capacity for on! in the Richmond Manufacturing Center. Currently, installed annualized capacity is approximately 25 million cans; however, due to the impacts of COVID-19, Helix expects potential delays in its ability to achieve annualized production capacity of 50 million cans by mid-year and 75
million cans by the end of 2020. Altria is continuing to monitor the risks associated with facility disruptions and workforce availability as a result of uncertainty related to the COVID-19 uncertainty.
pandemic.
Altria’s suppliers and those within its distribution chain are also may be subject to government action requiring the closure of apotential facility closures and remote working protocols. To date, Altria has not experienced any material disruptions to its supply chains or distribution systems, nor has it experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but is continuing to monitor these factors. The majority of retail stores in which Altria’s tobacco products are sold, including convenience stores, have been deemed to be essential businesses by authorities and have remained open. Altria is continuingcontinues to monitor the risk that a supplier, distributorone or more suppliers, distributors or any other entityentities within ourits supply and distribution chain closes temporarily or permanently.
In March 2020, PM USA temporarily closed its Atlanta and Richmond IQOS stores and paused its IQOS interactive marketing efforts. PM USA will consider guidance from public health authorities and consumer sentiment in deciding when to reopen the stores and resume its interactive marketing approach. HeatSticks remain available for sale in over 500 Atlanta and Richmond retail stores, and PM USA does not currently anticipate product availability issues. PM USA has also delayed the launch of IQOS in Charlotte due to COVID-19 concerns.
Although Altria’s core tobacco businesses have not been materially impacted to date by the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic may impact adult tobacco consumers in the adult consumer.future. Altria is monitoringcontinues to monitor the macro-economicmacroeconomic risks of the COVID-19 pandemic (including the availability of vaccines) and their effect on adult tobacco consumers, including impacts tostay-at-home practices and disposable income (which may be impacted by unemployment rates consumer confidence levels, number of housing starts and gasoline prices.fiscal stimulus). Altria is also monitoringcontinues to monitor adult tobacco consumersconsumers’ purchasing behavior,behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases (including a significant increase in deep discount category volumes in the first quarterand adoption of 2020 versus the prior quarter) and interest in noncombustiblenon-combustible products.
While Altria’s core tobacco businesses have not been materially impacted to date by COVID-19, Altria has experienced someadverse impacts to its alcohol assets.assets due to the COVID-19 pandemic. In the wine business, in 2020 Ste. Michelle Wine Estates Ltd.’s (“Ste. Michelle”) direct-to-consumer sales and on-premise wine sales in restaurants, bars and hospitality venues and on cruise lines were negatively impacted by disruptions arising from the COVID-19 pandemic, which also may have been negatively affected by COVID-19 disruptions. Inan impact on adult wine consumers going forward. These impacts in 2020 contributed to Ste. Michelle recording pre-tax inventory-related charges of $392 million in the first quarter of 2020 Ste. Michelle recorded pre-tax charges of $392 million consisting of (i) the write-off of inventory and (ii) estimated losses on future non-cancelable grape purchase commitments associatedin connection with product volume demand uncertainty, which has been further impacted by the economic uncertainty surrounding COVID-19. Altria and Ste. Michelle also undertook a reviewits strategic reset of the wine business resulting in a strategic reset.business. Ste. Michelle will continuecontinues to monitor the impact of the COVID-19 pandemic associated risks to its business, results of operations, cash flows orand financial position.
Anheuser-Busch InBev SA/NV (“ABI’ABI”) has also beencontinues to be impacted by the COVID-19 recently announcingpandemic. In 2020, these impacts included (i) a 50% reduction to its upcomingfinal 2019 dividend and a decision to forgo its interim 2020 dividend; (ii) the withdrawal of its earningearnings guidance for 2020 due to the uncertainty and volatility andrelated to the impact of COVID-19. Asthe COVID-19 pandemic; and (iii) a result of these announcements, Altria has reduced expectationsgoodwill impairment charge related to its Africa businesses. While ABI stated in its year end 2020 earnings report that it expects its financial results in 2021 to improve meaningfully versus 2020, ABI did not provide earnings guidance for equity earnings and cash dividends from ABI in 2020. In addition,2021 given the continued uncertainty. The extreme market disruption and volatility associated with the COVID-19 haspandemic resulted in a steep decline in ABI’s stock price in the first half of 2020. Although there was a gradual recovery in ABI’s stock price in the second half of 2020 and again in April 2021, the fair value of Altria’s investment in ABI is now wellcontinues to be below the carrying value of its investment in ABI.value. While Altria believes that this decline is temporary, it will continue to monitor its investment in ABI, andincluding the impact of the COVID-19 pandemic on ABI’s business and market valuation. If Altria considered the impact of the COVID-19 pandemic on the business of JUUL Labs, Inc. (“JUUL”), including its sales, distribution, operations, supply chain and liquidity, in conducting its periodic impairment assessment and quantitative valuations. JUUL’s operations were negatively impacted in 2020 by the COVID-19 pandemic due to conclude thatstay-at-home practices and government-mandated restrictions. While the declineimpact was considered in Altria’s quantitative valuations conducted in connection with the preparation of its financial statements for the three months ended March 31, 2021 and during 2020, Altria does not believe the COVID-19 pandemic was a primary driver of the non-cash pre-tax impairment charge recorded during 2020 or the changes in fair value is other than temporary, Altria would determine and recognize,recorded in the period identified,fourth quarter of 2020 or for the impairmentthree months ended March 31, 2021. Altria will continue to monitor the impact of its investment, which could be material. the COVID-19 pandemic on JUUL’s business in Altria’s quarterly quantitative valuations of JUUL. Altria has considered the impact of the COVID-19 pandemic on the businessesbusiness of JUUL Labs, Inc. (“JUUL”) and Cronos Group Inc. (“Cronos”), including theirits sales, distribution, operations, supply chain and liquidity,liquidity. Cronos has been and at this time,continues to be impacted by the COVID-19 pandemic, due in part to government actions limiting access to retail stores in the United States and Canada, including the recording in 2020 of an impairment charge on certain goodwill and intangible assets. Altria believeswill continue to monitor its investment in Cronos, including the impact of the COVID-19 to these businesses is not material,pandemic on Cronos’s business and Altria’s assessment, which included the consideration of potential impacts of COVID-19 on the businesses, did not result in impairment at March 31, 2020.
In addition, due to the uncertainties related to the impact of COVID-19 and varying economic recovery scenarios, Altria withdrew its forecast for its full-year 2020 adjusted diluted EPS growth rate. For further discussion, see 2020 Forecasted Results below.market valuation.
Consolidated Results of Operations for the Three Months Ended March 31, 2020: 2021 The changes in net earnings attributable to Altria and diluted EPS attributable to Altria for the three months ended March 31, 2020,2021, from the three months ended March 31, 2019,2020, were due primarily to the following: | (in millions, except per share data) | | (in millions, except per share data) | Net Earnings | | Diluted EPS | For the three months ended March 31, 2020 | | For the three months ended March 31, 2020 | $ | 1,552 | | | $ | 0.83 | | | 2020 Implementation and acquisition-related costs | | 2020 Implementation and acquisition-related costs | 300 | | | 0.16 | | 2020 Tobacco and health litigation items | | 2020 Tobacco and health litigation items | 19 | | | 0.01 | | | 2020 ABI-related special items | | 2020 ABI-related special items | 44 | | | 0.03 | | 2020 Cronos-related special items | | 2020 Cronos-related special items | 95 | | | 0.05 | | | 2020 Tax items | | 2020 Tax items | 24 | | | 0.01 | | Subtotal 2020 special items | | Subtotal 2020 special items | 482 | | | 0.26 | | 2021 NPM Adjustment Items | | 2021 NPM Adjustment Items | 24 | | | 0.01 | | 2021 Implementation and acquisition-related costs | | 2021 Implementation and acquisition-related costs | (37) | | | (0.02) | | 2021 Tobacco and health litigation items | | 2021 Tobacco and health litigation items | (26) | | | (0.01) | | | 2021 JUUL changes in fair value | | 2021 JUUL changes in fair value | (200) | | | (0.10) | | 2021 ABI-related special items | | 2021 ABI-related special items | 100 | | | 0.05 | | 2021 Cronos-related special items | | 2021 Cronos-related special items | 70 | | | 0.04 | | | 2021 Loss on early extinguishment of debt | | 2021 Loss on early extinguishment of debt | (496) | | | (0.27) | | 2021 Tax items | | 2021 Tax items | 6 | | | — | | Subtotal 2021 special items | | Subtotal 2021 special items | (559) | | | (0.30) | | | Change in tax rate | | Change in tax rate | (27) | | | (0.01) | | Operations | | Operations | (24) | | | (0.01) | | For the three months ended March 31, 2021 | | For the three months ended March 31, 2021 | $ | 1,424 | | | $ | 0.77 | | | 2021 Reported Net Earnings | | 2021 Reported Net Earnings | $ | 1,424 | | | $ | 0.77 | | 2020 Reported Net Earnings | | 2020 Reported Net Earnings | $ | 1,552 | | | $ | 0.83 | | % Change | | % Change | (8.2) | % | | (7.2) | % | | 2021 Adjusted Net Earnings and Adjusted Diluted EPS | | 2021 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 1,983 | | | $ | 1.07 | | 2020 Adjusted Net Earnings and Adjusted Diluted EPS | | 2020 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 2,034 | | | $ | 1.09 | | % Change | | % Change | (2.5) | % | | (1.8) | % | | | | Net Earnings | | Diluted EPS | | | (in millions, except per share data) | | For the three months ended March 31, 2019 | $ | 1,120 |
| | $ | 0.60 |
| | | | | | | 2019 Asset impairment, exit, implementation and acquisition-related costs | 125 |
| | 0.06 |
| | 2019 Tobacco and health litigation items | 13 |
| | 0.01 |
| | 2019 ABI-related special items 1 | 129 |
| | 0.07 |
| | 2019 Cronos-related special items | 328 |
| | 0.17 |
| | 2019 Tax items | 19 |
| | 0.01 |
| | Subtotal 2019 special items | 614 |
| | 0.32 |
| | | | | | | 2020 Implementation and acquisition-related costs | (300 | ) | | (0.16 | ) | | 2020 Tobacco and health litigation items | (19 | ) | | (0.01 | ) | | 2020 ABI-related special items | (44 | ) | | (0.03 | ) | | 2020 Cronos-related special items | (95 | ) | | (0.05 | ) | | 2020 Tax items | (24 | ) | | (0.01 | ) | | Subtotal 2020 special items | (482 | ) | | (0.26 | ) | | | | | | | Fewer shares outstanding | — |
| | 0.01 |
| | Change in tax rate | (1 | ) | | — |
| | Operations | 301 |
| | 0.16 |
| | For the three months ended March 31, 2020 | $ | 1,552 |
| | $ | 0.83 |
| | | | | | | 2020 Reported Net Earnings | $ | 1,552 |
| | $ | 0.83 |
| | 2019 Reported Net Earnings | $ | 1,120 |
| | $ | 0.60 |
| | % Change | 38.6 | % | | 38.3 | % | | | | | | | 2020 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 2,034 |
| | $ | 1.09 |
| | 2019 Adjusted Net Earnings and Adjusted Diluted EPS 1 | $ | 1,734 |
| | $ | 0.92 |
| | % Change | 17.3 | % | | 18.5 | % | |
1
Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures.For further discussion, see below.
For a discussion of eventsspecial items and other business drivers affecting the comparability of statementstatements of earnings amounts and reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.
▪Change in Tax Rate: The change in the tax rate was driven primarily by lower dividends from ABI.
Fewer Shares Outstanding▪: Fewer shares outstanding during the three months ended March 31, 2020 compared with the prior-year period were due primarily to shares repurchased by Altria under its share repurchase programs.
OperationsOperations: : The increasedecrease of $301$24 million in operations (which excludes the impact of special items shown in the table aboveabove) was due primarily to higher income from the smokeable products and oral tobacco products segments, partially offset by lower earnings from Altria’s equity investment in ABI.unfavorable timing of interest expense.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.
20202021 Forecasted Results: Due to the uncertainties related to the impact of the COVID-19 pandemic and economic recovery scenarios,
Altria withdrewexpects its forecast for its2021 full-year 2020 adjusted diluted EPS to be in a range of $4.49 to $4.62, representing a growth rate of 4%3% to 7%6% over its 20192020 full-year adjusted diluted EPS base which has been recast to $4.21 (from $4.22)of $4.36, as shown in the first table below. While the 2021 full-year adjusted diluted EPS guidance accounts for a changerange of scenarios, the external environment remains dynamic. Altria will continue to monitor conditions related to (i) unemployment rates, (ii) fiscal stimulus, (iii) adult tobacco consumer dynamics, including stay-at-home practices, disposable income, purchasing patterns and adoption of non-combustible products, (iv) regulatory and legislative (including excise tax) developments, (v) the timing and breadth of COVID-19 vaccine administration and (vi) expectations for adjusted earnings contributions from its alcohol assets. Altria’s 2021 full-year adjusted diluted EPS guidance range includes planned investments in ABI-related special itemssupport of its vision to responsibly lead the transition of adult smokers to a non-combustible future, such as shown(i) marketplace investments to expand the availability and awareness of Altria’s non-combustible products, (ii) costs associated with building an industry-leading consumer
engagement platform that enhances data collection and insights in support of adult tobacco consumer conversion to non-combustible products and (iii) increased non-combustible product research and development expense. Altria expects 2021 adjusted diluted EPS growth to come in the table below. In makinglast three quarters of the decision, Altria considered various factors, including uncertain contributions from its equity investment in ABI andyear. This forecasted growth rate excludes the potential impacts of COVID-19 on the macro-economic environment and adult tobacco consumers. Altria is continuing to assess the COVID-19 situation and intends to reestablish guidance at the appropriate time.
| | | | | Reconciliation of 2019 Reported Diluted EPS to 2019 Adjusted Diluted EPS | 2019 Reported diluted EPS | $ | (0.70 | ) | Asset impairment, exit, implementation and acquisition-related costs | 0.15 |
| Tobacco and health litigation items | 0.03 |
| Impairment of JUUL equity securities | 4.60 |
| ABI-related special items 1 | (0.16 | ) | Cronos-related special items | 0.34 |
| Tax items | (0.05 | ) | 2019 Adjusted diluted EPS | $ | 4.21 |
|
1 Beginning(income) expense items in the first quartersecond table below.
Altria continues to expect its 2021 full-year adjusted effective tax rate will be in a range of 2020, Altria changed its treatment of Altria’s share of ABI’s mark-to-market activity relating24.5% to certain ABI financial instruments associated with its share-based compensation programs that were previously included in Altria’s adjusted results. These amounts will now be treated as25.5%. | | | | | | Reconciliation of 2020 Reported Diluted EPS to 2020 Adjusted Diluted EPS | 2020 Reported diluted EPS | $ | 2.40 | | Asset impairment, exit, implementation and acquisition-related costs | 0.18 | | Tobacco and health litigation items | 0.03 | | Impairment of JUUL equity securities | 1.40 | | JUUL changes in fair value | (0.05) | | ABI-related special items | 0.32 | | | | | | | | Cronos-related special items | 0.03 | | COVID-19 special items | 0.02 | | Tax items | 0.03 | | 2020 Adjusted diluted EPS | $ | 4.36 | |
The following (income) expense items andare excluded from Altria’s 2021 forecasted adjusted results. The change is consistentdiluted EPS growth rate: | | | | | | (Income) Expense Excluded from 2021 Forecasted Adjusted Diluted EPS | NPM Adjustment Items | $ | (0.01) | | Implementation and acquisition-related costs | 0.02 | | Tobacco and health litigation items | 0.01 | | | | JUUL changes in fair value | 0.10 | | ABI-related special items | (0.05) | | Cronos-related special items | (0.04) | | Loss on early extinguishment of debt | 0.27 | | | | | $ | 0.30 | |
For a discussion of certain income and expense items excluded from the forecasted results above, see the Consolidated Operating Results section below. Altria’s full-year adjusted diluted EPS guidance and full-year forecast for its adjusted effective tax rate exclude the impact of certain income and expense items, including those items noted in the Non-GAAP Financial Measures section below, that management believes are not part of underlying operations. Altria’s management cannot estimate on a forward-looking basis the impact of these items on its reported diluted EPS or its reported effective tax rate because these items, which could be significant, may be unusual or infrequent, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding GAAP measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast. Non-GAAP Financial Measures While Altria reports its financial results in accordance with Altria’s treatmentGAAP, its management also reviews certain financial results, including OCI, OCI margins, net earnings attributable to Altria and diluted EPS, on an adjusted basis, which excludes certain income and expense items that management believes are not part of its shareunderlying operations. These items may include, for example, loss on early extinguishment of ABI’s mark-to-market activity on ABI’s financial instrumentsdebt, restructuring charges, asset impairment charges, acquisition-related costs, COVID-19 special items, equity investment-related special items (including any changes in fair value of the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain nonparticipating manufacturer (“NPM”) adjustment disputes under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items”). Altria’s management does not view any of these special items to be part of Altria’s underlying results as they may be highly variable, may be unusual or infrequent, are
difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s adjusted effective tax rate may exclude certain tax items from its reported effective tax rate. Altria’s management believes that adjusted financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to Altria’s chief operating decision maker (the “CODM”) for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. These adjusted financial measures are not required by, or calculated in accordance with GAAP and may not be calculated the same as similarly titled measures used by other share commitments. Altria has recast prior period results to conformcompanies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with current period presentation.GAAP.
Discussion and Analysis
Critical Accounting Policies and Estimates
Altria’s critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for the year ended December 31, 20192020 (the “2019“2020 Form 10-K”); there have been no material changes to these critical accounting policies and estimates, except as noted below. | | ▪ | Investments in ABI and Cronos: |
Altria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment on a quarterly basis in connection with the preparation of its financial statements by comparing the fair value of each of its investments to their carrying value. If the carrying value of an investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and reduced to fair value, and the impairment is recognized in the period identified.
Investment in ABI At March 31, 2020,2021, Altria’s investment in ABI consisted of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. The fair value of Altria’s equity investment in ABI is based on:on (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and, at March 31, 2021, was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets, for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder were to foreclose on the Restricted Shares, the encumbered Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share. The fair value of Altria’s equity investment in ABI at March 31, 20202021 and December 31, 20192020 was $8.8$12.4 billion (carrying value of $18.5$17.4 billion) and $16.1$13.8 billion (carrying value of $18.1$16.7 billion), respectively, which was less than its carrying value by approximately 52%28% and 11%17%, respectively. At April 27, 2020,26, 2021, the fair value of Altria’s investment washad increased to approximately $8.6 billion (approximately 53% below its carrying value). As recently as September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value.$13.9 billion. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value and at April 26, 2021 has not recovered. Altria has evaluated the factors related to the fair value decline, including the recent impact on the fair value of ABI’s shares amidstduring the COVID-19 pandemic, which has negatively impacted ABI’s business. Altria evaluated the equity markets. Altria has also evaluatedduration and magnitude of the fair value decline at March 31, 2021, ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded, both at March 31, 2021 and December 31, 2020, that the decline in fair value of its investment in ABI below its carrying value iswas temporary and, therefore, no impairment was recorded. This conclusion was based on the following factors: ▪a history of significant recovery in ABI’s stock price during 2019 and recoveries during 2020 (following the steep decline in the first quarter of 2020 associated with the impacts of the COVID-19 pandemic on its business) and in April 2021, all of which Altria believes indicate investor confidence in ABI’s ability to implement its business strategies and deleveraging plans as well as its ability to recover from the impacts of the COVID-19 pandemic; ▪the continued industry disruption and volatility associated with the COVID-19 pandemic, resulting in stock performance for ABI that Altria does not believe is reflective of actual underlying equity values; ▪ABI’s proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative, including the following actions since December 31, 2019: (i) ABI’s 50% reduction to its final 2019 dividend and its decision to forgo its interim 2020 dividend; (ii) ABI’s completion of the sale of its Australia subsidiary and of a minority stake in its U.S. based metal container operations; and (iii) ABI’s continuation of its refinancing efforts through issuance and redemption activity, specifically front-end maturities into longer dated maturities and reduction in gross debt levels; ▪ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, new product innovations, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and ▪the strategic plans implemented by ABI in response to the adverse impacts of the COVID-19 pandemic, including its ability to leverage learnings from recovering markets and respond quickly to the evolving environment to better position ABI for a robust recovery. This was evidenced by:
▪ABI’s performance in the second half of 2020, which represented improvement over the first half of 2020 and reinforced its confidence in the future potential of the beer category and its business; and
| | ▪ | the fair value of Altria’s equity investment in ABI historically exceeding its carrying value since October 2016, when Altria obtained its ownership interest in ABI, with the exception of certain periods starting in September 2018; |
| | ▪ | a history of significant recovery in stock price during 2019 which Altria believes indicates investor confidence in ABI’s ability to implement its business strategies and deleveraging plans; |
| | ▪ | the relatively short period of time that ABI shares have traded below Altria’s carrying value; |
| | ▪ | the extreme equity market disruption and volatility associated with the COVID-19 pandemic, resulting in stock prices across all markets that Altria does not believe are reflective of actual underlying equity values; |
| | ▪ | ABI’s recent proactive actions to preserve financial flexibility through the period of significant financial market and operational volatility and uncertainty associated with the COVID-19 pandemic, including the following actions since December 31, 2019: (i) ABI’s April 2020 announcement of a 50% reduction to its upcoming dividend; (ii) ABI’s borrowing of the full $9 billion commitment under its revolving facility; (iii) ABI’s debt issuances of $6 billion and 4.5 billion euro denominated senior notes for general corporate purposes; and (iv) ABI’s reaffirmation that it expects to close the sale of its Australia subsidiary in the second quarter of 2020; |
| | ▪ | ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and |
| | ▪ | Altria’s ownership of restricted shares being subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021, which Altria believes provides sufficient time to allow for an anticipated recovery in the fair value of its investment in ABI. |
▪ABI stating in its year end 2020 earnings report that it expects financial results in 2021 to improve meaningfully versus 2020. ABI stated that its 2021 outlook, which is subject to change as it continues to monitor ongoing developments, reflects, among other factors, its current assessment of the scale and magnitude of the COVID-19 pandemic.
Altria will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic and subsequent recovery on ABI’s business and market valuation. If Altria were to conclude that the decline in fair value is other than temporary, Altria would determine and recognize, in the period identified, the impairment of its investment, which could result in a material adverse effect on Altria’s consolidated financial position or earnings.
Investment in Cronos
The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos at March 31, 2020 and December 31, 2019 was $0.9 billion and $1.2 billion, respectively, compared with its carrying value of $1.0 billion at March 31, 2020 and December 31, 2019. At March 31, 2020, the fair value of Altria’s equity method investment in Cronos was below its carrying value by 14%. Based on Altria’s evaluation of the duration and magnitude of the fair value decline at March 31, 2020, Altria’s evaluation of Cronos’s financial condition (including its strong cash position) and near-term prospects, and Altria’s intent and ability to hold its investment in Cronos until recovery, Altria concluded that the decline in fair value of its equity method investment in Cronos below its carrying value is temporary and, therefore, no impairment was recorded. At April 27, 2020, the fair value of Altria’s equity method investment in Cronos was approximately $1.0 billion (which approximates its carrying value). Altria will continue to assess the fair value of its equity method investment in Cronos to determine if any decline in fair value below its carrying value is other than temporary.
For further discussion of Altria’s investmentsinvestment in ABI, and Cronos, see Note 4.3. Investments in Equity Securities to the condensed consolidated financial statements in Item 1.1 (“Note 3”).
Consolidated Operating Results | | | | | | | | For the Three Months Ended March 31, | | | For the Three Months Ended March 31, | | | 2020 | | 2019 | | | (in millions) | | Net revenues: | | | | | (in millions) | | (in millions) | 2021 | | 2020 | | Net Revenues: | | Net Revenues: | | | Smokeable products | $ | 5,606 |
| | $ | 4,935 |
| Smokeable products | $ | 5,250 | | | $ | 5,606 | | | Oral tobacco products | 601 |
| | 540 |
| Oral tobacco products | 626 | | | 601 | | | Wine | 146 |
| | 151 |
| Wine | 150 | | | 146 | | | All other | 6 |
| | 2 |
| All other | 10 | | | 6 | | | Net revenues | $ | 6,359 |
| | $ | 5,628 |
| Net revenues | $ | 6,036 | | | $ | 6,359 | | | | | | | | Excise taxes on products: | | | | | Excise Taxes on Products: | | Excise Taxes on Products: | | | Smokeable products | $ | 1,278 |
| | $ | 1,203 |
| Smokeable products | $ | 1,121 | | | $ | 1,278 | | | Oral tobacco products | 31 |
| | 31 |
| Oral tobacco products | 31 | | | 31 | | | Wine | 4 |
| | 5 |
| Wine | 4 | | | 4 | | | | Excise taxes on products | $ | 1,313 |
| | $ | 1,239 |
| Excise taxes on products | $ | 1,156 | | | $ | 1,313 | | | | | | | | Operating income: | | | | | Operating companies income (loss): | | | | | Operating Income: | | Operating Income: | | | OCI: | | OCI: | | | Smokeable products | $ | 2,370 |
| | $ | 1,932 |
| Smokeable products | $ | 2,372 | | | $ | 2,370 | | | Oral tobacco products | 414 |
| | 358 |
| Oral tobacco products | 392 | | | 414 | | | Wine | (379 | ) | | 15 |
| Wine | 18 | | | (379) | | | All other | (5 | ) | | (12 | ) | All other | (14) | | | (5) | | | Amortization of intangibles | (19 | ) | | (8 | ) | Amortization of intangibles | (17) | | | (19) | | | General corporate expenses | (45 | ) | | (46 | ) | General corporate expenses | (61) | | | (45) | | | Corporate asset impairment and exit costs | — |
| | (1 | ) | | | Operating income | $ | 2,336 |
| | $ | 2,238 |
| Operating income | $ | 2,690 | | | $ | 2,336 | | |
As discussed further in Note 9. Segment Reporting to8, the condensed consolidated financial statements in Item 1 (“Note 9”), Altria’s chief operating decision maker (“CODM”)CODM reviews operating companies income (loss) (“OCI”)OCI to evaluate the performance of, and allocate resources to, the segments. OCI forManagement believes it is appropriate to disclose this measure to help investors analyze the segments is defined as operating income before general corporate expensesbusiness performance and amortizationtrends of intangibles.the various business segments.
The following table provides a reconciliation of adjusted net earnings attributable to Altria and adjusted diluted EPS attributable to Altria for the three months ended March 31: | | (in millions of dollars, except per share data) | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Net Earnings Attributable to Altria | Diluted EPS | (in millions of dollars, except per share data) | | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Net Earnings Attributable to Altria | Diluted EPS | | 2020 Reported | $ | 2,108 |
| $ | 558 |
| $ | 1,550 |
| $ | 1,552 |
| $ | 0.83 |
| | ABI-related special items | 56 |
| 12 |
| 44 |
| 44 |
| 0.03 |
| | 2021 Reported | | 2021 Reported | | $ | 1,937 | | $ | 516 | | $ | 1,421 | | $ | 1,424 | | $ | 0.77 | | | NPM Adjustment Items | | NPM Adjustment Items | | (32) | | (8) | | (24) | | (24) | | (0.01) | | | Implementation and acquisition-related costs | 395 |
| 95 |
| 300 |
| 300 |
| 0.16 |
| Implementation and acquisition-related costs | | 48 | | 11 | | 37 | | 37 | | 0.02 | | | Tobacco and health litigation items | 24 |
| 5 |
| 19 |
| 19 |
| 0.01 |
| Tobacco and health litigation items | | 35 | | 9 | | 26 | | 26 | | 0.01 | | | | JUUL changes in fair value | | JUUL changes in fair value | | 200 | | — | | 200 | | 200 | | 0.10 | | | ABI-related special items | | ABI-related special items | | (128) | | (28) | | (100) | | (100) | | (0.05) | | | Cronos-related special items | | Cronos-related special items | | (70) | | — | | (70) | | (70) | | (0.04) | | | | Loss on early extinguishment of debt | | Loss on early extinguishment of debt | | 649 | | 153 | | 496 | | 496 | | 0.27 | | | Tax items | | Tax items | | — | | 6 | | (6) | | (6) | | — | | | 2021 Adjusted for Special Items | | 2021 Adjusted for Special Items | | $ | 2,639 | | $ | 659 | | $ | 1,980 | | $ | 1,983 | | $ | 1.07 | | | | 2020 Reported | | 2020 Reported | | $ | 2,108 | | $ | 558 | | $ | 1,550 | | $ | 1,552 | | $ | 0.83 | | | | Implementation and acquisition-related costs | | Implementation and acquisition-related costs | | 395 | | 95 | | 300 | | 300 | | 0.16 | | | Tobacco and health litigation items | | Tobacco and health litigation items | | 24 | | 5 | | 19 | | 19 | | 0.01 | | | | ABI-related special items | | ABI-related special items | | 56 | | 12 | | 44 | | 44 | | 0.03 | | | Cronos-related special items | 89 |
| (6 | ) | 95 |
| 95 |
| 0.05 |
| Cronos-related special items | | 89 | | (6) | | 95 | | 95 | | 0.05 | | | Tax items | — |
| (24 | ) | 24 |
| 24 |
| 0.01 |
| Tax items | | — | | (24) | | 24 | | 24 | | 0.01 | | | 2020 Adjusted for Special Items | $ | 2,672 |
| $ | 640 |
| $ | 2,032 |
| $ | 2,034 |
| $ | 1.09 |
| 2020 Adjusted for Special Items | | $ | 2,672 | | $ | 640 | | $ | 2,032 | | $ | 2,034 | | $ | 1.09 | | | | | | 2019 Reported | $ | 1,516 |
| $ | 395 |
| $ | 1,121 |
| $ | 1,120 |
| $ | 0.60 |
| | ABI-related special items 1 | 163 |
| 34 |
| 129 |
| 129 |
| 0.07 |
| | Asset impairment, exit, implementation and acquisition-related costs | 159 |
| 34 |
| 125 |
| 125 |
| 0.06 |
| | Tobacco and health litigation items | 17 |
| 4 |
| 13 |
| 13 |
| 0.01 |
| | Cronos-related special items | 425 |
| 97 |
| 328 |
| 328 |
| 0.17 |
| | Tax items | — |
| (19 | ) | 19 |
| 19 |
| 0.01 |
| | 2019 Adjusted for Special Items | $ | 2,280 |
| $ | 545 |
| $ | 1,735 |
| $ | 1,734 |
| $ | 0.92 |
| | | | |
1 Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments not previously identified as special items and excluded from Altria’s adjusted financial measures. For further discussion, see Executive Summary - 2020 Forecast Results above.
The following events that occurred duringspecial items affected the comparability of statements of earnings amounts for the three months ended March 31, 2021 and 2020: ▪NPM Adjustment Items: For a discussion of NPM Adjustment Items and a breakdown of these items by segment, see Health Care Cost Recovery Litigation in Note 10. Contingencies to the condensed consolidated financial statements in Item 1 (“Note 10”) and NPM Adjustment Items in Note 8, respectively. ▪Implementation and Acquisition-Related Costs: Pre-tax implementation and acquisition-related costs were $48 million and $395 million for the three months ended March 31, 2021 and 2020, respectively. For a discussion of implementation and 2019 affected the comparability of statement of earnings amounts:acquisition-related costs, see Note 8.
| | ▪ | ▪Tobacco and Health Litigation Items: For a discussion of tobacco and health litigation items and a breakdown of these costs by segment, see Note 11. Contingencies to the condensed consolidated financial statements in Item 1 (“Note 11”) and Tobacco and Health Litigation Items in Note 9, respectively. |
| | ▪ | Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax asset impairment, exit, implementation and acquisition-related costs were $395 million and $159 million for the three months ended March 31, 2020 and 2019, respectively.
|
Ste. Michelle has been experiencing product volume demand uncertainty, which has been further negatively impacted in the first quarter by the economic uncertainty surrounding the COVID-19 pandemic as discussed in the Operating Results - Wine Segment - Business Environment. As a result of wine inventory levels significantly exceeding forecasted product volume demand as of March 31, 2020 and other factors, Ste. Michelle recorded pre-tax charges of $392 million, which were included in cost of sales in Altria’s condensed consolidated statement of earnings for the three months ended March 31, 2020. The charges consisted of the following: (i) write-off of inventory ($292 million) as Ste. Michelle no longer believes that the benefit of the blending and production plans for its inventory outweighs inventory carrying cost given the reduced product volume demand; and (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believes no longer have a future economic benefit ($100 million). In conjunction with Ste. Michelle’s examination of its inventory levels, Altria and Ste. Michelle undertook a review of Ste. Michelle’s wine business and have implemented a strategic reset in order to maximize Ste. Michelle’s profitability and achieve improved long-term cash-flow generation. Ste. Michelle expects to deliver pre-tax cost savings of approximately $15 million and pre-tax cash savings of approximately $40 million annually by 2021.
In December 2018, Altria announced a cost reduction program (which included workforce reductions and third-party spending across the businesses) that delivered approximately $600 million in annualized cost savings in 2019.
For further discussion on asset impairment, exit and implementation costs, including a breakdown of these costs by segment, see Note 3.10 and Asset Impairment, ExitTobacco and Implementation CostsHealth Litigation Items to the condensed consolidated financial statements in Item 1 (“Note 3”).8, respectively.
▪JUUL Changes in Fair Value: For the three months ended March 31, 2020 and 2019,2021, Altria incurredrecorded a non-cash pre-tax acquisition-related costsunrealized loss of $3$200 million and $98 million, respectively. Substantially allreported as (income) losses from equity investments in its condensed consolidated statement of earnings as a result of a decrease in the pre-tax acquisition-related costsfair value of Altria’s investment in JUUL. A corresponding adjustment was made to the JUUL tax valuation allowance. For further discussion, see Note 3. ▪ABI-Related Special Items: Altria’s earnings from its equity investment in ABI for the three months ended March 31, 2019 were for2021 included net pre-tax income of $128 million, consisting primarily of (i) ABI’s completion of the write-offissuance of debt issuance costs related to Altria’s short-term borrowings under the term loan agreement that Altria entered intoa minority stake in connectionits U.S.-based metal container operations, (ii) mark-to-market gains on certain ABI financial instruments associated with its investments in JUULshare commitments and Cronos.
| | ▪ | ABI-Related Special Items: (iii) charges associated with an early bond termination by ABI.Altria’s earnings from its equity investment in ABI for the three months ended March 31, 2020 included net pre-tax charges of $56 million, consisting primarily of Altria’s share of ABI’s net mark-to-market losses on certain ABI financial instruments associated with its share commitments, partially offset by an additional net gain related to the completion in October 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited.
|
Altria’s earnings from its equity investment in ABI for the three months ended March 31, 20192020 included net pre-tax charges of $163$56 million, consisting primarily of Altria’s share of ABI’s net(i) mark-to-market losses on certain ABI financial instruments associated with its share commitments.commitments and (ii) ABI’s completion in October 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary.
These amounts include Altria’s respective share of amounts recorded by ABI and may also include additional adjustments related to (i) conversion from international financial reporting standards to GAAP and (ii) adjustments to Altria’s investment required under the equity method of accounting.
| | • | Cronos-Related Special Items: For the three months ended March 31, 2020 and 2019, Altria recorded net pre-tax losses of $89 million and $425 million, respectively, consisting of the following:
|
| | | | | | | | | | For the Three Months Ended March 31, | | 2020 | | 2019 | | (in millions) | Loss on Cronos-related financial instruments(1) | $ | 137 |
| | $ | 425 |
| Earnings from Equity Investments(2) | (48 | ) | | — |
| Total Cronos-related special items - (Income) Expense | $ | 89 |
| | $ | 425 |
|
▪Cronos-Related Special Items: For the three months ended March 31, 2021 and 2020, Altria recorded net pre-tax (income) expense consisting of the following: | | (1) | The 2020 and substantially all of the 2019 amounts are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction. |
| | (2) | Substantially all of these amounts represent Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares. |
| | | | | | | | | | | | | | | | | For the Three Months Ended March 31 | | | (in millions) | 2021 | | 2020 | | | | | (Gain) loss on Cronos-related financial instruments (1) | $ | (110) | | | $ | 137 | | | | | | (Income) losses from equity investments (2) | 40 | | | (48) | | | | | | Total Cronos-related special items - (income) expense | $ | (70) | | | $ | 89 | | | | | |
(1)The 2021 and 2020 amounts are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction. (2)Amounts primarily include Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares. For further discussion, see Note 5.3 and Note 4. Financial Instruments to the condensed consolidated financial statements in Item 1.
▪Loss on Early Extinguishment of Debt: For the three months ended March 31, 2021, Altria recorded pre-tax losses of $649 million as a result of the completed debt tender offers and redemption of certain long-term senior unsecured notes. For further discussion, see Note 9. Debt to the condensed consolidated financial statements in Item 1 (“Note 9”).
Consolidated Results of Operations for theThree Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020 versus the Three Months Ended March 31, 2019
Net revenues, which include excise taxes billed to customers, increased $731decreased $323 million (13.0%(5.1%), due primarily to higherlower net revenues in the smokeable products and oral tobacco products segments.
segment.
Cost of sales increased $595decreased $565 million (37.7%(26.0%), due primarily to the inventory-related charges in the wine segment in 2020 (as discussed above)in Note 8), higher per unit settlement charges and higherlower shipment volume in the smokeable products segment.
segment and favorable NPM Adjustment Items in 2021.
Excise taxes on products decreased $157 million (12.0%), due primarily to lower smokeable products shipment volume. Marketing, administration and research costs increased $74$45 million (6.0%(8.4%), due primarily to higher smokeableacquisition-related costs in the oral tobacco products shipment volume.
segment (as discussed in Note 8).
Operating income increased $98$354 million (4.4%(15.2%), due primarily to higher operating results fromin the smokeable products and oral tobacco products segments,wine segment, partially offset by lower operating results fromin the wineoral tobacco products segment.
Interest and other debt expense, net, decreased $109increased $33 million (28.4%(12.0%), due primarily to debt issuance costsunfavorable timing of interest expense. Income (losses) from equity investments, which decreased $106 million (67.5%), were negatively impacted by the non-cash pre-tax unrealized loss of $200 million as a result of a decrease in 2019 for borrowings associated with the fair value of Altria’s investment in JUUL and Cronos transactions.
Earningsunfavorable special items from Altria’s equity investments, increased $71 million (82.6%), due to higher earnings from Altria’s investment in ABI and earnings from Altria’s investment in Cronos in 2020 (which were both positively impacted(as shown above), partially offset by favorable ABI-related special items).
items.
Reported net earnings attributable to Altria of $1,552$1,424 million increased $432decreased $128 million (38.6%(8.2%), due primarily to lowerthe loss on Cronos-related financial instruments,early extinguishment of debt and the non-cash unrealized loss as a result of a decrease in the fair value of Altria’s investment in JUUL, partially offset by higher operating income debt issuance costs in 2019 and higher earnings from Altria’s equity investments.favorable Cronos-related and ABI-related special items. Reported diluted and basic EPS attributable to Altria of $0.83,$0.77, each increaseddecreased by 38.3%7.2%, due to higherlower net earnings attributable to Altria and fewer shares outstanding.
Altria.
Adjusted net earnings attributable to Altria of $2,034$1,983 million increased $300decreased $51 million (17.3%(2.5%), due primarily to unfavorable timing of interest and other debt expense, net and a higher adjusted OCI from the smokeable products and oral tobacco products segments, partially offset by lower adjusted earnings from Altria’s equity investment in ABI.tax rate. Adjusted diluted EPS attributable to Altria of $1.09 increased$1.07 decreased by 18.5%1.8%, due to higherlower adjusted net earnings attributable to Altria and fewer shares outstanding.
Non-GAAP Financial Measures
Altria.
While Altria reports its financial results in accordance with GAAP, its management reviews certain financial results, including OCI, OCI margins, net earnings attributable to Altria and diluted EPS, on an adjusted basis, which excludes certain income and expense items that management believes are not part
Table of underlying operations. These items may include, for example, restructuring charges, asset impairment charges, acquisition-related costs, equity investment-related special items (including any changes in fair value for the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain nonparticipating manufacturer (“NPM”) adjustment disputes under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment DisputesContents in Note 11. Altria’s management does not view any of these special items to be part of Altria’s underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s adjusted effective tax rate may exclude certain tax items from its reported effective tax rate.
Altria’s management believes that adjusted financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to Altria’s CODM for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. These adjusted financial measures are not required by, or calculated in accordance with GAAP and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The U.S. tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume of Altria’s tobacco subsidiaries and investees and Altria’s consolidated results of operations, cash flows or financial position. These challenges, some of which are discussed in more detail below, in Note 1110 and in Part II,I, Item 1A., Risk Factors of thisthe 2020 Form 10-Q (“Item 1A”)10-K, include:
▪pending and threatened litigation and bonding requirements;
| | ▪ | pending and threatened litigation and bonding requirements; |
| | ▪ | restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the Food and Drug Administration (“FDA”); |
| | ▪ | actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements; |
| | ▪ | bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers; |
| | ▪ | other federal, state and local government actions, including: |
| | ▪ | ▪restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”), and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the United States Food and Drug Administration (the “FDA”); ▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements; ▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers; ▪other federal, state and local government actions, including: ▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes; |
| | ▪ | additional restrictions on the advertising and promotion of tobacco products; |
| | ▪ | other actual and proposed tobacco product legislation and regulation; and |
| | ▪ | governmental investigations; |
| | ▪ | the diminishing prevalence of cigarette smoking; |
| | ▪ | increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products; |
| | ▪ | changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower-priced tobacco products; |
| | ▪ | the highly competitive nature of the tobacco categories in which Altria’s tobacco subsidiaries operate, including competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation; |
| | ▪ | illicit trade in tobacco products; |
| | ▪ | potential adverse changes in prices, availability and quality of tobacco, other raw materials and components; and |
▪additional restrictions on the advertising and promotion of tobacco products; ▪other actual and proposed tobacco-related legislation and regulation; and ▪governmental investigations; ▪the diminishing prevalence of cigarette smoking; ▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products; ▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower-priced tobacco products; ▪the highly competitive nature of all tobacco categories, including, without limitation, competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation and the proliferation of innovative tobacco products, including e-vapor and oral nicotine pouch products; ▪illicit trade in tobacco products; ▪potential adverse changes in prices, availability and quality of tobacco, other raw materials and components; and ▪the COVID-19 pandemic. In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences pose challenges for Altria’sare continuing to impact the tobacco subsidiaries.industry. Altria’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. In fact, a growing number of adultAdult smokers are convertingcontinue to convert from cigarettes to exclusive use of non-combustible tobacco product alternatives. Up until the second half of 2019, the e-vapor category had experienced significant growth, in recent years, and the number of adults who exclusively used e-vapor products also increased during that time which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes and moist smokeless tobacco products (“MST”). Growth in the e-vapor category has beenwas negatively impacted by the legislative and regulatory activities discussed below. Based onHowever, the accelerated adult smoker movement across categoriese-vapor category is now experiencing a moderate rate of growth and has become increasingly competitive. Oral nicotine pouch retail share of the federal government raisingtotal oral tobacco category has doubled since the legal agefirst quarter of 2020. The oral nicotine pouch category is becoming increasingly competitive and we are also monitoring the introduction of new unregulated synthetic nicotine pouches, which may lead to purchase tobacco products to 21, as discussed below under Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products, Altria expects the U.S. adjusted cigarette industry volumefurther competition for 2020 to decline by 4% - 6%. Due to the expected continued volatility across tobacco categories, Altria is no longer providing a multi-year forecast for U.S. cigarette industry volume decline. oral nicotine pouches. Altria and its tobacco subsidiaries believe the innovative tobacco productproducts categories (in particular, e-vapor) will continue to be dynamic as adult tobacco consumers explore a variety of tobacco product options and as a result of adult consumer perceptions of the regulatory environmentrelative risks of non-combustible products compared to cigarettes, FDA determinations on product applications and legislative actions.
Domestic cigarette industry volume for these innovative2020 was unchanged versus the prior year, which Altria believes was the result of stay-at-home practices due to the COVID-19 pandemic and higher tobacco products evolves.
discretionary spending. In the first quarter of 2021, we estimate that adjusted domestic cigarette industry volume declined by 2%. Altria expects 2021 cigarette industry volume trends to be most influenced by (i) adult smoker stay-at-home practices, (ii) unemployment rates, (iii) fiscal stimulus, (iv) cross-category movement, (v) the timing and breadth of COVID-19 vaccine administration and (vi) adult smoker purchasing behavior of those who receive the vaccine.
Economic conditions also impact adult tobacco consumer purchase behavior. Prior economic downturns have resulted in adult tobacco consumers choosing discount products and other lower-priced tobacco products. IfAlthough the economic downturn resulting from the COVID-19 pandemic resultshas not meaningfully increased the growth of discount and lower priced tobacco products, in an economic recession,part due to stimulus payments, adult tobacco consumers may still increasingly choose these products.products if economic conditions do not continue to improve. See Operating Results - Smokeable Products SegmentExecutive Summary in Item 27 above for further discussion.
Altria and its tobacco subsidiaries work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the U.S. through innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties).
FSPTCA and FDA Regulation
▪The Regulatory FrameworkFramework:
The FSPTCA, expressly establishes certainits implementing regulations and its 2016 deeming regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions: ▪impose restrictions and prohibitions on our tobacco businesses and authorizes or requires further FDA action. Under the FSPTCA, the FDA has broad authority to (1) regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of tobacco products; (2) require disclosuresproducts (see Final Tobacco Marketing Rule below); ▪establish pre-market review pathways for new and modified tobacco products (see Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below); ▪prohibit any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization; ▪authorize the FDA to impose tobacco product standards that are appropriate for the protection of related information;the public health; and (3) enforce ▪equip the FDA with a variety of investigatory and enforcement tools, including the authority to inspect product manufacturing and other facilities. The FSPTCA also bans descriptors such as “light,” “low” or “mild” when used as descriptors of modified risk, unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by John Middleton Co. (“Middleton”), the Department of Justice, on behalf of the FDA, informed Middleton that the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to bring another lawsuit. ▪Final Tobacco Marketing Rule: As required by the FSPTCA, in March 2010 the FDA promulgated a wide range of advertising and related regulations. The FSPTCA applies topromotion restrictions for cigarettes cigarette tobacco and smokeless tobacco(1) products (the “Final Tobacco Marketing Rule”). The May 2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives, but do not include any component or part that is not made or derived from tobacco. The Final Tobacco Marketing Rule, as amended, among other things: ▪restricts the use of 2016, Other Tobacco Products. Seenon-tobacco trade and brand names on cigarettes and smokeless tobacco products; ▪prohibits sampling of all tobacco products except that sampling of smokeless tobacco products is permitted in qualified adult-only facilities; ▪prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos; ▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and ▪requires the development by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and gives the FDA the authority to require new warnings for any type of tobacco product (see FDA Regulatory Actions - Deeming RegulationsGraphic Warnings below.below).
Among other measures, the FSPTCA or its implementing regulations:
| | ▪ | imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail; |
___________________________
(1)“Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
| | ▪ | bans descriptors such as “light,” “mild” or “low” or similar descriptors when used as descriptors of modified risk unless expressly authorized by the FDA; |
| | ▪ | requires extensive product disclosures to the FDA and may require public disclosures; |
prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
| | ▪ | imposes reporting obligations relating to contraband activity and grants the FDA authority to impose recordkeeping and other obligations to address illicit trade in tobacco products; |
| | ▪ | changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size and requires the development by the FDA of graphic warningsSubject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes establishes warning requirements for Other Tobacco Products and gives the FDA the authority to require new warnings for any type of tobacco products (see FDA Regulatory Actions - Graphic Warnings below);
|
| | ▪ | authorizes the FDA to adopt product regulations and related actions, including imposing tobacco product standards that are appropriate for the protection of the public health and imposing manufacturing standards for tobacco products (see FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation and FDA Regulatory Actions - Potential Product Standards below);
|
| | ▪ | establishes pre-market review pathways for new and modified tobacco products for the FDA to follow (see Pre-Market Review Pathways Including Substantial Equivalence below); and
|
| | ▪ | equips the FDA with a variety of investigatory and enforcement tools, including the authority to inspect tobacco product manufacturing and other facilities. |
Pre-Market Review Pathways for Tobacco Products, Including Substantial Equivalence
The FSPTCA permits the sale of tobacco products that were commercially marketed as of February 15, 2007, and for which no modifications have been made to the products since that date (“Grandfathered Products”). For new and modified tobacco products, however, the FSPTCA imposes restrictions on marketing, requiring FDA review and authorization before marketing a new or modified product. Specifically, cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced into the market after March 22, 2011, and Other Tobacco Products modified or first introduced into the market afterin August 8, 2016, are subject to new tobacco product application and pre-market review and authorization requirements unless a manufacturer can demonstrate they are “substantially equivalent” to products commercially marketed as of February 15, 2007. The FDA could deny any such new tobacco product application or determine lack of substantial equivalence, thereby preventing the distribution and sale of any product affected by such denial. A manufacturer is permitted, however, to introduce Grandfathered Products into the marketplace.
For cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced into the market between February 15, 2007 and March 22, 2011 (“Provisional Products”) for which a manufacturer submitted substantial equivalence reports, the FDA may determine that such products are not “substantially equivalent” to products commercially marketed as of February 15, 2007. In such cases, the FDA could require the removal of such products from the marketplace (see FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways - Cigarettes and Smokeless Tobacco Products below).
Similarly, the FDA could determine that Other Tobacco Products modified or first introduced into the market between February 15, 2007 and August 8, 2016 for which a manufacturer submits substantial equivalence reports, are not “substantially equivalent” to products commercially marketed as of February 15, 2007, or reject a new tobacco product application submitted by a manufacturer, both of which could require the removal of such products from the marketplace (see FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation, and FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways - Other Tobacco Products below).
Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, can trigger the FDA’s pre-market review process described above. As noted, adverse determinations by the FDA during that process could restrict a manufacturer’s ability to continue marketing such products.
FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation
In July 2017, the FDA announced a comprehensive plan for tobacco and nicotine regulation designed to strike a balance between regulation and encouraging the development of innovative tobacco products that may be less risky than combustible cigarettes. Since then, the FDA has issued additional information about its comprehensive plan in response to concerns associated with the rise in the use of e-vapor products by youth, and the potential youth appeal of flavoredall other tobacco products.
The FDA said it is monitoring youth tobacco usage rates, particularly e-vapor product use, and exercised its regulatory authority by implementing measures designed to decrease youth tobacco use, including the removal of certain e-vapor products from the market (see ▪FDA Regulatory Actions - Underage Access and Use of Certain Tobacco Products below).
Major components of the FDA’s comprehensive plan include the following:
| | ▪ | issuing advance notices of proposed rulemaking (“ANPRM”) relating to potential product standards for nicotine in cigarettes, flavors in all tobacco products (including menthol in cigarettes and characterizing flavors in all cigars); and, for e-vapor products, protection against known public health risks such as concerns about youth exposure to liquid nicotine; |
| | ▪ | taking actions to restrict youth access to e-vapor products; |
| | ▪ | establishing content requirements for “new tobacco product” and “modified risk tobacco product” applications; |
| | ▪ | reconsidering the FDA review processes of substantial equivalence reports for Provisional Products and establishing review processes for e-vapor new product applications; and |
| | ▪ | revisiting the timelines (previously extended by the FDA) to submit applications for Other Tobacco Products. |
See FDA Regulatory Actions below for further discussion.
Rulemaking and Guidance
The provisions of the FSPTCA that require the FDA to take action through rulemaking generally involve consideration of public comment and, for some issues, scientific review. As required by the FSPTCA, the FDA has established a tobacco product scientific advisory committee (the “TPSAC”), which consists of voting and non-voting members, to provide advice, reports, information and recommendations to the FDA on certain scientific and health issues relating to tobacco products. TPSAC votes are considered by the FDA, but are not binding. Guidance: From time to time, the FDA issues proposed rules or guidance, which may be issued in draft or final form, generally involve public comment and generally involves public comment.may include scientific review. The FDA also may request comments on broad topics through an Advanced Notice of Proposed Rulemaking (“ANPRM”). Altria’s tobacco subsidiaries participate actively in processes established byengage with the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA policies and proposals and participation in public hearings and engagement sessions.
The FDA’s implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by U.S. states, territories and localities of their laws and regulations as well as of the State Settlement Agreements discussed below (see State Settlement Agreements below). Such enforcement efforts may adversely affect the ability of Altria’s tobacco subsidiaries and investees to market and sell regulated tobacco products in those states, territories and localities.
▪FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation: In July 2017, the FDA announced a “Comprehensive Plan for Tobacco and Nicotine Regulation” (“Comprehensive Plan”) designed to strike a balance between regulation and encouraging the development of innovative tobacco products that may be less risky than cigarettes. Since then, the FDA has issued additional information about its Comprehensive Plan in response to concerns associated with the rise in the use of e-vapor products by youth, and the potential youth appeal of flavored tobacco products (see Underage Access and Use of Certain Tobacco Products below). As part of the Comprehensive Plan, the FDA:
Impact on Our Business; Compliance Costs▪issued ANPRMs relating to potential product standards for nicotine in cigarettes, flavors in all tobacco products (including menthol in cigarettes and User Feescharacterizing flavors in all cigars); and, for e-vapor products, to protect against known public health risks such as concerns about youth exposure to liquid nicotine;
▪took actions to restrict youth access to e-vapor products;
Regulations imposed and other regulatory actions taken▪reconsidered the processes used by the FDA underto review certain reports and new product applications; and
▪revisited the timelines (previously extended by the FDA) to submit applications for tobacco products first regulated by the FDA in 2016. ▪Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement: The FSPTCA permits the sale of tobacco products commercially marketed as of February 15, 2007 and not subsequently modified (“Grandfathered Products”) and new or modified products authorized through the pre-market tobacco product application (“PMTA”), Substantial Equivalence (“SE”) or SE Exemption pathways. The FDA pre-market authorization enforcement policy varies based on product type and date of availability in the market; specifically: ▪All tobacco products on the market as of February 15, 2007, and not subsequently modified, are Grandfathered Products and exempt from the pre-market authorization requirement; ▪Cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health; and ▪Tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Grandfathered Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020. Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, could trigger the FDA’s pre-market or SE review processes. Through these processes, a manufacturer could receive (i) a “not substantially equivalent” determination, (ii) a denial of a PMTA or (iii) a marketing order withdrawal by the FDA on one or more products, which would require the removal of the product or products from the market. Such action could have a material adverse effectimpact on the business and consolidated results of operations cash flows or financial position of Altria and itsour tobacco subsidiaries in a number of different ways. For example, actions byand investees, and the FDA could:
| | ▪ | impact the consumer acceptability of tobacco products; |
| | ▪ | delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products; |
| | ▪ | limit adult tobacco consumer choices; |
| | ▪ | impose restrictions on communications with adult tobacco consumers; |
| | ▪ | create a competitive advantage or disadvantage for certain tobacco companies; |
| | ▪ | impose additional manufacturing, labeling or packaging requirements; |
| | ▪ | impose additional restrictions at retail; |
| | ▪ | result in increased illicit trade in tobacco products; or |
| | ▪ | otherwise significantly increase the cost of doing business. |
The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
Provisional Products:Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are Provisional Products. Altria’s subsidiaries timely submitted SE reports for these Provisional Products. PM USA and USSTC have received SE determinations on certain Provisional Products. Those that were found by the FDA to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that
continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent.
The FSPTCA imposes user fees onIn addition, the FDA has communicated that it will not review a certain subset of Provisional Product SE reports and that the products that are the subject of those reports can continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products.
While Altria’s cigarette cigarette tobacco,and smokeless tobacco cigar and pipe tobacco manufacturers and importers to pay forsubsidiaries believe their current Provisional Products meet the coststatutory requirements of the FSPTCA, they cannot predict how the FDA will ultimately apply law, regulation and guidance to their various SE reports. Should Altria’s cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any SE reports currently pending with the FDA, they believe they can replace the vast majority of their respective product volumes with other matters. The FSPTCAFDA authorized products or with Grandfathered Products. Non-Provisional Products: Cigarette and smokeless tobacco products introduced into the market or modified after March 22, 2011 are “Non-Provisional Products” and must receive a marketing order from the FDA prior to being offered for sale. Marketing orders for Non-Provisional Products may be obtained by filing an SE report, PMTA or using another pre-market pathway established by the FDA. Altria’s cigarette and smokeless tobacco subsidiaries may not be able to obtain a marketing order for non-provisional products because the FDA may determine that any such product does not impose user fees on e-vapor ormeet the statutory requirements for approval. Products Regulated in 2016: Manufacturers of products first regulated by the FDA in 2016, including cigars, oral nicotine pouch manufacturers. The costpouches and e-vapor products, that were on the market as of August 8, 2016 and not subsequently modified must have filed an SE report or PMTA by the filing deadline of September 9, 2020 in order for their products to remain on the market. At the FDA’s discretion, these products can remain on the market during FDA review for up to one year from the date of the application with additional case-by-case discretion to remain on the market after that time, so long as the report or application was timely filed with the FDA. It is uncertain when and for how long FDA user fee is allocated first amongmay permit such products to remain on the market pursuant to its case-by-case discretion. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing the product. Helix Innovations LLC (“Helix”) submitted PMTAs for on! oral nicotine pouches in May 2020, which are presently under review by the FDA. JUUL submitted PMTAs to the FDA for its e-vapor device and the related tobacco and menthol flavors in July 2020. Middleton has received market orders or exemptions that cover over 97% of its cigar product categoriesvolume and filed SE reports for its remaining cigar product volume by the filing deadline. In December 2013, Altria’s subsidiaries entered into a series of agreements with Philip Morris International Inc. (“PMI”), including an agreement that grants Altria an exclusive right to commercialize certain of PMI’s heated tobacco products in the United States, subject to FDA regulationauthorization of the applicable products. PMI submitted a PMTA and then among manufacturers a modified risk tobacco product application with the FDA for its electronically heated tobacco products comprising the IQOS Tobacco Heating System. In April 2019, the FDA authorized the PMTA for the IQOS Tobacco Heating System and importers within each respective categoryin July 2020, the FDA authorized the marketing of this system as a modified risk tobacco product (“MRTP”) with a reduced exposure claim. The IQOS electronic device heats but does not burn tobacco. In December 2020, the FDA authorized the PMTA for IQOS 3, an updated version of the IQOS electronic device. The MRTP authorization for the original IQOS electronic device currently does not apply to the IQOS 3device. PMI has disclosed that it plans to seek an MRTP authorization for the IQOS 3 electronic device. Post-Market Surveillance: Manufacturers that receive product authorizations through the PMTA process must submit to the FDA post-market records and reports, as detailed in market orders. This includes notification of all marketing activities. The FDA may amend requirements of a market order or withdraw the market order based on their relative market shares, all as prescribedthis information if, among other reasons, it determines that the continued marketing of the products is no longer appropriate for the protection of the public health. Effect of Adverse FDA Determinations: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. Failure of manufacturers to submit applications by the statute and FDA regulations. Payments for user fees are adjusted for several factors, including inflation, market share and industry volume. For a discussion ofapplicable deadline, an unfavorable determination on an application or the impact ofwithdrawal by the FDA user fee payments on Altria, see Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below. In addition, compliance with the FSPTCA’s regulatory requirements has resulted and will continue toof a prior marketing order could result in additional costs for Altria’s tobacco businesses. The amountthe removal of additional compliance and related costs has not been material in any given quarterproducts from the market. These manufacturers would have the option of marketing products that have received FDA pre-market authorization or year to date period but could become material, either individuallyGrandfathered Products. A “not substantially equivalent” determination, a denial of a PMTA or ina marketing order withdrawal by the aggregate, toFDA on one or more of Altria’s tobacco subsidiaries.
Investigation and Enforcement
The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. The use of any of these investigatory or enforcement tools by the FDAproducts could result in significant costs or otherwise have a material adverse effectimpact on the business and consolidated results of operations of our tobacco subsidiaries and investees, and the cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
Final Tobacco Marketing Rule
As required by the FSPTCA, the FDA re-promulgated in March 2010 a wide range of advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to a United States Supreme Court ruling) (the “Final Tobacco Marketing Rule”). The May 2016 amendments to the Final Tobacco Marketing Rule apply certain provisions to certain “covered tobacco products,” which include cigars, e-vapor products containing nicotine or other tobacco derivatives, pipe tobacco and oral nicotine pouches, but do not include any component or part that is not made or derived from tobacco. The Final Tobacco Marketing Rule as so amended:
| | ▪ | bans the use of color and graphics in cigarette and smokeless tobacco product labeling and advertising; |
| | ▪ | prohibits the sale of cigarettes, smokeless tobacco and covered tobacco products to persons under the age of 18 (See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for a discussion of more recent laws raising the minimum legal age to purchase tobacco products to 21);
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| | ▪ | restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products; |
| | ▪ | requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions; |
| | ▪ | prohibits sampling of cigarettes and covered tobacco products and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities; |
| | ▪ | prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos; and |
| | ▪ | prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event. |
Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products and in August 2016 for covered tobacco products. At the time of the re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an ANPRM regarding the so-called “1000 foot rule,” which would establish restrictions on the placement of outdoor tobacco advertising in relation to schools and playgrounds.
FDA Regulatory Actions
▪Graphic Warnings
:In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting thecertain negative health consequences of smoking. According to thesmoking on cigarette packaging and advertising. The final rule requires that the graphic health warnings will (i) be located beneath the cellophane and comprise the top 50% of the front and rear panels of cigarette packages and (ii) occupy 20% of a cigarette advertisement and be located at the top of the advertisement. TheAs a result of a court order related to the COVID-19 pandemic and an additional court ruling in March 2021 resulting from a lawsuit brought by R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and others against the FDA, the final rule iswill be effective as of June 18, 2021. Other tobaccoApril 14, 2022. PM USA and other cigarette manufacturers alsohave filed a lawsuitlawsuits challenging the final rule. rule on substantive and procedural grounds. In the preamble to the final rule, the FDA stated that it would not
exempt from the final rule HeatSticks, a heated tobacco product used with the IQOS electronic device, as part of the rulemaking, but would consider the HeatSticks marketmarketing order, and similar marketother marketing orders, on a case-by-case basis.
Substantial Equivalence and Other New Product Processes/Pathways
Cigarettes and Smokeless Tobacco Products:In general, in order to continue marketing Provisional Products, manufacturers of such products were required to submit to To date, the FDA reports demonstrating substantial equivalence by March 22, 2011 for the FDAhas not taken any action to determine if such tobacco products are “substantially equivalent” to products commercially available as of February 15, 2007. Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are Provisional Products, as are some of the products currently marketed by Sherman Group Holdings, LLC (“Nat Sherman”). Altria’s subsidiaries submitted timely substantial equivalence reports for these Provisional Products and can continue marketing these products unless the FDA makes a determination that a specific Provisional Product is not substantially equivalent. If the FDA ultimately makes such a determination, it could require the removal of such products exempt HeatSticks from the marketplace, leaving Altria’s cigarette and smokeless tobacco subsidiaries with the option of marketing other products that have received FDA pre-market authorization or Grandfathered Products.graphic health warnings requirements.
The FDA has communicated that it will not review a certain subset of Provisional Product substantial equivalence reports and that the products that are the subject of those reports can generally continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products, but also have a number of Provisional Products that will continue to be subject to the substantial equivalence review process. In addition, PM USA and USSTC have submitted, and continue to submit, substantial equivalence reports on products proposed to be marketed after March 22, 2011 (“Non-Provisional Products”).
PM USA and USSTC have received substantial equivalence determinations on certain Provisional and Non-Provisional Products. The Provisional Products that were found to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, the determinations did not impact business results.
While Altria’s cigarette and smokeless tobacco subsidiaries believe all of their current products meet the statutory requirements of the FSPTCA, they cannot predict whether, when or how the FDA ultimately will apply its guidance to their various respective substantial equivalence reports or seek to enforce the law and regulations. Should Altria’s cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any substantial equivalence reports currently pending with the FDA, they believe they have the ability to replace most of their respective product volumes that could be impacted by these determinations with other products that have received FDA pre-market authorization or with Grandfathered Products.
Other Tobacco Products▪:In 2016, the FDA said that it would permit manufacturers to continue marketing Other Tobacco Products modified or introduced into the market for the first time between February 15, 2007 and August 8, 2016, until the FDA rendered decisions on the applicable substantial equivalence reports and new tobacco product applications. A number of cigars were on the market as of February 15, 2007, including certain cigars manufactured by Middleton. Therefore, in addition to being able to file new tobacco product applications, certain cigar manufacturers, including Middleton, can file substantial equivalence reports with the FDA for products that were on the market as of August 8, 2016. Few if any e-vapor products or oral nicotine pouches, however, were on the market as of February 15, 2007. Therefore manufacturers of these products may not be able to file substantial equivalence reports with the FDA on e-vapor products or oral nicotine pouches that were on the market as of August 8, 2016. In such cases, manufacturers, including JUUL and Helix, have to file new tobacco product applications that, among other things, demonstrate that the marketing of the products would be appropriate for the protection of the public health.
Previously, the deadlines to file all substantial equivalence reports and new tobacco product applications for combustible Other Tobacco Products, such as cigars and pipe tobacco, and for non-combustible Other Tobacco Products, such as e-vapor products and oral nicotine pouches, were at various points in 2018. The FDA extended these deadlines to August 8, 2021 for combustible Other Tobacco Products and August 8, 2022 for non-combustible Other Tobacco Products through guidance rather than by providing notice and allowing for public comment. In May 2019, in a lawsuit filed by the American Academy of Pediatrics, among other plaintiffs, a federal district court in Maryland found that the FDA’s failure to engage in the notice and comment process violated the Administrative Procedures Act. In July 2019, the court ordered that: (1) the FDA require that for Other Tobacco Products on the market as of August 8, 2016, applications must be filed with the FDA by May 12, 2020; (2) at the FDA’s discretion, Other Tobacco Products for which applications are not timely filed will be subject to FDA enforcement action; (3) applications for Other Tobacco Products that are timely filed can remain on the market during FDA review without being subject to FDA enforcement action for up to one year from the date of the application; and (4) on a case-by-case basis,
the FDA can exempt Other Tobacco Products from filing requirements for good cause. The court’s ruling did not, however, prevent the FDA from taking enforcement action against Other Tobacco Products prior to the May 12, 2020 filing deadline. The FDA and other parties appealed the court’s ruling to the United States Court of Appeals for the Fourth Circuit. In April 2020, amid the COVID-19 pandemic, the federal district court extended the filing deadline to September 9, 2020.
If JUUL is unable to meet the court-ordered filing deadline, or if JUUL’s new tobacco product applications are timely filed but subsequently denied, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
Manufacturers of cigars and oral nicotine pouches also must file substantial equivalence reports or new tobacco product applications by the court-ordered filing deadline in order for their products to remain on the market. Middleton has received market authorizations from the FDA that cover a significant portion of its cigar product volume, and plans to file any required substantial equivalence reports with the FDA for its remaining cigar product volume by the court-ordered filing deadline. Helix also plans to file all required new tobacco product applications for its oral nicotine pouches by the court-ordered filing deadline.
Failure of Other Tobacco Product manufacturers, including Middleton, Helix and JUUL, to meet the court-ordered filing deadline for currently marketed products or to ultimately obtain market authorization from the FDA following proper submission, could result in Other Tobacco Products being removed from the market.
In January 2020, in an effort to address youth usage of certain Other Tobacco Products, the FDA issued final guidance (the “January 2020 Final Guidance”) in which it stated that certain cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) would be prioritized for FDA enforcement action beginning early February 2020, effectively requiring the removal of these products from the market unless these products receive FDA market authorization. E-vapor product manufacturers may still, however, file new tobacco product applications for these products. In its January 2020 Final Guidance, separate from the above-mentioned federal court order, the FDA adopted the filing deadline set by the court and stated that after that deadline, it would prioritize its enforcement against any e-vapor product (in any format or flavor) offered for sale but for which either no new tobacco product application has been filed or for which an application was timely filed but for which the FDA issued an adverse decision. See FDA Regulation - Underage Access and Use of Certain Tobacco Productsbelow for further discussion. The effect of this guidance is to restrict the sale of certain flavored cartridge-based e-vapor products including those manufactured by JUUL, but permit the continued sale (subject to the exceptions discussed above) of other flavored e-vapor products, including flavored disposable e-vapor products. If these other flavored e-vapor products are sold in higher volumes than JUUL’s e-vapor products, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
All Tobacco Products: In March 2019, the FDA issued a proposed rule that would, if finalized, require that all substantial equivalence reports filed after the effective date of the final rule meet certain content and format requirements. Such requirements would not apply to substantial equivalence reports for Provisional Products or to any substantial equivalence report submitted to the FDA before this proposed rule becomes final. Various products marketed by Altria’s tobacco subsidiaries may fall within the scope of this proposed rule if finalized.
In September 2019, the FDA issued a proposed rule in which it set forth requirements for content, format and FDA’s procedures for reviewing new tobacco product applications. PM USA, Nat Sherman, Middleton, USSTC and Helix filed comments with the FDA. As of April 27, 2020, the FDA has not issued a final rule.
It is not possible to predict how long reviews by the FDA of substantial equivalence reports or new tobacco product applications for any tobacco product will take. A “not substantially equivalent” determination or denial of a new tobacco product application on one or more products could have a material adverse impact on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
Deeming Regulations
As discussed above under FSPTCA and FDA Regulation - The Regulatory Framework, in 2016, the FDA issued final regulations for all Other Tobacco Products, imposing the FSPTCA regulatory framework on the cigar products manufactured, marketed and sold by Middleton and Nat Sherman. At the same time the FDA issued its final deeming regulations, it also amended the Final Tobacco Marketing Rule as described above in FSPTCA and FDA Regulation - Final Tobacco Marketing Rule.
Among the FSPTCA requirements that apply to Other Tobacco Products is a ban on descriptors, including “mild,” when used as descriptors of modified risk unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by Middleton, the Department of Justice, on behalf of the FDA, informed Middleton that at present, the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to make a submission to the FDA and ultimately, if necessary, to bring another lawsuit.
Underage Access and Use of Certain Tobacco Products
The FDA announced regulatory actions in September 2018 that it is using its regulatory authority to address underage access and use of e-vapor products. Altria has engaged with the FDA on this topic in 2018 before discontinuing its Nu Mark LLC e-vapor business and also after acquiring a 35% economic interest in JUUL in December 2018. Altriahas reaffirmed to the FDA its ongoing and long-standing investment incommitment to preventing underage tobacco use prevention efforts.use. For example, during 2019, Altria advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage tobacco use, which is now federal law. See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for further discussion.
In March 2019, the FDA issued draft guidance (the “March 2019 Draft Guidance”) further reflecting, among other things, its concerns aboutproposing restrictions to address youth e-vapor use. TheThis guidance, which the FDA finalized this guidance in the form of the January 2020, Final Guidance discussed above, which revises the FDA’s compliance policy and states that the FDA intends to prioritize enforcement action against:
| | ▪ | cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and |
| | ▪ | all e-vapor products (in any format or flavor): |
| | ▪ | for which a manufacturer has failed or is failing to take adequate measures to prevent access by those under the age of 21 (referred to in the FDA guidance as “minors”); |
| | ▪ | that are targeted to minors and the marketing for which is likely to promote use of such products by minors; or |
| | ▪ | offered for sale after the court-ordered filing deadline and for which the manufacturer has either not submitted a pre-market application or for which an application was timely filed but an adverse decision on the application was issued by the FDA. |
▪cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and
The January 2020 Final Guidance became effective▪all e-vapor products (in any format or flavor):
▪for which a manufacturer has failed or is failing to take adequate measures to prevent access by those under the age of 21 (referred to in early February 2020.the FDA guidance as “minors”); ▪targeted to minors and the marketing for which is likely to promote use of such products by minors; or ▪offered for sale after the court-ordered filing deadline and for which the manufacturer has either not submitted a PMTA or for which an application was timely filed but an adverse decision on the application was issued by the FDA. E-vapor product manufacturers, however, may continue to file PMTAs for flavored tobacco products. FDA enforcement action could result in tobacco products that are subject to such action being removed from the market unless and until these products receive pre-market authorization from the FDA. JUUL ceased its sales of all of its cartridge-based, flavored e-vapor products (other than tobacco and menthol) in 2019. If FDA enforcement action is taken against currently marketed JUUL e-vapor products, and a significant number of those products are removed from the market or if the FDA does not ultimately allow for the reintroduction of flavors other than tobacco and menthol, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
The January 2020 guidance effectively permits the continued sale (subject to the exceptions discussed above) of certain flavored e-vapor products, including flavored disposable e-vapor products. If, as a result, these flavored e-vapor products are sold in higher volumes than JUUL’s e-vapor products, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
▪Potential Product Standards
| | ▪ | Nicotine in cigarettes and potentially other combustible tobacco products:In March 2018, the FDA issued an ANPRM through which it sought comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels through achievable product standards. Specifically, the FDA sought comments on the consequences of such▪Nicotine in cigarettes and other combustible tobacco products:In March 2018, the FDA issued an ANPRM seeking comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels. Among other issues, the FDA sought comments on (i) whether smokers would compensate by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) whether the proposed rule would create an illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars. Were the FDA to develop and finalize a product standard including (i) smokers compensating by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) the illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars.
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This ANPRM process may ultimately lead to the FDA’s development of product standards for nicotine in combustible tobacco products, such as cigarettes and cigars. If such regulations were to become final if the standard was appealed
and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries.
| | ▪ | ▪Flavors in tobacco products: In March 2018, the FDA issued an ANPRM seeking comments on the role that flavors (including menthol) in tobacco products play in attracting youth and may play in helping some smokers switch to |
potentially less harmful forms of nicotine delivery. The FDA previously released its preliminary scientific evaluation on menthol, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” The FDA’s evaluation followed an earlier report to the FDA from TPSAC on the impact of the use of menthol in cigarettes on the public health and included a recommendation that the “[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States” and an observation that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences. As discussed above under FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation, the FDA indicated that it is considering proposing rulemaking for a product standard that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, and that it intends to propose a product standard that would ban characterizing flavors in all cigars. cigars, including Grandfathered Products and those that have received SE determinations from the FDA - an intention reiterated in the FDA’s January 2020 guidance. In March 2018, the FDA issued an ANPRM seeking comments on the role, if any, that flavors (including menthol) in tobacco products may play in attracting youth and in helping some smokers switch to potentially less harmful forms of nicotine delivery. In the context of litigation, the FDA has stated its intention to issue a response by April 29, 2021 to a 2013 citizen petition requesting that the FDA prohibit menthol as a characterizing flavor in cigarettes. If the FDA decides to ban menthol in cigarettes, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries.
While the FDA has yet to define “characterizing flavors” with respect to cigars, most of Middleton’s cigar products contain added flavors and may be subject to any action by the FDA to ban flavors in cigars. No future action can be taken by theThe FDA toalso may ban characterizing flavors in all cigars or regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) until the completion of a full rulemaking process.
In the March 2019 Draft Guidance, noted above under FDA Regulatory Action - Underage Access and Use of Certain Tobacco Products,the FDA also proposed prioritizing enforcement action against flavored cigars (other than tobacco flavor) that either are not Grandfathered Products or have not received market authorization from the FDA to remain on the market. In the January 2020 Final Guidance, the FDA declined to prioritize enforcement action against such cigars before the court-ordered filing deadline. Instead, the FDA reiterated its intention to issue a proposed rule for a product standard banning all cigars with characterizing flavors. In its March 2019 Draft Guidance, the FDA indicated that such a rule would include Grandfathered Products and cigars that have received market authorization from the FDA.
Altria’s tobacco subsidiaries submitted public comments in response to the ANPRM regarding flavors in tobacco products and to the March 2019 Draft Guidance. Any proposed rules ultimately may lead to the FDA banning characterizing flavors in not only cigars, but in allother tobacco products, including oral nicotine pouches. If these regulations become final and are appealed and upheld in the courts, it could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪NNN in Smokeless Tobacco:In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. If the proposed rule, in present form, were to become final and was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.USSTC.
| | ▪ | NNN in Smokeless Tobacco:In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. If the proposed rule, in present form, were to become final and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and USSTC.
|
Good Manufacturing Practices
Practices: The FSPTCA requires that the FDA promulgate good manufacturing practice regulations (referred to by the FDA as “Requirements for Tobacco Product Manufacturing Practice”) for tobacco product manufacturers, but does not specify a timeframe for such regulations. Compliance with any such regulations could result in increased costs, which may have a material adverse effect on the financial position of Altria, its tobacco subsidiaries and its investees, including adversely affecting the value of Altria’s investment in JUUL.
▪Impact on Our Business; Compliance Costs and User Fees: FDA regulatory actions under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries in various ways. For example, actions by the FDA could:
▪impact the consumer acceptability of tobacco products; ▪delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products; ▪limit adult tobacco consumer choices; ▪impose restrictions on communications with adult tobacco consumers; ▪create a competitive advantage or disadvantage for certain tobacco companies; ▪impose additional manufacturing, labeling or packaging requirements; ▪impose additional restrictions at retail; ▪result in increased illicit trade in tobacco products; and/or ▪otherwise significantly increase the cost of doing business. The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including inflation, market share and industry volume. For a discussion of the impact of the FDA user fee payments on Altria, see Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below. In addition, compliance with the FSPTCA’s regulatory requirements has resulted, and will continue to result, in additional costs for Altria’s tobacco businesses.
The amount of additional compliance and related costs has not been material in any given quarter or year to date period but could become material, either individually or in the aggregate, to one or more of Altria’s tobacco subsidiaries. ▪Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. Investigations or enforcement actions could result in significant costs or otherwise have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. Excise Taxes
Tobacco products are subject to substantial excise taxes in the U.S. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the U.S., including as a result of the COVID-19 pandemic as a way for governments to address potential budget shortfalls.
The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies.
Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation. Between the end of 1998 and April 27, 2020,26, 2021, the weighted-average state cigarette excise tax increased from $0.36 to $1.82$1.89 per pack. As of April 27, 2020, no26, 2021, one state, Maryland, has increasedenacted new legislation increasing cigarette excise taxes in 2020,2021, but various increases are under consideration or have been proposed.
A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria’s subsidiaries support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of April 27, 2020,26, 2021, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST.
An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As of April 27, 2020, 2326, 2021, 30 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, ten11 states and the District of Columbia have enacted legislation to tax oral nicotine pouches. Tax increases could have an adverse impact on the sales of these products.
Tax increases are expected to continue to have an adverse impact on sales of cigarettes and MST products of Altria’s tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments, or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of cigarettes and MST products of Altria’s tobacco subsidiaries.
International Treaty on Tobacco Control
The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of April 27, 2020, 18026, 2021, 181 countries, as well as the European Community, have become parties to the FCTC. While the U.S. is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues.
There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the U.S., either indirectly or as a result of the U.S. becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 11,10, during 1997 and 1998, PM USA and other major domestic tobacco productcigarette manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. For a discussion of the impact of the State Settlement Agreements on Altria, see Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below and Note 11.10. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the
advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions areThe State Settlement Agreements also placedplace restrictions on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also placeproducts and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.
Other International, Federal, State and Local Regulation and Governmental and Private Activity
▪International, Federal, State and Local Regulation:
A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including cigarettes, smokeless tobacco, cigars, e-vapor products and other innovative tobacco products)oral nicotine pouches), such as legislation that (1) prohibits the sale of all tobacco productproducts or certain tobacco categories, such as e-vapor, and/or(2) prohibits the sale of tobacco products with certain characterizing flavors, such as menthol cigarettes, (2)(3) requires the disclosure of health information separate from or in addition to federally mandated health warnings and (3)(4) restricts
commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales).products. The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As of April 27, 2020, 2326, 2021, 17 states and the District of Columbia have proposed legislation to ban flavors in one or more tobacco products, including e-vapor products, oral nicotine pouches and cigarettes and fourfive states, California, Massachusetts, New Jersey, Utah and New York, have passed such legislation. Some of these states, such as New York and Utah, exempt certain products that have received FDA market authorization.authorization through the PMTA pathway. The legislation in California bans the sale of most tobacco products with characterizing flavors, including menthol, mint and wintergreen. Following enactment of the flavor ban in August 2020, several registered California voters filed a referendum against the legislation. In January 2021 the requisite number of registered California voters signed a petition to place the question of whether the legislation should be affirmed or overturned on the next statewide general election ballot, which will likely take place in 2022, unless a special statewide election is called earlier. As a result, the implementation of the legislation is delayed until after a vote on the referendum occurs. Additionally, in October 2020, Altria’s tobacco operating companies, along with several other parties including R.J. Reynolds, filed a lawsuit challenging the flavor ban and seeking to enjoin its implementation. Massachusetts has passed legislation capping the amount of nicotine in e-vapor products. Similar legislation is pending in three other states.
In addition to legislation, some state governors had imposed restrictions on tobacco products through executive action. For example, in response to reports of lung injuries and deaths related to e-vapor product use, the governors of eight states exercised executive action to temporarily prohibit either the sale of all e-vapor products or e-vapor products with flavors other than tobacco. Some of those executive actions have been challenged in the courts and many of those executive actions have expired. Restrictions on e-vapor products also have been instituted or proposed internationally. For example, India and Singapore have instituted bans on e-vapor products.
Altria’s tobacco subsidiaries have challenged and will continue to challenge certain federal, state and local legislation and other governmental action, including through litigation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products
Products: After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, in December 2019, the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. As of April 26, 2021, 34 states and the District of Columbia have enacted laws increasing the legal age to purchase tobacco products to 21. Although an increase in the minimum age to purchase tobacco products may have a negative impact on sales volume of our tobacco businesses, as discussed above under Underage Access and Use of Certain Tobacco Products, Altria supported raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, reflecting its longstanding commitment to combat underage tobacco use.
▪Health Effects of Tobacco Products, Including E-vapor Products
Products: Reports with respect to the health effects of smoking have been publicized for many years, including various reports by the U.S. Surgeon General. In 2019, there were public health advisories concerning vaping-related lung injuries and deaths and, more recently, there have been health concerns
raised about potential increased risks associated with COVID-19 among smokers and vapers. Altria and its tobacco subsidiaries believe that the public should be guided by the messages of the U.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.
Most jurisdictions within the U.S. have restricted smoking in public places and some have restricted vaping in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking and vaping in outdoor places, in private apartments and in cars transporting children. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on legislation and regulation.
▪Other Legislation or Governmental Initiatives
Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, amid the COVID-19 pandemic, state and local governments have required additional health and safety requirements of all businesses, including tobacco manufacturing and other facilities. State and local governments also have mandated the temporary closure of some businesses. It is possible that tobacco manufacturing and other facilities and the facilities of our suppliers, our suppliers’ suppliers and our trade partners could be subject to these government-mandated temporary closures. Additionally, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards; establish educational campaigns relating to tobacco consumption or tobacco control programs or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes;
require tax stamping of smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and Other Tobacco Products.other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful.
It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪Governmental Investigations
Investigations: From time to time, Altria, its subsidiaries and investees are subject to governmental investigations on a range of matters. For example,example: (i) the FTCU.S. Federal Trade Commission (the “FTC”) issued a Civil Investigative Demand (“CID”) to Altria while conducting its antitrust review of Altria’s investment in JUUL seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee andemployee; (ii) the SEC hasU.S. Securities and Exchange Commission (“SEC”) commenced an investigation relating to Altria’s acquisition, disclosures and accountingcontrols in connection with the JUUL investment.investment; and (iii) the New York State Office of the Attorney General issued a subpoena to Altria seeking documents relating to Altria’s investment in and provision of services to JUUL. Additionally, JUUL is currently under investigation by various federal and state agencies, including the SEC, the FDA and the FTC, and state attorneys general. Such investigations vary in scope but at least some appear to include JUUL’s marketing practices,practices; particularly as such practices relate to youth.
youth, and Altria may be asked in the context of those investigations to provide information concerning its investment in JUUL or relating to its marketing of Nu Mark LLC e-vapor products.
Private Sector Activity
on E-Vapor
A number of retailers, including national chains, have discontinued the sale of e-vapor products. Reasons for the discontinuation include reported illnesses related to e-vapor product use and the uncertain regulatory environment. It is possible that this private sector activity could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on the businesses of Altria, its tobacco subsidiaries and investees. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the U.S. that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our tobacco subsidiaries’ and investees’ products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment Altria’s tobacco subsidiaries and investees have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including
increasing excise taxes; imposing legislative or regulatory requirements that may adversely impact Altria’s consolidated results of operations and cash flows, including adversely affecting the value of Altria’s investment in JUUL, and the businesses of its tobacco subsidiaries and investees; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold.
Altria’s tobacco subsidiaries communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect their trademarks.
Price, Availability and Quality of Tobacco, Other Raw Materials and Component Parts
Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, production control programs, economic trade sanctions, import duties and tariffs, international trade disruptions, geopolitical instability, climate and production control programsenvironmental changes and disruptions due to man-made or natural disasters may increase or decrease the cost or reduce the supply or quality of tobacco andor other raw materials or ingredients or component parts used to manufacture our companies’ products. Any significant change in the price, quality or availability of tobacco, other raw materials, ingredients or component parts used to manufacture our products could restrict our subsidiaries’ ability to continue manufacturing and marketing
existing products or impact adult consumer product acceptability and adversely affect our subsidiaries’ profitability and businesses.
With respect to tobacco, as with other agricultural commodities, crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Additionally, the price and availability of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand. Economic conditions, are increasingly unpredictable in lightincluding the economic effects of the COVID-19 pandemic, are unpredictable, which, among other economic factors, may result in changes in the patterns of demand for agricultural products and the cost of tobacco production which could impact tobacco leaf prices and tobacco supply. In addition, as consumer demand increases for non-combustible products and decreases for combustible products, the volume of tobacco leaf required for production may decrease. The reduced demand for tobacco leaf may result in the reduced supply and availability of domestic tobacco as growers divert resources to other crops. Tobacco production in certain countries also is subject to a variety of controls, including government-mandated prices and production control programs. CertainMoreover, certain types of tobacco are only available in limited geographies, including geographies experiencing political instability or government prohibitions on the import or export of tobacco, and loss of their availability could impair our subsidiaries’ ability to continue marketing existing products or impact adult tobacco consumer product acceptability.
The COVID-19 pandemic also may limit access to and increase the cost of raw materials, component parts and personal protective equipment as U.S. and global suppliers temporarily shut down facilities in order to address exposure to the virus or as a result of a government mandate.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Operating Results Smokeable products segmentProducts Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the smokeable products segment: | | Smokeable Products | | | For the Three Months Ended March 31, | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | Change | | Operating Results | | | | | | | | For the Three Months Ended March 31, | | (in millions) | | (in millions) | 2021 | | 2020 | | Change | | Net revenues | $ | 5,606 |
| | $ | 4,935 |
| | 13.6 | % | Net revenues | $ | 5,250 | | | $ | 5,606 | | | (6.4) | % | | Excise taxes | (1,278 | ) | | (1,203 | ) | | | Excise taxes | (1,121) | | | (1,278) | | | | Revenues net of excise taxes | $ | 4,328 |
| | $ | 3,732 |
| | | Revenues net of excise taxes | $ | 4,129 | | | $ | 4,328 | | | | | | | | | | | | Reported OCI | $ | 2,370 |
| | $ | 1,932 |
| | 22.7 | % | Reported OCI | $ | 2,372 | | | $ | 2,370 | | | 0.1 | % | | Asset impairment, exit and implementation costs | — |
| | 44 |
| | | | | NPM Adjustment Items | | NPM Adjustment Items | (32) | | | — | | | | Tobacco and health litigation items | 22 |
| | 15 |
| | | Tobacco and health litigation items | 35 | | | 22 | | | | | Adjusted OCI | $ | 2,392 |
| | $ | 1,991 |
| | 20.1 | % | Adjusted OCI | $ | 2,375 | | | $ | 2,392 | | | (0.7) | % | | | | | | | | | | Reported OCI margins 1 | 54.8 | % | | 51.8 | % | | 3.0 pp |
| | Adjusted OCI margins 1 | 55.3 | % | | 53.3 | % | | 2.0 pp |
| | Reported OCI margins (1) | | Reported OCI margins (1) | 57.4 | % | | 54.8 | % | | 2.6 pp | | Adjusted OCI margins (1) | | Adjusted OCI margins (1) | 57.5 | % | | 55.3 | % | | 2.2 pp | |
1(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
Net revenues, which include excise taxes billed to customers, increased $671decreased $356 million (13.6%(6.4%), due primarily to higherlower shipment volume ($370715 million) and, partially offset by higher pricing ($306368 million), which includes higher promotional investments.
Reported OCI increased $438 million (22.7%), due primarily towas essentially unchanged, as higher pricing ($306364 million), which includes higher promotional investments, higherlower costs ($62 million) and NPM Adjustment Items ($32 million), were mostly offset by lower shipment volume ($205428 million) and higher per unit settlement charges. Adjusted OCI decreased $17 million (0.7%), due primarily to lower shipment volume and asset impairment, exit and implementation costs in 2019 ($44 million),higher per unit settlement charges, partially offset by higher per unit settlement charges. Reported OCI margins increased 3.0 percentage points to 54.8%.
Adjusted OCI increased $401 million (20.1%), due primarily to higher pricing, ($306 million), which includes higher promotional investments, and higher shipment volume ($205 million), partially offset by higher per unit settlement charges. Adjusted OCI margins increased 2.0 percentage points to 55.3%.lower costs.
Shipment Volume and Retail Share Results
The following table summarizes the smokeable products segment shipment volume performance: | | | | | | | | | | | Shipment Volume | | For the Three Months Ended March 31, | | 2020 | | 2019 | | Change | | (sticks in millions) | Cigarettes: | | | | | | Marlboro | 21,842 |
| | 20,467 |
| | 6.7 | % | Other premium | 1,137 |
| | 1,165 |
| | (2.4 | )% | Discount | 2,045 |
| | 1,962 |
| | 4.2 | % | Total cigarettes | 25,024 |
| | 23,594 |
| | 6.1 | % | Cigars: | | | | | | Black & Mild | 430 |
| | 380 |
| | 13.2 | % | Other | 2 |
| | 2 |
| | — | % | Total cigars | 432 |
| | 382 |
| | 13.1 | % | Total smokeable products | 25,456 |
| | 23,976 |
| | 6.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | Shipment Volume | | For the Three Months Ended March 31, | | | (sticks in millions) | 2021 | | 2020 | | Change | | | | | | | Cigarettes: | | | | | | | | | | | | Marlboro | 19,415 | | | 21,842 | | | (11.1) | % | | | | | | | Other premium | 981 | | | 1,137 | | | (13.7) | % | | | | | | | Discount | 1,618 | | | 2,045 | | | (20.9) | % | | | | | | | Total cigarettes | 22,014 | | | 25,024 | | | (12.0) | % | | | | | | | Cigars: | | | | | | | | | | | | Black & Mild | 479 | | | 430 | | | 11.4 | % | | | | | | | Other | 1 | | | 2 | | | (50.0) | % | | | | | | | Total cigars | 480 | | | 432 | | | 11.1 | % | | | | | | | Total smokeable products | 22,494 | | | 25,456 | | | (11.6) | % | | | | | | |
Note: Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament,, Benson & Hedges and Nat’s; and Discount brands, which include L&M,, Basic and Chesterfield. Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.
The following table summarizes cigarettes retail share performance: | | | | | | | | | | | | | | | | | | | | | | | | | Retail Share | | For the Three Months Ended March 31, | | | | 2021 | | 2020 | | Percentage Point Change | | | | | | | Cigarettes: | | | | | | | | | | | | Marlboro | 43.1 | % | | 42.7 | % | | 0.4 | | | | | | | | Other premium | 2.3 | | | 2.3 | | | — | | | | | | | | Discount | 3.6 | | | 4.0 | | | (0.4) | | | | | | | | Total cigarettes | 49.0 | % | | 49.0 | % | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Retail Share | | For the Three Months Ended March 31, | | 2020 | | 2019 | | Percentage Point Change | Cigarettes: | | | | | | Marlboro | 42.8 | % | | 43.3 | % | | (0.5 | ) | Other premium | 2.4 |
| | 2.5 |
| | (0.1 | ) | Discount | 4.0 |
| | 4.1 |
| | (0.1 | ) | Total cigarettes | 49.2 | % | | 49.9 | % | | (0.7 | ) |
Note: Retail share results for cigarettes are based on data from IRI/Management Science Associates, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service.
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.
Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 12.0%, driven primarily by trade inventory movements, the industry’s rate of decline, one fewer shipping day and other factors. When adjusted for trade inventory movements, one fewer shipping day and other factors, the smokeable products segment’s reported domestic cigarettes shipment volume decreased by an estimated 3.5%. When adjusted for trade inventory movements, one fewer shipping day and other factors, total estimated domestic cigarette industry volumes decreased by an estimated 2%. Shipments of premium cigarettes accounted for 92.7% and 91.8% of the smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended March 31, 2021 and 2020, increased 6.1%, driven primarily by trade inventory movements, calendar differences and consumer pantry loading due to COVID-19, partially offset by the industry’s rate of decline, retail share losses and other factors. When adjusted for the traditional factors of trade inventory movements, calendar differences and other factors, the smokeable products segment’s domestic cigarettes shipment volume for the three months ended March 31, 2020 decreased by an estimated 3.5%. However, Altria believes that its preliminary estimates of consumer pantry loading due to COVID-19 should be an adjusting factor to reported volumes due to its high likelihood of near-term volume payback. When adjusted for trade inventory movements, calendar differences, Altria’s preliminary estimates of consumer pantry loading due to COVID-19 and other factors, the smokeable products segment’s domestic cigarettes shipment volume decreased by an estimated 5%. While it’s difficult to identify trends based on short time periods, especially in such a fluid environment, Altria will continue to monitor marketplace dynamics and will update its estimates as more data becomes available. When adjusted for the traditional factors of trade inventory movements, calendar differences and other factors, total domestic cigarette industry volumes for the three months ended March 31, 2020 declined by an estimated 2%. When adjusted for trade inventory movements, calendar differences, Altria’s preliminary estimates of consumer pantry loading due to COVID-19 and other factors, total domestic cigarette industry volumes decreased by an estimated 3.5%.
Shipments of premium cigarettes accounted for 91.8% of smokeable products’ reported domestic cigarettes shipment volume for the three months ended March 31, 2020, versus 91.7% for the three months ended March 31, 2019.
Marlboro retail share of the total cigarette category declined 0.5 share points to 42.8% for the three months ended March 31, 2020, due to adult smoker movement across tobacco categories and dynamics within the discount cigarette category, each discussed above.
respectively.
Total cigarettes industry discount category retail share increased 0.80.1 share pointspoint to 24.8% for the three months ended March 31, 2020, driven primarily by the deep discount category.25.3%.
Reported cigar shipment volume increased 11.1%.
Pricing Actions PM USA and Middleton executed the following pricing and promotional allowance actions during 2021 and 2020: ▪Effective January 24, 2021 PM USA increased the list price on all of its cigarette brands by $0.14 per pack. ▪Effective January 10, 2021, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.07 per five-pack. ▪Effective November 1, 2020 and 2019:PM USA increased the list price on all of its cigarette brands by $0.13 per pack.
| | ▪ | Effective February 16,▪Effective June 21, 2020, PM USA increased the list price on all of its cigarette brands by $0.08 per pack. |
| | ▪ | Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.08 per five-pack. |
| | ▪ | Effective October 20, 2019, PM USA increased the list price on all of its cigarette brands by $0.08 per pack. |
| | ▪ | Effective August 4, 2019, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.04 per five-pack. |
| | ▪ | Effective June 16, 2019, PM USA increased the list price on all of its cigarette brands by $0.06 per pack, except for L&M, which had no list price change.
|
| | ▪ | Effective February 24, 2019, PM USA increased the list price on Marlboro and L&M by $0.11 per pack and Parliament and Virginia Slims by $0.16 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.31 per pack.
|
▪Effective February 16, 2020, PM USA increased the list price on all of its cigarette brands by $0.08 per pack. ▪Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.08 per five-pack.
Oral Tobacco Products Segment
Oral tobacco products segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the oral tobacco products segment: | | | | | | | | | | Operating Results | Oral Tobacco Products | | | For the Three Months Ended March 31, | | For the Three Months Ended March 31, | | | 2020 | | 2019 | | Change | | (in millions) | | (in millions) | 2021 | | 2020 | | Change | | Net revenues | $ | 601 |
| | $ | 540 |
| | 11.3 | % | Net revenues | $ | 626 | | | $ | 601 | | | 4.2 | % | | Excise taxes | (31 | ) | | (31 | ) | | | Excise taxes | (31) | | | (31) | | | | Revenues net of excise taxes | $ | 570 |
| | $ | 509 |
| | | Revenues net of excise taxes | $ | 595 | | | $ | 570 | | | | | | | | | | | | Reported OCI | $ | 414 |
| | $ | 358 |
| | 15.6 | % | Reported OCI | $ | 392 | | | $ | 414 | | | (5.3) | % | | Asset impairment, exit, implementation and acquisition-related costs | 2 |
| | 9 |
| | | | Acquisition-related costs | | Acquisition-related costs | 37 | | | 2 | | | | | Adjusted OCI | $ | 416 |
| | $ | 367 |
| | 13.4 | % | Adjusted OCI | $ | 429 | | | $ | 416 | | | 3.1 | % | | | | | | | | | | Reported OCI margins 1 | 72.6 | % | | 70.3 | % | | 2.3 pp |
| | Adjusted OCI margins 1 | 73.0 | % | | 72.1 | % | | 0.9 pp |
| | Reported OCI margins (1) | | Reported OCI margins (1) | 65.9 | % | | 72.6 | % | | (6.7) pp | | Adjusted OCI margins (1) | | Adjusted OCI margins (1) | 72.1 | % | | 73.0 | % | | (0.9) pp | |
1(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
Net revenues, which include excise taxes billed to customers, increased $61$25 million (11.3%(4.2%), due primarily to higher pricing ($4326 million) and, which includes higher shipment volume ($20 million)promotional investments in on!.
Reported OCI decreased $22 million (5.3%), due primarily to higher costs ($41 million, which includes higher acquisition-related costs), partially offset by higher pricing, which includes higher promotional investments. Adjusted OCI increased $56$13 million (15.6%(3.1%), due primarily to higher pricing, ($43 million),which includes higher shipment volume ($19 million) and lower asset impairment, exit, implementation and acquisition-related costs,promotional investments, partially offset by increased costs associated with the expansion of on!. Reported OCI margins increased 2.3 percentage points to 72.6%.higher costs.
Adjusted OCI increased $49 million (13.4%), due primarily to higher pricing ($43 million), higher shipment volume ($19 million), partially offset by increased costs associated with the expansion of on!. Adjusted OCI margins increased 0.9 percentage points to 73.0%.
Shipment Volume and Retail Share Results
The following table summarizes oral tobacco products segment shipment volume performance: | | | | | | | | | | | | | | | | | | | | | | | | | Shipment Volume | | For the Three Months Ended March 31, | | | (cans and packs in millions) | 2021 | | 2020 | | Change | | | | | | | Copenhagen | 122.9 | | | 125.0 | | | (1.7) | % | | | | | | | Skoal | 48.2 | | | 51.3 | | | (6.0) | % | | | | | | | Other (includes Red Seal and on!) | 26.8 | | | 20.4 | | | 31.4 | % | | | | | | | Total oral tobacco products | 197.9 | | | 196.7 | | | 0.6 | % | | | | | | |
| | | | | | | | | | | Shipment Volume | | For the Three Months Ended March 31, | | 2020 | | 2019 | | Change | | (cans and packs in millions) | Copenhagen | 125.0 |
| | 125.2 |
| | (0.2 | )% | Skoal | 51.3 |
| | 50.3 |
| | 2.0 | % | Other1 | 20.4 |
| | 15.9 |
| | 28.3 | % | Total oral tobacco products | 196.7 |
| | 191.4 |
| | 2.8 | % |
1 Other includes Red Seal and on!.
Note: Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is currently not material to the oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.
The following table summarizes oral tobacco products segment retail share performance (excluding international volume): | | | | | | | | | | | | | | | | | | | | | | | | | Retail Share | | For the Three Months Ended March 31, | | | | 2021 | | 2020 | | Percentage Point Change | | | | | | | Copenhagen | 30.2 | % | | 32.4 | % | | (2.2) | | | | | | | | Skoal | 12.9 | | | 14.4 | | | (1.5) | | | | | | | | Other (includes Red Seal and on!) | 5.0 | | | 3.6 | | | 1.4 | | | | | | | | Total oral tobacco products | 48.1 | % | | 50.4 | % | | (2.3) | | | | | | | |
| | | | | | | | | | | Retail Share | | For the Three Months Ended March 31, | | 2020 | | 2019 | | Percentage Point Change | Copenhagen | 32.4 | % | | 34.6 | % | | (2.2 | ) | Skoal | 14.3 |
| | 15.1 |
| | (0.8 | ) | Other | 3.7 |
| | 3.5 |
| | 0.2 |
| Total oral tobacco products | 50.4 | % | | 53.2 | % | | (2.8 | ) |
Note: Retail share results for oral tobacco products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Oral tobacco products is defined by IRI as MST, snus and oral nicotine pouches. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.
As discussed above, in the first quarter of 2020, Altria’s smokeless products segment was renamed as the oral tobacco products segment. Prior to 2020, the smokeless products segment retail share performance and category industry volume estimates included MST and snus products, but excluded oral nicotine pouch products. Altria has restated prior period retail share performance data and estimated category industry volume to reflect the inclusion of oral tobacco products. The quarterly and year-to-date retail share results for the oral tobacco products segment, which are summarized below, have been restated to reflect this change.
| | | | | | | | | | | | | | Restated Retail Share | | For the Three Months Ended | | 12/31/19 | | 9/30/19 | | 6/30/19 | | 3/31/19 | Copenhagen | 33.2 | % | | 33.8 | % | | 34.1 | % | | 34.6 | % | Skoal | 14.6 |
| | 15.0 |
| | 15.4 |
| | 15.1 |
| Other | 3.6 |
| | 3.5 |
| | 3.5 |
| | 3.5 |
| Total oral tobacco products | 51.4 | % | | 52.3 | % | | 53.0 | % | | 53.2 | % |
| | | | | | | | | | | | | | Restated Retail Share | | For the Year Ended | | For the Nine Months Ended | | For the Six Months Ended | | For the Year Ended | | 12/31/19 | | 9/30/19 | | 6/30/19 | | 12/31/18 | Copenhagen | 33.9 | % | | 34.2 | % | | 34.4 | % | | 34.4 | % | Skoal | 15.0 |
| | 15.2 |
| | 15.2 |
| | 15.9 |
| Other | 3.6 |
| | 3.4 |
| | 3.5 |
| | 3.4 |
| Total oral tobacco products | 52.5 | % | | 52.8 | % | | 53.1 | % | | 53.7 | % |
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.
Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020
The oral tobacco products segment’s reported domestic shipment volume increased 2.8% for the three months ended March 31, 2020,0.6%, driven primarily by the industry’s growth rate, calendar differencesof on! oral nicotine pouches and retail and consumer pantry loading due to COVID-19,trade inventory movements, partially offset by retail share losses (primarily due to the rapid growth of oral nicotine pouches), calendar differences and wholesale trade inventory movements.other factors. When adjusted for traditional factors of wholesale trade inventory movements, calendar differences and other factors, the oral tobacco products segment’s reported domestic shipment volume increased by an estimated 1% for0.5%.
the three months ended March 31, 2020. However, Altria believes that its preliminary estimates of retail and consumer pantry loading due to COVID-19 should be an adjusting factor to reported volumes due to its high likelihood of near-term volume payback. When adjusted for wholesale trade inventory movements, Altria’s preliminary estimates of retail and consumer pantry loading due to COVID-19, calendar differences and other factors, the oral tobacco products segment’s shipment volume decreased by an estimated 0.5%.
The oral tobacco products category industry volume increased by an estimated 6% over the six months ended March 31, 2020, as the growth in oral nicotine pouches more than offset the volume decline in MST and snus. When adjusted for Altria’s preliminary estimates of retail and consumer pantry loading due to COVID-19, theTotal oral tobacco products category industry volume increased by an estimated 5% over the six months ended March 31, 2020.2021, driven by growth in oral nicotine pouches.
OralThe oral tobacco products segmentsegment’s retail share of 50.4% declinedwas 48.1% for the three months ended March 31, 2020, due to the rapid growth of oral nicotine pouches2021 and the associated volume declines in MST and snus.
Copenhagen continued to be the leading oral tobacco brand with a retail share of 32.4%.30.2% for the three months ended March 31, 2021. Share losses in the oral tobacco products segment, including Copenhagen, were due to the growth of oral nicotine pouches.
In the first quarter of 2021, Helix expanded the distribution of on! by an additional 15,000 stores. on! was available in approximately 93,000 stores as of March 31, 2021. on!’s retail share of the total oral tobacco category was 1.7% in the first quarter of 2021, an increase of 0.6% from the fourth quarter of 2020. on!’s retail share of the oral tobacco category in stores with on! distribution was 3.1% for the twelve months ended March 31, 2021, an increase of 0.7% from the twelve months ended December 31, 2020. Helix continues to expect unconstrained on! manufacturing capacity for the U.S. market by mid-year 2021.
Pricing Actions USSTC executed the following pricing actions during 2021 and 2020: ▪Effective March 2, 2021, USSTC increased the list price on its Skoal Blend products by $0.16 per can. USSTC also increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.08 per can. ▪Effective October 20, 2020, USSTC increased the list price on its Skoal Blend products by $0.15 per can. USSTC also increased the list price on its Huskyand 2019:Red Seal brands and its Copenhagen and Skoal popular price products by $0.08 per can. In addition, USSTC increased the list price on the balance of its Copenhagen and Skoal products by $0.07 per can.
▪Effective July 21, 2020, USSTC increased the list price on its Skoal Blend products by $0.15 per can. USSTC also increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.07 per can.
| | ▪ | ▪Effective February 18, 2020, USSTC increased the list price on its Skoal X-TRA products by $0.56 per can. USSTC also increased the list price on its Skoal Blend products by $0.16 cents per can and increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.07 per can.
|
| | ▪ | Effective October 22, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.09 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.04 per can.
|
| | ▪ | Effective July 23, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.08 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.03 per can.
|
| | ▪ | Effective April 30, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.17 per can. USSTC also increased the list price on its Husky and Red Seal brands and its Copenhagen and Skoal popular price products by $0.12 per can. In addition, USSTC increased the list price on the balance of its Copenhagen and Skoal products by $0.07 per can.
|
Wine Segment
Business Environment
Ste. Michelle is a producer and supplier of premium varietal and blended table wines and of sparkling wines. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle and 14 Hands, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley, Patz & Hall in Sonoma and Erath in Oregon. In addition, Ste. Michelle imports and markets Antinori and Villa Maria Estate wineswine and Champagne Nicolas Feuillatte products in the United States. Ste. Michelle works to meet evolving adult consumer preferences over time by developing, marketing and distributing products through innovation.
Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors.
Adult consumer preferences among alcohol categories and within the wine category can shift due to a variety of factors, including changes in taste preferences, demographics or social trends, and changes in leisure, dining and beverage consumption patterns and economic conditions. Evolving adult consumer preferences pose strategic challenges to the wine category,for Ste. Michelle, which has seen slowing volume growth in the wine category and increases in inventory levels.levels in recent periods. Ste. Michelle has been experiencing product volume demand uncertainty, which has beenwas further negatively impacted in the first quarter2020 by the COVID-19 pandemic (including economic uncertainty surrounding theand government actions that restrict direct-to-consumer sales and on-premise sales).
COVID-19 pandemic. Ste. Michelle’s on-premise sales in restaurants, bars, hospitality venues and on cruise lines have been negatively impacted by disruptions arising from the COVID-19 pandemic. As a result of wine inventory levels significantly exceeding long-term forecasted product volume demand, as ofat March 31, 2020, Ste. Michelle recorded pre-tax charges of $392 million in costconsisting of sales, including a $292 million(i) the write-off of inventory write off($292 million) and $100 million in(ii) estimated losses on future non-cancelable grape purchase commitments. Ste. Michelle expects to record additional charges up to approximately $25 million during the remainder of 2020, consisting of inventory disposal costs and other charges.commitments ($100 million). For further discussion, see Asset Impairment, Exit and Implementation Costs in Note 3. In addition, Ste. Michelle also temporarily suspended operations at an operating facility as a result of the COVID-19 pandemic.8. Evolving adult consumer preferences, anthe current economic downturn, or recession, an extended disruption in on-premise sales or facility shutdowns, either voluntary or government-mandated, could result in a further slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business, the consolidated results of operations, cash flows or financial position of Ste. Michelle.
As with other agricultural commodities, grape quality and availability can be influenced by plant disease and infestation, as well as by variations in weather patterns, such as fires and smoke damage from fires, including those caused by climate change. For example, in 2019, freezing temperatures reduced grape production and resulted in fewer grapes being available to Ste. Michelle.
Additionally, Ste. Michelle experienced some impact from the fires in the western United States during 2020.
Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages could have an adverse effect on Ste. Michelle’s wine business.
Operating Results
Financial Results and Shipment Volume
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the wine segment: | | | | | | | | | | Operating Results | Wine | | | For the Three Months Ended March 31, | | For the Three Months Ended March 31, | | | 2020 | | 2019 | | Change | | (in millions) | | (in millions) | 2021 | | 2020 | | Change | | Net revenues | $ | 146 |
| | $ | 151 |
| | (3.3 | )% | Net revenues | $ | 150 | | | $ | 146 | | | 2.7 | % | | Excise taxes | (4 | ) | | (5 | ) | | | Excise taxes | (4) | | | (4) | | | | Revenues net of excise taxes | $ | 142 |
| | $ | 146 |
| | | Revenues net of excise taxes | $ | 146 | | | $ | 142 | | | | | | | | | | | | Reported OCI | $ | (379 | ) | | $ | 15 |
| | (100.0)%+ |
| | Reported OCI (Loss) | | Reported OCI (Loss) | $ | 18 | | | $ | (379) | | | 100.0+ % | | Implementation costs | 392 |
| | $ | — |
| | | Implementation costs | 1 | | | 392 | | | | Adjusted OCI | 13 |
| | 15 |
| | (13.3 | )% | Adjusted OCI | $ | 19 | | | $ | 13 | | | 46.2 | % | | | | | | | | | | Reported OCI margins 1 | (100.0)%+ |
| | 10.3 | % | | (100.0)%+ |
| | Adjusted OCI margins 1 | 9.2 | % | | 10.3 | % | | (1.1) pp |
| | Reported OCI margins (1) | | Reported OCI margins (1) | 12.3 | % | | (100.0)%+ | | 100.0+ pp | | Adjusted OCI margins (1) | | Adjusted OCI margins (1) | 13.0 | % | | 9.2 | % | | 3.8 pp | |
1(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.taxes.
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
Net revenues, which include excise taxes billed to customers, decreased $5increased $4 million (3.3%(2.7%), due primarily to lower shipment volume, partially offset by higher pricing, which includes lower promotional investments, and favorable mix.
pricing.
Reported OCI decreased $394increased $397 million (100.0%+), due primarily to the2020 inventory-related charges discussed abovein Note 8 (included in implementation costs and charged to cost of sales) , lower shipment volume and higher costs, partially offset by higher pricing, which includes lower promotional investments, and favorable mix. Reported OCI margins decreased in excess of 100.0 percentage points.
.
Adjusted OCI decreased $2increased $6 million (13.3%(46.2%), due primarily to lower shipment volume and higher costs, partially offset by higher pricing which includesand lower promotional investments, and favorable mix. Adjusted OCI margins decreased 1.1 percentage points to 9.2%
costs.
For the three months ended March 31, 2020,2021, Ste. Michelle’s reported wine shipment volume of 1,7151,745 thousand cases decreased 10.2%increased 1.7%.
Financial Review
Cash Provided by/Used in Operating Activities
During the first three months of 2020,2021, net cash provided by operating activities was $3,129$3,040 million compared with $2,289$3,129 million during the first three months of 2019.2020. This increasedecrease was due primarily to higherlower net revenues, in the smokable products and oral tobacco products segments and lower payments as a resultnet of savings from the cost reduction program announced in December 2018, partially offset by higher long-term debt interest payments.
excise taxes.
Altria had a working capital deficit at March 31, 20202021 and December 31, 2019.2020. Altria’s management believes that Altria has the ability to fund working capital deficits with cash provided by operating activities and borrowings through its access to credit and capital markets, as discussed in the Debt and Liquidity section below.
Cash Provided by/Used in Investing Activities
During the first three months of 2020,2021, net cash used in investing activities was $52$29 million compared with $1,950$52 million during the first three months of 2019.2020. This decrease was due primarily to the investment in Cronos in 2019.
lower capital expenditures.
Cash Provided by/Used in Financing Activities
During the first three months of 2020,2021, net cash used in financing activities was $2,172 million compared with net cash provided by financing activities wasof $427 million compared with $1,683 million during the first three months of 2019.2020. This decreasechange was due primarily to the following: ▪payment of $5.0 billion of Altria senior unsecured notes in connection with the 2021 debt tender offers and redemption and the premiums and fees in connection with the debt tender offers described below and in Note 9; ▪proceeds of $16.3$3.0 billion from short-term borrowings in 2020; ▪repurchases of common stock in 2021; ▪higher dividends paid in 2021; partially offset by: ▪proceeds of $5.5 billion from the issuance of long-term senior unsecured debt used to repurchase and redeem senior unsecured notes in 2019;connection with the 2021 debt tender offers and redemption; and
▪repayment of $1.0 billion in full of Altria senior unsecured notes at scheduled maturity in January 2020;
partially offset by:
repayments of $12.8 billion of short-term borrowings in 2019; and
proceeds of $3.0 billion from short-term borrowings in 2020.
Debt and Liquidity
Source of Funds - Altria is a holding company. As a result, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria receives cash dividends on its interest in ABI and will continue to do so as long as ABI pays dividends.
Credit Ratings - Altria’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under theAltria’s Credit Agreement is discussed below.in Note 9.
At March 31, 2020,2021, the credit ratings and outlook for Altria’s indebtedness by major credit rating agencies were: | | | | | | | | | | | | | | | | | | | Short-term Debt | | Long-term Debt | | Outlook | Moody’s Investors Service, Inc. (“Moody’s”) | P-2 | | A3 | | Negative Stable | Standard & Poor’s RatingsFinancial Services LLC (“Standard & Poor’s”S&P”) | A-2 | | BBB | | Stable | Fitch Ratings Ltd.Inc. | F2 | | BBB | | Stable |
Credit Lines- From time to time, Altria has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs.
TheAt March 31, 2021, Altria’s Credit Agreement, provideswhich is used for borrowings up to an aggregate principal amount of $3.0 billion.
On March 23, 2020, Altria provided notice to JPMorgan Chase Bank, N.A., as administrative agent under the Credit Agreement, to borrow the entire available amount ($3.0 billion) under the Credit Agreement and, as of March 31, 2020,general corporate purposes, had $3.0 billion available and Altria was outstanding underin compliance with the covenants in the Credit Agreement. Altria typically accessesexpects to continue to meet the commercial paper market earlycovenants in the second quarter to help fund payments related to the 1998 Master Settlement Agreement (the “MSA”) and shareholder dividends. In light of the current uncertainty in the global capital markets, including the commercial paper markets, resulting from the COVID-19 pandemic, Altria elected to borrow the entire amount available under the Credit Agreement as a precautionary measure to increase its cash position and preserve financial flexibility. Altria used a portion of the proceeds from the borrowing under the Credit Agreement to help fund these payments and for other general corporate purposes.
All borrowings under the Credit Agreement mature on August 1, 2023, unless extended. The Credit Agreement includes an option, subject to certain conditions, for Altria to extend the expiration date for two additional one-year periods. Altria may repay the borrowings under the Credit Agreement at any time without penalty. Altria has the intent and ability to repay the entire outstanding balance under the Credit Agreement within one year and believes it has adequate liquidity and access to financial resources to meet its anticipated obligations in the foreseeable future. As a result, Altria has classified the full amount of the borrowings as a current liability on its condensed consolidated balance sheet at March 31, 2020.Agreement. For further discussion, including interest and covenants in the Credit Agreement, see Note 10. Debt to the condensed consolidated financial statements in Item 1 (“Note 10”).
9.
Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA asUSA. For further discussed indiscussion, see Supplemental Guarantor Financial Information below and Note 12. 9.Condensed Consolidating Financial Information to the condensed consolidated financial statements in Item 1 (“Note 12”).
Financial Market Environment - Altria believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria monitors the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group.
COVID-19 Due to Pandemic -Despite the uncertainty surrounding the COVID-19 pandemic, including its duration, severity and ultimate overall impact Altria expects to maintain a higher than normal cash balance in order to preserve its financial flexibility. As a result, Altria tookon the following actions to increase its cash position:
borrowedglobal and U.S. economies and the full $3.0 billion available under the Credit Agreement as discussed above;
did not repurchase any shares during the first quarterbusinesses of 2020 under its current $1.0 billion share repurchase program, and in April 2020, the Board of Directors rescinded the $500 million remainingAltria’s operating companies, including some volatility in the share repurchase program;
as permitted under recent federal government COVID-19 tax relief, deferred approximately $450 million of estimated federal income tax payments from Aprilcommercial paper markets in March 2020, Altria has not experienced a material impact to July 2020 and will defer an additional $475 million from June 2020 to July 2020;
as permitted under recent state governments COVID-19 tax relief, deferred approximately $65 million of estimated state income tax payments from April 2020 to July 2020 and will defer future payments as allowable; and
deferred federal excise tax payments of approximately $450 million from April 2020 to July 2020 and will continue to defer payments previously due in May 2020 and June 2020 by 90 days to August 2020 and September 2020, respectively.
At March 31, 2020, Altria’s receivables primarily reflect sales of wine produced and/or distributed by Ste. Michelle. Altria’s businesses anticipate that the COVID-19 pandemic may present challenges in ensuring timely payment and collection of accounts receivable for some of its customers. Altria will closely monitor these situations and will record an allowance for doubtful accounts against such receivables, if such conditions arise. As of the date of this filing, Altria was not aware of any such conditions.
In addition, in April 2020, ABI announced that it would reduce its next dividend payment by 50% to preserve financial flexibility during this period of significant volatility and uncertainty. This action will result in a reduction to Altria’s cash dividends received from ABI of approximately $100 million in the second quarter of 2020.
liquidity.
Debt - At March 31, 20202021 and December 31, 2019,2020, Altria’s total debt was $30.0$29.7 billion and $28.0$29.5 billion, respectively. The increase in debt was due to Altria’s borrowings of $3.0 billion under the Credit Agreement discussed above, partially offset by the repayment in full of $1.0 billion of In February 2021, Altria issued long-term senior unsecured notes in the aggregate principal amount of $5.5 billion (the “Notes”). The net proceeds from the Notes were used (i) to fund the purchase and redemption of certain unsecured notes and payment of related fees and expenses, as described below, and (ii) for other general corporate purposes. During the first quarter of 2021, Altria (i) completed debt tender offers to purchase for cash certain of its long-term senior unsecured notes in the aggregate principal amount of $4,042 million and (ii) redeemed all of its outstanding 3.490% Notes due 2022 in an aggregate principal amount of $1.0 billion. As a result, for the three months ended March 31, 2021, Altria recorded pre-tax losses on early extinguishment of debt of $649 million, which included premiums and fees of $623 million and the write-off of related unamortized debt discounts and debt issuance costs of $26 million. As a result of these debt transactions, Altria reduced its near-term maturity towers and extended the weighted-average maturity of its debt. In addition, the weighted-average coupon interest rate on total long-term debt decreased to 4.0% at scheduled maturity in JanuaryMarch 31, 2021 from 4.1% at December 31, 2020.
For further details on short-term borrowings and long-term debt, including the terms of the Notes, the debt tender offers and the redemption, see Note 10.
9.
Guarantees and Other Similar Matters - As discussed in Note 11,10, Altria and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at March 31, 2020.2021. From time to time, subsidiaries of Altria also issue lines of credit to affiliated entities. In addition, as discussed below in Supplemental Guarantor Financial Information and in Note 12,9, PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under itsthe Credit Agreement and amounts outstanding under itsthe commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria’s liquidity. For further discussion regarding Altria’s liquidity, see theDebt and Liquiditysection above.
Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 11,10, PM USA and Nat Sherman havehas entered into State Settlement Agreements with the states and territories of the United States that call for certain payments. In addition, PM USA, Middleton Nat Sherman and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA.
Altria’s subsidiaries recorded $1.1$1.0 billion and $1.0$1.1 billion of charges to cost of sales for the three months ended March 31, 20202021 and 2019,2020, respectively, in connection with the State Settlement Agreements and FDA user fees. For further discussion of the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the MSA,1998 Master Settlement Agreement, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 11.10.
Based on current agreements, 20192020 market share and estimated annual industry volume decline rates, the estimated amounts that Altria’s subsidiaries may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees approximateare $4.5 billion in 2020 and $4.4 billion each year thereafter.on average for the next three years. These amounts exclude the potential impact of any NPM Adjustment Items.
The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.
Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of March 31, 2020,2021, PM USA had posted appeal bonds totaling $48$53 million, which have been collateralized with restricted cash that is included in assets on the condensed consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST LLC (“UST”) or Altria in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 11 and in Cautionary Factors That May Affect Future Results,10, management expects cash flow from operations, together with Altria’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
On February 26, 2020, Altria granted an aggregate of 0.9 million restricted stock units “(“RSUs”) and 0.2 million performance stock units (“PSUs”) to eligible employees. The service restrictions for the RSUs and the PSUs lapse in the first quarter of 2023. In addition, the vesting of the PSUs depends first on Altria’s performance on certain financial metrics over the three-year vesting period. The payout resulting from the performance metrics is then scaled up or down by a total shareholder return (“TSR”) performance multiplier, which depends on Altria’s relative TSR against a predetermined peer group. The market value per share of the RSUs and the PSUs granted on February 26, 2020 was $42.61 and $43.28, respectively, on the date of grant.
During the three months ended March 31, 2020, 0.5 million shares of RSUs vested. The total fair value of RSUs that vested during the three months ended March 31, 2020 was $23 million. The weighted-average grant date fair value per share of these awards was $66.76.
Dividends paid during the first three months of 2021 and 2020 and 2019 were $1,563$1,601 million and $1,502$1,563 million, respectively, an increase of 4.1%2.4%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria under its share repurchase programs.rate. The current annualized dividend rate is $3.36$3.44 per shareshare. Altria maintains its long-term objective of Altria common stock. In 2020, Altria expects to recommend a quarterly dividend rate to the Board of Directors that reflects, among other things, its strong cash generation and the strength of its balance sheet. Altria’s objective remains a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of theAltria’s Board of Directors.
Directors (the “Board of Directors” or “Board”).
For a discussion of Altria’s share repurchase programs, see Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Item 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.
New Accounting Guidance Not Yet Adopted
See Note 13.11. New Accounting Guidance Not Yet Adopted to the condensed consolidated financial statements in Item 1 for a discussion of issued accounting guidance applicable to, but not yet adopted by, Altria.
Contingencies
See Note 1110 for a discussion of contingencies.
Supplemental Guarantor Financial Information PM USA (the “Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (the “Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below. The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor. Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees: ▪received less than reasonably equivalent value or fair consideration therefor; and
▪either: ▪was insolvent or rendered insolvent by reason of such occurrence; ▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or ▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if: ▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation; ▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or ▪it could not pay its debts as they become due. To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent. The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of: ▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor; ▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor; ▪the payment in full of the Obligations pertaining to such Guarantees; and ▪the rating of the Parent’s long-term senior unsecured debt by S&P of A or higher. The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests. The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP.
Summarized Balance Sheets (in millions of dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Parent | | Guarantor | | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | Assets | | | | | | | | | Due from Non-Guarantor Subsidiaries | | $ | 125 | | | $ | 112 | | | $ | 199 | | | $ | 199 | | Other current assets | | 6,023 | | | 4,896 | | | 745 | | | 734 | | Total current assets | | $ | 6,148 | | | $ | 5,008 | | | $ | 944 | | | $ | 933 | | | | | | | | | | | | | | | | | | | | Due from Non-Guarantor Subsidiaries | | $ | 4,790 | | | $ | 4,790 | | | $ | — | | | $ | — | | Other assets | | 17,582 | | | 16,883 | | | 1,955 | | | 1,983 | | Total non-current assets | | $ | 22,372 | | | $ | 21,673 | | | $ | 1,955 | | | $ | 1,983 | | | | | | | | | | | Liabilities | | | | | | | | | Due to Non-Guarantor Subsidiaries | | $ | 1,047 | | | $ | 1,169 | | | $ | 729 | | | $ | 656 | | Other current liabilities | | 3,431 | | | 3,688 | | | 5,972 | | | 4,539 | | Total current liabilities | | $ | 4,478 | | | $ | 4,857 | | | $ | 6,701 | | | $ | 5,195 | | | | | | | | | | | Total non-current liabilities | | $ | 31,394 | | | $ | 30,958 | | | $ | 1,261 | | | $ | 1,268 | |
Summarized Statements of Earnings (Losses) (in millions of dollars) | | | | | | | | | | | | | | | | | | | For the Three Months Ended March 31, 2021 | | | | | Parent (1) | | Guarantor | Net revenues | | $ | — | | | $ | 4,986 | | | | Gross profit | | — | | | 2,543 | | | | Net earnings (losses) | | (452) | | | 1,643 | | | | | | | | | | |
(1) For the three months ended March 31, 2021, net earnings includes $58 million of intercompany interest income from non-guarantor subsidiaries.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the SEC, reports to security holders, press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements and whether to invest in or remain invested in Altria’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in, or implied by, any forward-looking statements made by us;Altria; any such statement is qualified by reference to the following cautionary statements. We elaborate on these important factors and the risks we face throughout this Form 10-Q,
particularly in Item 1A and in the “Business Environment” sectionssection preceding our discussion of the operating results of our subsidiaries’ businesses,segments, and in our publicly filed reports, including our 20192020 Form 10-K. These factors include the following: | | ▪ | the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial performance and financial condition and on our subsidiaries’ and investees’ ability to continue manufacturing and distributing products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession; |
| | ▪ | unfavorable litigation outcomes, including risks associated with adverse jury and judicial determinations, courts and arbitrators reaching conclusions at variance with our, our subsidiaries’ or our investees’ understanding of applicable law, bonding requirements in the jurisdictions that do not limit the dollar amount of appeal bonds, and certain challenges to bond cap statutes; |
| | ▪ | government (including FDA) and private sector actions that impact adult tobacco consumer acceptability of, or access to, tobacco products; |
| | ▪ | the growth of the e-vapor category and other innovative tobacco products contributing to reductions in cigarette and MST consumption levels and sales volume; |
| | ▪ | tobacco product taxation, including lower tobacco product consumption levels and potential shifts in adult consumer purchases as a result of federal, state and local excise tax increases; |
| | ▪ | the failure by our tobacco and wine subsidiaries to compete effectively in their respective markets; |
| | ▪ | our tobacco and wine subsidiaries’ continued ability to promote brand equity successfully; to anticipate and respond to evolving adult consumer preferences; to develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, and investments in third parties); to improve productivity; and to protect or enhance margins through cost savings and price increases; |
| | ▪ | changes, including in economic conditions, that result in adult consumers choosing lower-priced brands including discount brands; |
| | ▪ | the unsuccessful commercialization of adjacent products or processes by our tobacco subsidiaries and investees, including innovative tobacco products that may reduce the health risks associated with cigarettes and other traditional tobacco products, and that appeal to adult tobacco consumers; |
| | ▪ | significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic; |
| | ▪ | the risks related to the reliance by our tobacco and wine subsidiaries on a few significant facilities and a small number of key suppliers, and the risk of an extended disruption at a facility or of service by a supplier of our tobacco or wine subsidiaries or investees including as a result of the COVID-19 pandemic; |
| | ▪ | required or voluntary product recalls as a result of various circumstances such as product contamination or FDA or other regulatory action; |
| | ▪ | the failure of our information systems or service providers’ information systems to function as intended, or cyber-attacks or security breaches; |
| | ▪ | unfavorable outcomes of any government investigations of Altria, our subsidiaries or investees; |
▪unfavorable litigation outcomes, including risks associated with adverse jury and judicial determinations, courts and arbitrators reaching conclusions at variance with our, our subsidiaries’ or our investees’ understanding of applicable law, bonding requirements in the jurisdictions that do not limit the dollar amount of appeal bonds, and certain challenges to bond cap statutes; ▪government (including the FDA) and private sector actions that impact adult tobacco consumer acceptability of, or access to, tobacco products; ▪tobacco product taxation, including lower tobacco product consumption levels and potential shifts in adult consumer purchases as a result of federal, state and local excise tax increases; ▪unfavorable outcomes of any government investigations of Altria, our subsidiaries or investees; ▪a successful challenge to our tax positions or an increase to the corporate income tax rate; ▪the risks related to our and our investees’ international business operations, including failure to prevent violations of various U.S. and foreign laws and regulations such as foreign privacy laws and laws prohibiting bribery and corruption; ▪the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial performance and financial condition and on our subsidiaries’ and investees’ ability to continue manufacturing and distributing products, and the impact of health epidemics and pandemics on general economic conditions (including any resulting recession or other economic crisis) and, in turn, adult consumer purchasing behavior, which may be further impacted by any changes in government stimulus or unemployment payments; ▪the failure of our tobacco and wine subsidiaries and our investees to compete effectively in their respective markets; ▪the growth of the e-vapor category and other innovative tobacco products, including oral nicotine pouches, contributing to reductions in cigarette and MST consumption levels and sales volume; ▪our tobacco and wine subsidiaries’ and our investees’ continued ability to promote brand equity successfully; to anticipate and respond to evolving adult consumer preferences; to develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, and investments in third parties); to improve productivity; and to protect or enhance margins through cost savings and price increases; ▪changes, including in economic conditions (due to the COVID-19 pandemic or otherwise), that result in adult consumers choosing lower-priced brands, including discount brands; ▪the unsuccessful commercialization of adjacent products or processes by our tobacco subsidiaries and investees, including innovative tobacco products that may reduce the health risks associated with cigarettes and other traditional tobacco products, and that appeal to adult tobacco consumers; ▪significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic; ▪the risks related to the reliance by our tobacco and wine subsidiaries on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers, and the risk of an extended disruption at a facility of, or of service by, a supplier, distributor or distribution chain service provider of our tobacco or wine subsidiaries or investees, including as a result of the COVID-19 pandemic; ▪required or voluntary product recalls as a result of various circumstances such as product contamination or FDA or other regulatory action; ▪the failure of our information systems or service providers’ information systems to function as intended, or cyber attacks or security breaches; ▪our inability to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage, tobacco control actions and other factors; ▪impairment losses as a result of the write down of intangible assets, including goodwill; ▪the risks related to Ste. Michelle’s wine business, including competition, unfavorable changes in grape supply, and changes in adult consumer preferences that have resulted and may continue to result in increased inventory levels and inventory write offs, and governmental regulations; ▪the adverse effect of acquisitions, investments, dispositions or other events on our credit rating; ▪our inability to acquire attractive businesses or make attractive investments on favorable terms, or at all, or to realize the anticipated benefits from an acquisition or investment and our inability to dispose of businesses or investments on favorable terms or at all;
▪the risks related to disruption and uncertainty in the credit and capital markets, including risk of access to these markets both generally and at current prevailing rates, which may adversely affect our earnings or dividend rate or both;
| | ▪ | a successful challenge to our tax positions; |
| | ▪ | the risks related to our and our investees’ international business operations, including failure to prevent violations of various U.S. and foreign laws and regulations such as laws prohibiting bribery and corruption; |
| | ▪ | our inability to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions; |
| | ▪ | the adverse effect of acquisitions, investments, dispositions or other events on our credit rating; |
| | ▪ | our inability to acquire attractive businesses or make attractive investments on favorable terms, or at all, or to realize the anticipated benefits from an acquisition or investment and our inability to dispose of businesses or investments on favorable terms or at all; |
| | ▪ | the risks related to disruption and uncertainty in the credit and capital markets, including risk of access to these markets both generally and at current prevailing rates which may adversely affect our earnings or dividend rate or both; |
| | ▪ | impairment losses as a result of the write down of intangible assets, including goodwill; |
| | ▪ | the risks related to Ste. Michelle’s wine business, including competition, unfavorable changes in grape supply, and changes in adult consumer preferences that have resulted and may continue to result in increased inventory levels and inventory write offs, and governmental regulations; |
| | ▪ | the risk that any challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction; |
| | ▪ | the risks generally related to our investments in JUUL and Cronos, including our inability to realize the expected benefits of our investments in the expected time frames, or at all, due to the risks encountered by our investees in their businesses, such as operational, compliance and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity; potential disruptions to our investees’ management or current or future plans and operations; domestic or international litigation developments, government investigations, tax disputes or otherwise; and impairment of our investments; |
| | ▪ | the risks related to our inability to acquire a controlling interest in JUUL as a result of standstill restrictions or to control the material decisions of JUUL, restrictions on our ability to sell or otherwise transfer our shares of JUUL until December 20, 2024, and non-competition restrictions for the same time period subject to certain exceptions; |
| | ▪ | the adverse effects of risks encountered by ABI in its business, including effects of the COVID-19 pandemic, foreign currency exchange rates and the impact of movements in ABI’s stock price on our equity investment in ABI, including on our reported earnings from and carrying value of our investment in ABI, which could result in impairment of our investment, and the dividends paid by ABI on the shares we own; |
| | ▪ | the risks related to our inability to transfer our equity securities in ABI until October 10, 2021, and, if our ownership percentage decreases below certain levels, the adverse effects of additional tax liabilities, a reduction in the number of directors that we have the right to have appointed to the ABI board of directors, and our potential inability to use the equity method of accounting for our investment in ABI; |
| | ▪ | the risk of challenges to the tax treatment of the consideration we received in the ABI/SABMiller business combination and the tax treatment of our equity investment; and |
| | ▪ | the risks, including criminal, civil or tax liability for Altria, related to Cronos’s or Altria’s failure to comply with applicable laws, including cannabis laws. |
▪our inability to attract and retain investors due to the impact of decreasing social acceptance of tobacco usage or unfavorable environmental, social and governance ratings;
▪the risk that any challenge to our investment in JUUL, if successful, could result in a broad range of resolutions, including divestiture of the investment or rescission of the transaction; ▪the risks generally related to our investments in JUUL and Cronos, including our inability to realize the expected benefits of our investments in the expected time frames, or at all, due to the risks encountered by our investees in their businesses, such as operational, competitive, compliance, legislative and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity; potential disruptions to our investees’ management or current or future plans and operations; domestic or international litigation developments, government investigations, tax disputes or otherwise; and impairment of our investment in Cronos and changes in the fair value of our investment in JUUL; ▪the risks related to our inability to acquire a controlling interest in JUUL as a result of standstill restrictions or to control the material decisions of JUUL, restrictions on our ability to sell or otherwise transfer our shares of JUUL until December 20, 2024, and non-competition restrictions for the same time period subject to certain exceptions; ▪the adverse effects of risks encountered by ABI in its business, including effects of the COVID-19 pandemic, foreign currency exchange rates and the impact of movements in ABI’s stock price on our equity investment in ABI, including on our reported earnings from and carrying value of our investment in ABI, which could result in impairment of our investment, and the dividends paid by ABI on the shares we own; ▪the risks related to our inability to transfer our equity securities in ABI until October 10, 2021, and, if our ownership percentage decreases below certain levels, the adverse effects of additional tax liabilities, a reduction in the number of directors that we have the right to have appointed to the ABI board of directors, and our potential inability to use the equity method of accounting for our investment in ABI; ▪the risk of challenges to the tax treatment of the consideration we received in the ABI/SABMiller business combination and the tax treatment of our equity investment; and ▪the risks, including criminal, civil or tax liability for Altria, related to Altria’s or Cronos’s failure to comply with applicable laws, including cannabis laws. You should understand that it is not possible to predict or identify all factors and risks. Consequently, you should not consider the foregoing list to be complete. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Interest Rates
At March 31, 2020 and December 31, 2019, theThe fair value of Altria’s long-term debt, all of which is fixed-rate debt, was $28.3 billion and $30.7 billion, respectively. The fair value of Altria’s long-term debt is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at March 31, 2020 and December 31, 2019 would decreaseThe following table provides the fair value of Altria’s long-term debt by $2.2 billion and $2.4 billion, respectively. Athe change in fair value based on a 1% increase or decrease in market interest rates at March 31, 20202021 and December 31, 2019 would increase the fair value of Altria’s long-term debt by $2.5 billion and $2.7 billion, respectively.2020:
| | | | | | | | | | | | | | | (in billions) | | March 31, 2021 | | December 31, 2020 | Fair value | | $ | 32.4 | | | $ | 34.7 | | Decrease in fair value from a 1% increase in market interest rates | | 2.9 | | | 2.7 | | Increase in fair value from a 1% decrease in market interest rates | | 3.3 | | | 3.1 | |
At March 31, 2020, the fair value of Altria’s short-termInterest rates on borrowings under the Credit Agreement was $3.0 billion. Altria had no short-term borrowings at December 31, 2019. Interestare expected to be based on the outstanding borrowings under the Credit Agreement at March 31, 2020 was based on London Interbank Offered Rate (“LIBOR”), or any mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s and Standard & Poor’s.S&P. The applicable percentage based on Altria’s long-term senior unsecured debt ratings at March 31, 2020 for2021 borrowings under the Credit Agreement was 1.0%. At March 31, 2021 and December 31, 2020, the interest rate for Altria’s current borrowingAltria had no borrowings under the Credit Agreement was 2.23%.
Agreement.
Equity Price Risk
The estimated fair values of the Fixed-price Preemptive Rights and the Cronos warrant are subject to equity price risk. The Fixed-price Preemptive Rights and warrant are recorded at fair value, which is estimated using Black-Scholes option-pricing
models. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are subject to fluctuations resulting from changes in the quoted market price of Cronos shares, the underlying equity security.
At March 31, 2020, theThe following table provides (i) fair values of the Fixed-price Preemptive Rights and Cronos warrant were $34 millionwarrants and $132 million, respectively. A(ii) the change in fair value based on a 10% increase or decrease in the quoted market price of Cronos shares at March 31, 2020 would increase or decrease the fair values of the Fixed-price Preemptive Rights2021 and Cronos warrant by approximately $7 million and $23 million, respectively.December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | (in millions) | | Fixed-price Preemptive Rights | | Cronos Warrant | Fair values | | $ | 38 | | | $ | 24 | | | $ | 235 | | | $ | 139 | | Change in fair value based on a 10% increase/decrease in the quoted market price of Cronos shares | | 10 | | | 6 | | | 45 | | | 28 | |
Item 4. Controls and Procedures.
Procedures
Altria carried out an evaluation, with the participation of Altria’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Form 10-Q. Based upon that evaluation, Altria’s Chief Executive Officer and Chief Financial Officer concluded that Altria’s disclosure controls and procedures are effective.
There have been no changes in Altria’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Part II – OTHER INFORMATION
Item 1. Legal Proceedings.
Proceedings
See Note 1110 for a discussion of legal proceedings pending against Altria and its subsidiaries. See also Exhibits 99.1 and 99.2 to this Form 10-Q.
Item 1A. Risk Factors.
Factors
Information regarding Risk Factors appears in Part I, Item 1A. Risk Factors of the 20192020 Form 10-K. Except as set forth below, thereThere have been no material changes to the risk factors previously disclosed in the 20192020 Form 10-K:
Altria, its subsidiaries and its investees face various risks related to health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, which could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its subsidiaries and investees.
Altria’s, its subsidiaries’ and its investees’ business and financial results, consolidated results of operations, cash flows or financial position could be negatively impacted by health epidemics, pandemics and similar outbreaks. The recent and rapidly spreading COVID-19 pandemic could have negative impacts, such as (i) a global or U.S. recession or other economic crisis including a financial crisis, (ii) credit and capital markets volatility (and access to these markets, including by those in the distribution and supply chains), (iii) significant volatility in demand for our tobacco and wine subsidiaries’ and investees’ products, (iv) changes in adult consumer accessibility to those products including due to government action; (v) changes in adult consumer behavior and preferences, including trading down to lower-priced products or cessation of product use due to public health actions or concerns and (vi) extended or multiple disruptions in our subsidiaries’ or investees’ manufacturing operations, or in their distribution and supply chains. In addition, our subsidiaries’ and investees’ operations may incur increased costs and otherwise be negatively affected if significant portions of their respective workforces (or the workforces within their respective distribution or supply chains) are unable to work or work effectively, including because of illness, unavailability of personal protective equipment, quarantines, government actions, facility closures or other restrictions.
10-K.
The impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including the duration and severity of the outbreak and actions taken to contain its spread and mitigate the public health effects. In the first quarter of 2020, due to these uncertainties, and the potential adverse impact of an economic downturn or recession due to the pandemic, including on our earnings from ABI, we withdrew our 2020 full-year adjusted diluted EPS guidance and our three-year adjusted diluted EPS growth objective. We cannot at this time predict the impact of the COVID-19 pandemic on our or our investees’ future financial or operational results, but the impact could be material over time. See the third risk factor below for risks related to extended disruptions at a facility, of a distributor or in service by a service provider and the sixth risk factor below for risks related to our investment in ABI and the earnings from and carrying value of that investment. For further discussion on the impact of the COVID-19 pandemic on the tobacco and wine businesses, see Tobacco Segment - Business Environment and Wine Segment - Business Environment in Item 2.
Significant changes in price, availability or quality of tobacco, other raw materials or component parts could have an adverse effect on the profitability and business of Altria’s tobacco subsidiaries and investees.
Any significant change in prices, quality or availability of tobacco, other raw materials or component parts, particularly as a result of the COVID-19 pandemic, could adversely affect our tobacco subsidiaries’ and our investees’ profitability and business. The COVID-19 pandemic also may impact the availability of direct materials necessary for our tobacco subsidiaries and JUUL to remain compliant with FDA and other regulatory requirements for tobacco products. For further discussion, see Tobacco Space - Business Environment - Price, Availability and Qualityof Tobacco, Other Raw Materials and Component Parts in Item 2.
Altria’s subsidiaries rely on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers. An extended disruption at a facility or in service by a supplier, distributor or distribution chain service provider could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria and its tobacco and wine subsidiaries and investees.
Altria’s subsidiaries face risks inherent in reliance on a few significant manufacturing facilities and a small number of key suppliers, distributors and distribution chain service providers. A natural or man-made disaster or other disruption that affects the manufacturing operations of any of Altria’s tobacco or wine subsidiaries or investees, the operations of any key supplier, distributor or distribution chain service provider of any of Altria’s tobacco or wine subsidiaries or investees or any other disruption in the supply or distribution of goods or services (including a key supplier’s inability to comply with government regulations or unwillingness to supply goods or services to a tobacco company) could adversely impact the operations of the affected subsidiaries and investees. For example, in March 2020, the COVID-19 pandemic resulted in a temporary suspension of operations at PM USA’s Richmond, Virginia manufacturing facility, which is the primary facility for manufacturing PM USA cigarettes. Some state governors also have issued executive orders requiring that certain businesses temporarily suspend operations for varying periods of time while the COVID-19 pandemic persists. Operations of our subsidiaries, suppliers, distributors and distribution chain service providers and those of our investees could be suspended temporarily once or multiple times, or closed permanently, depending on various factors, including how long the COVID-19 pandemic persists and the extent to which state, local and federal governments, as well as foreign countries, impose restrictions on the operation of facilities or otherwise place limits on the supply and distribution chains. An extended disruption in operations experienced by one or more of Altria’s subsidiaries, investees or in the supply or distribution of goods or services by one or more key suppliers, distributors or distribution chain service providers could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria and its tobacco and wine subsidiaries and investees.
Competition, changes in adult consumer preferences, unfavorable changes in grape supply and new governmental regulations or revisions to existing governmental regulations could adversely affect Ste. Michelle’s wine business.
Ste. Michelle’s business is impacted by evolving adult consumer preferences. Shifts away from the wine category to other alcohol categories or shifts to lower-priced wines have resulted, and could continue to result, in slowing growth in Ste. Michelle’s sales and increased inventory levels and have an adverse effect on Ste. Michelle’s wine business. As discussed in Asset Impairment, Exit and Implementation Costs in Note 3, in the first quarter of 2020, Ste. Michelle recorded pre-tax charges of $392 million in cost of sales, including a $292 million inventory write off and $100 million in estimated losses on future non-cancelable grape purchase commitments as a result of inventory levels significantly exceeding long-term forecasted demand. Ste. Michelle expects to record additional charges up to approximately $25 million during the remainder of 2020, consisting of inventory disposal costs and other charges. Evolving adult consumer preferences, an economic downturn or recession or other factors could result in afurther slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business. The adequacy of Ste. Michelle’s grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington. Supply shortages or surpluses related to any one or more of these factors could impact production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle’s sales. In addition, Ste. Michelle’s business is subject to significant competition, including from many large, well-established domestic and international companies. Federal, state and local governmental agencies also regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business. For further discussion see Wine Segment - Business Environment in Item 2.
A challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction.
A challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction. In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act, and substantially lessened competition in violation of Section 7 of the Clayton Act. The FTC seeks a broad range of remedies including divestiture of Altria’s minority investment in JUUL, rescission of the transaction and prohibition against any officer or director of either Altria or JUUL serving on the other’s board of directors or attending meetings. The administrative trial will take place before an FTC administrative law judge and is currently scheduled to begin March 11, 2021. Any ruling by the FTC is subject to review by the FTC Commissioners and subsequently, by a federal appellate court.
Additionally, on October 1, 2019, the FTC issued a Civil Investigative Demand to Altria seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee. The FTC administrative complaint, referenced above, contains no allegations relating to this issue and the FTC has raised no further questions about it.
Also as of April 27, 2020, three putative class action lawsuits were filed against Altria and JUUL in the United States District Court for the Northern District of California. The lawsuits cite the FTC administrative complaint referenced above and allege claims similar to those made by the FTC. For further discussion see Note 11.
Neither the FTC nor the private plaintiffs has sought to preliminarily enjoin Altria from converting Altria’s non-voting JUUL shares to voting shares or appointing directors to the JUUL board of directors.
A successful challenge by the FTC or the plaintiffs in the lawsuits to the investment would adversely affect us, including by substantially limiting our rights with respect to our investment in JUUL.
Altria’s reported earnings from and carrying value of its equity investment in ABI and the dividends paid by ABI on shares owned by Altria may be adversely affected by various factors, including foreign currency exchange rates and ABI’s business results, including as a result of the COVID-19 pandemic, and stock price.
For purposes of financial reporting, the earnings from and carrying value of our equity investment in ABI are translated into U.S. dollars (“USD”) from various local currencies. In addition, ABI pays dividends in euros, which we convert into USD. During times of a strengthening USD against these currencies, our reported earnings from and carrying value of our equity investment in ABI will be reduced because these currencies will translate into fewer USD and the dividends that we receive
from ABI will convert into fewer USD. Dividends and earnings from and carrying value of our equity investment in ABI are also subject to the risks encountered by ABI in its business, its business outlook, cash flow requirements and financial performance, the state of the market and the general economic climate, including the impact of the COVID-19 pandemic. For example, in April 2020, as a result of the uncertainty, volatility and impact of the COVID-19 pandemic on ABI’s business, ABI announced a proposed 50% reduction to its upcoming dividend, which would result in a reduction of cash dividends Altria will receive from ABI. ABI previously announced a 50% rebase to its dividends in October 2018. In addition, if the carrying value of our investment in ABI exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired, which would result in impairment losses and could have a material adverse effect on Altria’s consolidated financial position or earnings. We cannot provide any assurance that ABI will successfully execute its business plans and strategies. Earnings from and carrying value of our equity investment in ABI are also subject to fluctuations in ABI’s stock price.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Proceeds
In July 2019,January 2021, the Board of Directors authorized a new $1.0$2.0 billion share repurchase program (the “July 2019“January 2021 share repurchase program”). In April 2020,Altria expects to complete the Board of Directors rescinded the $500 million remaining in the July 2019January 2021 share repurchase program.
program by June 30, 2022. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board.
Altria’s share repurchase activity for each of the three months in the period ended March 31, 2020,2021, was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | | | | | | | | | | January 1-31, 2021 | | — | | | $ | — | | | — | | | $ | 2,000,000,000 | | February 1-28, 2021 | | 1,862,657 | | | $ | 43.99 | | | 1,722,464 | | | $ | 1,924,167,584 | | March 1-31, 2021 | | 5,189,991 | | | $ | 48.01 | | | 5,189,991 | | | $ | 1,675,000,043 | | | | 7,052,648 | | | $ | 46.95 | | | 6,912,455 | | | |
| | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | | | | | | | | | | January 1 - 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 500,000,064 |
| February 1 - 29, 2020 | | 192,652 |
| | $ | 46.18 |
| | — |
| | $ | 500,000,064 |
| March 1 - 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 500,000,064 |
| For the Quarter Ended March 31, 2020 | | 192,652 |
| | $ | — |
| | — |
| | |
| | (1) | The total number of shares purchased represents shares withheld by Altria in an amount equal to the statutory withholding taxes for holders who vested in stock-based awards. |
(1) The total number of shares purchased includes (a) shares purchased under the January 2021 share repurchase program (which totaled 1,722,464 shares in February and 5,189,991 shares in March) and (b) shares withheld by Altria in an amount equal to the statutory withholding taxes for vested stock-based awards previously granted to eligible employees (which totaled 140,193 shares in February).
Item 6. Exhibits.Exhibits
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema. 101.CAL XBRL Taxonomy Extension Calculation Linkbase. 101.DEF XBRL Taxonomy Extension Definition Linkbase. 101.LAB XBRL Taxonomy Extension Label Linkbase. 101.PRE XBRL Taxonomy Extension Presentation Linkbase. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALTRIA GROUP, INC.
/s/ SALVATORE MANCUSO Salvatore Mancuso Executive Vice President and Chief Financial Officer April 30, 2020
29, 2021
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