0000764180 mo:PhilipMorrisUSAMember mo:HealthCareCostRecoveryActions2016NPMAdjustmentsMemberMember 2019-01-01 2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 20172019
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-08940
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
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| Virginia | | | 13-3260245 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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| 6601 West Broad Street, | Richmond, | Virginia | 23230 |
| (Address of principal executive offices) | (Zip Code) |
804-274-2200
804-274-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbols | Name of each exchange on which registered |
Common Stock, $0.33 1/1/3 par value | MO | New York Stock Exchange |
| 1.000% Notes due 2023 | MO23A | New York Stock Exchange |
| 1.700% Notes due 2025 | MO25 | New York Stock Exchange |
| 2.200% Notes due 2027 | MO27 | New York Stock Exchange |
| 3.125% Notes due 2031 | MO31 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days þ Yes¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) þ Yes¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Securities registered pursuant to Section 12(g) of the Act: None | | | | | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days þ Yes ¨ No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) þ Yes ¨ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
Large accelerated filer | | þ | | Accelerated filer¨ | | ☐ |
Non-accelerated filer¨ (Do not check if smaller | | ☐ | | Smaller reporting company) Smaller operating company¨ | | ☐ |
| | | | Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨Yes þ No
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐Yes þ No
As of June 30, 2017,2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $143$88 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
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Class | Outstanding at February 13, 2018 14, 2020 |
Common Stock, $0.33 1/3 par value | 1,900,449,362 1,858,366,804 |
| shares |
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on May 17, 2018,14, 2020, to be filed with the Securities and Exchange Commission on or about April 5, 2018,2, 2020, are incorporated by reference into Part III hereof. |
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| | TABLE OF CONTENTS | |
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| PART I | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II | | |
| Item 5. | | |
Item 6. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
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| PART III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
| Item 15. | | |
| Item 16. | | |
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Part I
Item 1. Business.
General Development of Business
▪General: Altria Group, Inc. (“Altria”) is a holding company incorporated in the Commonwealth of Virginia in 1985. At December 31, 2017, Altria Group, Inc.’s2019, Altria’s wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”), which are engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; and UST LLC (“UST”), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), a wholly-owned subsidiary that is engaged in the manufacture and sale of innovative tobacco products,wine; and Philip Morris Capital Corporation (“PMCC”), a wholly-owned subsidiary thatwhich maintains a portfolio of finance assets, substantially all of which are leveraged leases. As discussed below, Altria also owns an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of on! oral nicotine pouches. In December 2018, Altria refocused its innovative product efforts, which included the discontinuation of production and distribution of alle-vapor products by Nu Mark LLC (“Nu Mark”). Prior to that time, Nu Mark was engaged in the manufacture and sale of innovative tobacco products. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services LLC (“ALCS”), which provides various support services in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria Group, Inc. and its subsidiaries.
At September 30, 2016, Altria Group, Inc. had an approximate 27% ownership of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounted for under the equity method of accounting. In October 2016, Anheuser-Busch InBev SA/NV (“Legacy AB InBev”) completed its business combination with SABMiller, and Altria Group, Inc. received cash and shares representing a 9.6% ownership in the combined company (the “Transaction”). The newly formed Belgian company, which retained the name Anheuser-Busch InBev SA/NV (“AB InBev”), became the holding company for the combined businesses. Subsequently, Altria Group, Inc. purchased approximately 12 million ordinary shares of AB InBev, increasing Altria Group, Inc.’s ownership to approximately 10.2% at December 31, 2016. At December 31, 2017, Altria Group, Inc. had an approximate 10.2% ownership of AB InBev, which Altria Group, Inc. accounts for under the equity method of accounting using a one-quarter lag. As a result of the one-quarter lag and the timing of the completion of the Transaction, no earnings from Altria Group, Inc.’s equity investment in AB InBev were recorded for the year ended December 31, 2016. For further discussion, see Note 6. Investment in AB InBev/SABMiller to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K (“Item 8”).
In January 2017, Altria Group, Inc. acquired Nat Sherman, which joined PM USA and Middleton as part of Altria Group, Inc.’sAltria’s smokeable products segment.
▪SourceDuring the third quarter of Funds: Because2019, Helix acquired Burger Söhne Holding and its subsidiaries as well as certain affiliated companies (the “Burger Group”) that are engaged in the manufacture and sale of on! oral nicotine pouches. At closing, Altria Group, Inc. is a holding company, its access toindirectly owned an 80% interest in Helix, for which Altria paid $353 million in the operating cash flowsthird quarter of 2019. The financial results of Helix are included in Altria’s consolidated financial statements as part of its wholly-owned subsidiaries consists of cash received fromsmokeless products segment, with the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At December 31, 2017, Altria Group, Inc.’s principal wholly-owned subsidiaries 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. In addition, Altria Group, Inc. receives cash dividends on its20% minority ownership interest in AB InBev if and when AB InBev pays such dividends. Helix (held by the former shareholders of the Burger Group) included as a noncontrolling interest.
Financial Information About Segments
Altria Group, Inc.’sAltria’s reportable segments are smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in an all other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’sAltria’s innovative tobacco products businesses to Altria’s consolidated results. For further information, see Note 16. Segment Reporting to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K (“Item 8”).
At September 30, 2016, Altria had an approximate 27% ownership of SABMiller plc (“SABMiller”), which Altria accounted for under the equity method of accounting. In October 2016, Anheuser-Busch InBev SA/NV completed its business combination with SABMiller, and Altria received cash and shares representing a 9.6% ownership in the combined company (the “ABI Transaction”). The newly formed Belgian company, which retained the name Anheuser-Busch InBev SA/NV (“ABI”), became the holding company for the combined businesses. Subsequently, Altria purchased approximately 12 million ordinary shares of ABI, increasing Altria’s ownership to approximately 10.2% at December 31, 2016. At December 31, 2019, Altria had a 10.1% ownership in ABI, which Altria accounts for under the equity method of accounting using a one-quarter lag.
In December 2018, Altria, through a wholly-owned subsidiary, purchased shares of non-voting convertible common stock of JUUL Labs, Inc. (“JUUL”), representing a 35% economic interest. JUUL is engaged in the manufacture and sale of e-vapor products globally and is the U.S. leader in e-vapor. At December 31, 2019, Altria had a 35% economic interest in JUUL, which it accounts for as an investment in an equity security.
In March 2019, Altria, through a subsidiary, completed its acquisition of a 45% economic and voting interest in Cronos Group Inc.’s consolidated results. (“Cronos”), a global cannabinoid company headquartered in Toronto, Canada. At December 31, 2019, Altria had a 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of accounting using a one-quarter lag.
Altria Group, Inc.’s chief operating decision maker (the “CODM”) reviews operating companies income to evaluate the performanceFor further discussion of and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the CODM. Net revenues and operating companies income (together with a reconciliation to earnings before income taxes) attributable to each such segment for each of the last three years are set forthAltria’s investments in equity securities, see Note 15. Segment Reporting7. Investments in Equity Securities to the consolidated financial statements in Item 8 (“Note 15”7”). Information about total assets by segment
▪Source of Funds: Because Altria is not disclosed because such information is not reported to or used by the CODM. Segment goodwill and other intangible assets, net, are disclosed in Note 3. Goodwill and Other Intangible Assets, net a holding company, its access to the consolidated financial statements in Item 8 (“Note 3”). The accounting policiesoperating cash flows of its wholly-owned subsidiaries consists of cash received from the segments are the same as those described in Note 2. Summarypayment of Significant Accounting Policies to the consolidated financial statements in Item 8 (“Note 2”).
The relative percentages of operating companies income (loss) attributable to each reportable segmentdividends and distributions, and the all other category werepayment 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 follows:long as ABI pays dividends.
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| | 2017 |
| 2016 |
| 2015 |
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| Smokeable products | 85.8 | % | 86.2 | % | 87.4 | % |
| Smokeless products | 13.2 |
| 13.1 |
| 12.8 |
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| Wine | 1.5 |
| 1.8 |
| 1.8 |
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| All other | (0.5 | ) | (1.1 | ) | (2.0 | ) |
| Total | 100.0 | % | 100.0 | % | 100.0 | % |
For items affecting the comparability of the relative percentages of operating companies income (loss) attributable to each reportable segment, see Note 15.
Narrative Description of Business
Portions of the information called for by this Item are included in Operating Results by Business Segment in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsof this Annual Report on Form 10-K (“Item 7”).
Tobacco Space
Altria Group, Inc.’sAltria’s tobacco operating companies include PM USA, USSTC and other subsidiaries of UST, Middleton, Nu MarkNat Sherman and Nat Sherman.Helix. Altria Group Distribution Company provides sales and distribution services to Altria Group, Inc.’sAltria’s tobacco operating companies.
The products of Altria Group, Inc.’sAltria’s tobacco subsidiaries include (i) smokeable tobacco products, consisting of combustible cigarettes manufactured and sold by PM USA and Nat Sherman, machine-made large cigars and pipe tobacco manufactured and sold by Middleton and premium cigars sold by Nat Sherman; and (ii) smokeless tobacco products, consisting of moist smokeless tobacco (“MST”) and snus products manufactured and sold by USSTC;USSTC, and innovative tobacco products, including e-vapor productsoral nicotine pouches manufactured and sold by Nu Mark.Helix.
▪Cigarettes: PM USA is the largest cigarette company in the United States. Marlboro, the principal cigarette brand of PM USA, has been the largest-selling cigarette brand in the United States for over 40the past 45 years. Nat Sherman sells substantially all of its super premium cigarettes in the United States. Total smokeable products segment’s cigarettes shipment volume in the United States was 116.6101.8 billion units in 2017,2019, a decrease of 5.1%7.3% from 2016.2018.
▪Cigars:Middleton is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco. Middleton contracts with a third-party importer to supply a majority of its cigars and sells substantially all of its cigars to customers in the United States. Black & Mild is the principal cigar brand of Middleton. Nat Sherman sources all of its cigars from third-party suppliers and sells substantially all of its cigars to customers in the United States. Total smokeable products segment’s cigars shipment volume was approximately 1.51.7 billion units in 2017,2019, an increase of 9.9%3.1% from 2016.
2018.▪Smokeless tobacco products: USSTC is the leading producer and marketer of moist smokeless tobacco (“MST”)MST products. The smokeless products segment includes the premium brands, Copenhagen and Skoal, and value brands, Red Seal and Husky.Husky, sold by USSTC. In addition, the smokeless products segment includes on! oral nicotine pouches sold by Helix. Substantially all of the smokeless tobacco products are manufactured and sold to customers in the United States. Total smokeless products segment’s shipment volume was 841.3807.0 million units in 2017,2019, a decrease of 1.4%3.1% from 2016.2018.
▪Innovative tobacco products: Nu Mark participates in the e-vapor category and has developed and commercialized other innovative tobacco products. In addition, Nu Mark sources the production of its e-vapor products through overseas contract manufacturing arrangements. In 2013, Nu Mark introduced MarkTen e-vapor products. In April 2014, Nu Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”), which began selling e-vapor products in 2009. In 2017, Altria Group, Inc.’s subsidiaries purchased certain intellectual property related to innovative tobacco products.
In December 2013, Altria Group, Inc.’sAltria’s subsidiaries entered into a series of agreements with Philip Morris International Inc. (“PMI”) pursuant to which, including an agreement that grants Altria Group, Inc.’s subsidiaries provide an exclusive licenseright to PMI to sell Nu Mark’s e-vapor products outside the United States, and PMI’s subsidiaries provide an exclusive license to Altria Group, Inc.’s subsidiaries to sell twocommercialize certain of PMI’s heated tobacco product platforms in the United States. Further, in July 2015, Altria Group, Inc. announced the expansion of its strategic framework with PMI to include a joint research, development and technology-sharing agreement. Under this agreement, Altria Group, Inc.’s subsidiaries and PMI will collaborate to develop e-vapor products for commercialization in the United States, by Altria Group, Inc.’s subsidiaries and in markets outside the United States by PMI. This agreement also provides for exclusive technology cross licenses, technical information sharing and cooperation on scientific assessment, regulatory engagement and approval relatedsubject to e-vapor products.
In the fourth quarter of 2016, PMI submitted a Modified Risk Tobacco Product (“MRTP”) application for an electronically heated tobacco product with the United States Food and Drug Administration’s (“FDA”) Center for Tobacco Products and filed its correspondingauthorization of the applicable products. PMI submitted a pre-market tobacco product application in the first quarter of 2017. Upon regulatory authorization by(“PMTA”) and modified risk tobacco product application with the FDA Altria Group, Inc.’s subsidiaries will have an exclusive license to sell thisfor its electronically heated tobacco product, IQOS. In April 2019, the FDA authorized the PMTA for IQOS, which PM USA currently sells in limited U.S. markets.
In December 2018, Altria refocused its innovative product efforts, which included the discontinuation of production and distribution of alle-vapor products by Nu Mark. Prior to that time, Nu Mark was engaged in the United States.manufacture and sale of innovative tobacco products.
▪Distribution, Competition and Raw Materials: Altria Group, Inc.’sAltria’s tobacco subsidiaries sell their tobacco products principally to wholesalers (including distributors), and large retail organizations, including chain stores, and the armed services.stores.
The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product quality, taste, price, product innovation, marketing, packaging and distribution constituting the significant methods of competition. Promotional activities include, in certain instances and where permitted by law, allowances, the distribution of incentive items, price promotions, product promotions, coupons and other discounts.
In June 2009, the President of the United States of America signed into law theThe Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), which provides the FDA with broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of tobacco products; the authority to require disclosures of related information; and the authority to enforce the FSPTCA and related regulations. The FSPTCA went into effect in 2009 for cigarettes, cigarette tobacco and smokeless tobacco products and in August 2016 for all other tobacco products, including cigars, e-vapor products, pipe tobacco and oral tobacco-derived nicotine products (“Other Tobacco Products”). The FSPTCA imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail. PM USA, Middleton, Nat Sherman and USSTC are subject to quarterly user fees as a result of the FSPTCA. Their respective FDA user fee amounts are determined by an allocation formula administered by the FDA that is based on the respective market shares of manufacturers and importers of each kind of tobacco product. PM USA, Nat Sherman, USSTC and other U.S. tobacco manufacturers have agreed to other marketing restrictions in the United States as part of the settlements of state health care cost recovery actions. For further discussion of these restrictions, see Tobacco Space - Business Environment in Item 7.
In the United States, under a contract growing program, PM USA purchases the majority of its burley and flue-cured leaf tobaccos directly from domestic tobacco growers. Under the terms of this program, PM USA agrees to purchase the amount of tobacco specified in the grower contracts.contracts that meets PM USA’s grade and quality standards. PM USA also purchases a portion of its tobacco requirements through leaf merchants.
Nat Sherman purchases its tobacco requirements through leaf merchants.
USSTC purchases dark fire-cured, dark air-cured and burley leaf tobaccos from domestic tobacco growers under a contract growing program as well as from leaf merchants.
Middleton purchases burley, dark air-cured and flue-cured leaf tobaccos through leaf merchants. Middleton does not have a contract growing program.
Altria Group, Inc.’sAltria’s tobacco subsidiaries believe there is an adequate supply of tobacco in the world markets to satisfy their current and anticipated production requirements. See Item 1A. Risk Factors of this Annual Report on Form 10-K (“Item 1A”) and Tobacco Space - Business Environment - Price, Availability and Quality of Agricultural ProductsTobacco, Other Raw Materials and Component Parts in Item 7 for a discussion of risks associated with tobacco supply.
Wine
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, Columbia Crestand 14 Hands,and owns wineries in or distributes wines from several other domestic and foreign wineregions. Ste. Michelle’s total 20172019 wine shipment volume of approximately 8.58.3 million cases decreased 8.6%increased 0.6% from 2016.2018.
Ste. Michelleholds 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, Torres and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States.
▪Distribution, Competition and Raw Materials: Key elements of Ste. Michelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.
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. Evolving adult consumer preferences pose challenges to the wine category, which has seen slowing volume growth in the premium wine category and increases in inventory levels.
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 maycould have an adverse effect on Ste. Michelle’s wine business.
Ste. Michelle uses grapes harvested from its own vineyards or purchased from independent growers, as well as bulk wine purchased from other sources. Grape production can be adversely affected by weather and other forces that may limit production. At the present time, Ste. Michelle believes that there is a sufficient supply of grapes and bulk wine available in the market to satisfy its current and expected production requirements. See Item 1A for a discussion of risks associated with competition, consumer preferences, unfavorable changes in grape supply and governmental regulations.
Financial Services Business
In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. For further information on PMCC’s finance assets, see Note 7. Finance Assets, net to the consolidated financial statements in Item 8.
Other Matters
▪Customers: The largest customer of PM USA, USSTC, Helix, Middleton and Nat Sherman, McLane Company, Inc., accounted for approximately 26%25%, 25%27% and 26% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. In addition, Core-Mark Holding Company, Inc. accounted for approximately 14%15%, 14% and 10%14% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Substantially all of these net revenues were reported in the smokeable products and smokeless products segments.
Sales to threetwo distributors accounted for approximately 67%, 69% and 66%64% of net revenues for the wine segment for the years ended December 31, 2017, 20162019 and 2015,2018, respectively.
▪Employees: At Sales to three distributors accounted for approximately 67% of net revenues for the wine segment for the year ended December 31, 2017,2017.
▪Employees: At December 31, 2019, Altria Group, Inc. and its subsidiaries employed approximately 8,3007,300 people.
▪Executive Officers of Altria Group, Inc.: Altria: The disclosure regarding executive officers is included in Item 10. Directors, Executive Officers and Corporate Governance - Information about Our Executive Officers as of February 13, 2018 14, 2020 of this Annual Report on Form 10-K.
▪Research and Development: Research and development expense for the years ended December 31, 2017, 2016 and 2015 is set forth in Note 17. Additional Information to the consolidated financial statements in Item 8.
▪Intellectual Property: Trademarks are of material importance to Altria Group, Inc. and its operating companies, and are protected by registration or otherwise. In addition, as of December 31, 2017,2019, the portfolio of approximately 8001,150 United States patents owned by Altria Group, Inc.’sAltria’s businesses, as a whole, was material to Altria Group, Inc. and its tobacco businesses. However, no one patent or group of related patents was material to Altria Group, Inc.’sAltria’s business or its tobacco businesses as of December 31, 2017. Altria Group, Inc.’s2019. Altria’s businesses also have proprietary trade secrets, technology, know-how, processes and other intellectual property rights that are protected by appropriate confidentiality measures. Certain trade secrets are material to Altria Group, Inc. and its tobacco and wine businesses.
▪Environmental Regulation: Altria Group, Inc. 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 United States: 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 Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.’sAltria’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. As discussed in Note 22. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8 (“Note 2”), Altria Group, Inc. 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 Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation and compliance costs or damages and the making of
related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.’sAltria’s consolidated results of operations, capital expenditures, financial position or cash flows.
Financial Information About Geographic Areas
Substantially all of Altria Group, Inc.’s net revenues are from sales generated in the United States for each of the last three fiscal years and substantially all of Altria Group, Inc.’s long-lived assets are located in the United States.
Available Information
Altria Group, Inc. is required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Investors may read and copy any document that Altria Group, Inc. files, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access Altria Group, Inc.’s SEC filings.
Altria Group, Inc. makes available free of charge on or through its website (www.altria.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after Altria Group, Inc. electronically files such material with, or furnishes it to, the SEC. Investors can access Altria Group, Inc.’sAltria’s filings with the SEC by visiting www.altria.com/secfilings.
The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this reportAnnual Report on Form 10-K or incorporated into any other filings Altria Group, Inc. makes with the SEC.
Item 1A. Risk Factors.
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our results of operations, our cash flows, our financial position and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.
We (1) 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
(1) This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context.
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 vary 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 Group, Inc.’sAltria’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; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document,Annual Report on Form 10-K particularly in the “Business Environment” sections preceding our discussion of the operating results of our subsidiaries’ businesses below in Item 7. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
(1) This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria and its various operating subsidiaries or when any distinction is clear from the context.
Unfavorable litigation outcomes could materially adversely affect the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or the businesses of one or more of its subsidiaries.subsidiaries or investees.
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries,USSTC, as well as their respective indemnitees.indemnitees and Altria’s investees. Various types of claims may be raised in these proceedings, including product liability, consumer protection,unfair trade practices, antitrust, tax, contraband-related claims, patent infringement, employment matters, claims for contribution and claims of competitors, shareholders and distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may
be specified in a lawsuit bears little relevance to the ultimate outcome.
In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed in Note 18. 19. Contingenciesto the consolidated financial statements in Item 8 (“Note 18”19”), tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, Group, Inc., or the businesses of one or more of its subsidiaries or investees, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
In certain litigation, Altria, Group, Inc.its subsidiaries and its subsidiariesinvestees may face potentially significant non-monetary remedies, which may cause reputational harm.remedies. For example, in the lawsuit brought by the United States Department of Justice, discussed in detail in Note 18,19, the district court did not impose monetary penalties but ordered significant non-monetary remedies, including the issuance of “corrective statements”statements.”
Additionally, the on! transaction, discussed in Note 1. Background and Basis of Presentation to the consolidated financial statements in Item 8(“Note 1”), is the subject of pending arbitration. An unfavorable decision could adversely affect Helix’s ability to compete effectively with oral nicotine pouches.
In 2019, we determined that Altria Group, Inc.our investment in JUUL was impaired in part due to the increase in the number and PM USA began making in various mediatype of legal cases pending against JUUL, especially in the fourth quarter of 2017.2019. This impairment and the risks associated with our JUUL investment are discussed further in The expected benefits of the JUUL transaction may not materialize in the expected manner or timeframe or at all.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty, and significant challenges remain.
It is possible that the consolidated results of operations, cash flows or financial position of Altria, Group, Inc., or the businesses of one or more of its subsidiaries or investees, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into
settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so. See Item 3.Legal Proceedingsof this Annual Report on Form 10-K (“Item 3”), Note 1819 and Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K for a discussion of pending tobacco-related litigation.
Significant federal, state and local governmental actions, including actions by the FDA, and various private sector actions may continue to have an adverse impact on us and our tobacco subsidiaries’ or our investees’ businesses and sales volumes.
As described in Tobacco Space - Business Environment in Item 7, our cigarette subsidiaries face significant governmental and private sector actions, including efforts aimed at reducing the incidence of tobacco use and efforts seeking to hold these subsidiaries responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. These actions, combined with the diminishing social acceptance of smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels.
ActionsMore broadly, actions by the FDA and other federal, state or local governments or agencies, including those specific actions described in Tobacco Space - Business Environment in Item 7,may impact the adult tobacco consumer acceptability of or access to tobacco products (for
(for example, through product standards)standards that may be proposed by the FDA for nicotine and flavors), limit adult tobacco consumer choices, delay or prevent the launch of new or modified tobacco products or products with claims of reduced risk, require the recall or other removal of tobacco products from the marketplace (for example as a result of product contamination, rulemaking that bans menthol or other flavors, a determination by the FDA that one or more tobacco products do not satisfy the statutory requirements for substantial equivalence, or because the FDA requires that a modification to a currently-marketedcurrently marketed tobacco product proceed through the pre-market review process)process or because the FDA otherwise determines that removal is necessary for the protection of public health), restrict communications to adult tobacco consumers, restrict the ability to differentiate tobacco products, create a competitive advantage or disadvantage for certain tobacco companies, impose additional manufacturing, labeling or packing requirements, interrupt manufacturing or otherwise significantly increase the cost of doing business, or restrict or prevent the use of specified tobacco products in certain locations or the sale of tobacco products by certain retail establishments. Any one or more of these actions may have a material adverse impact on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.subsidiaries, including adversely affecting Altria’s investment in JUUL. See Tobacco Space - Business Environment in Item 7for a more detailed discussion.
Tobacco products are subject to substantial taxation, which could have an adverse impact on sales of the tobacco products of Altria Group, Inc.’sAltria’s tobacco subsidiaries.
Tobacco products are subject to substantial excise taxes, and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the federal, state federal and local levels. Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our 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 other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the reported share performance of tobacco products of Altria Group, Inc.’sAltria’s tobacco subsidiaries. For further discussion, see Tobacco Space - Business Environment - Excise Taxes in Item 7.
Our tobacco businesses face significant competition within their categories(including across categories) and their failure to compete effectively could have an adverse effect on the consolidated results of operations or cash flows of Altria, Group, Inc., or the business of Altria Group, Inc.’sAltria’s tobacco subsidiaries.
Each of Altria Group, Inc.’sAltria’s tobacco subsidiaries operates in highly competitive tobacco categories. This competition also exists across categories as adult tobacco consumer preferences evolve. Significant methods of competition include product quality, taste, price, product innovation, marketing, packaging, distribution and promotional activities. AThis highly competitive environment could negatively impact the profitability, market share and shipment volume of our tobacco subsidiaries, which could have an adverse effect on the consolidated results of operations or cash flows of Altria. See Tobacco Space - Business Environment - Summary in Item 7 for additional discussion concerning evolving adult tobacco consumer preferences, including e-vapor products. Growth of the e-vapor product category and other innovative tobacco products has further contributed to reductions in cigarette consumption levels and cigarette industry sales volume and has adversely affected the growth rates of other tobacco products. Continued growth in these categories could have a material adverse impact on the business, results of operations, cash flows or financial position of Altria Group, Inc.and its tobacco subsidiaries.
PM USA also faces competition from lowest pricedlower-priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to settlements of certain tobacco litigation in the United States. These settlements, among other factors, have resulted in substantial cigarette price increases. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers’ cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes, and imports of foreign lowest pricedlower-priced brands. USSTC faces significant competition in the smokeless tobacco category and has experienced consumer down-trading to lower-priced brands. In the cigar category, additional competition has resulted from increased imports of machine-made large cigars manufactured offshore.
Altria Group, Inc. and its subsidiaries may be unsuccessful in anticipating changes in adult consumer preferences, responding to changes in consumer purchase behavior or managing through difficult competitive and economic conditions.conditions, which could have an adverse effect on the consolidated results of operations and cash flows of Altria or the business of Altria’s tobacco and wine subsidiaries.
Each of our tobacco and wine subsidiaries is subject to intense competition and changes in adult consumer preferences. To be successful, they must continue to:
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| ▪ | promote brand equity successfully; |
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| ▪ | anticipate and respond to new and evolving adult consumer preferences; |
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| ▪ | develop, manufacture, market and distribute new and innovative products that appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, third parties); |
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| ▪ | improve productivity; and |
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| ▪ | protect or enhance margins through cost savings and price increases. |
See Tobacco Space - Business Environment - Summary in Item 7 and the immediately preceding risk factor for additional discussion concerning evolving adult tobacco consumer preferences, specifically the growth of e-vapor and other innovative tobacco products and the effects on our tobacco operating companies.
See Wine Segment - Business Environment - Summary in Item 7 for additional discussion concerning evolving adult tobaccoalcohol consumer preferences, including e-vapor products. Growthpreferences; specifically the slowing of this productthe premium wine category could contribute to reductions in cigarette consumption levels and cigarette industry sales volume and could adversely affect the growth rates of other tobacco products.effects on our wine subsidiaries.
The willingness of adult consumers to purchase premium consumer product brands depends in part on economic conditions. In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products, which could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its subsidiaries. While our tobacco and wine subsidiaries work to broaden their brand portfolios to compete effectively with lower-priced products, the failure to do so could negatively impact our companies’ ability to compete in these circumstances.
Our financial services business (conducted through PMCC) holds investments in finance leases, principally in transportation (including aircraft), power generation, real estate and manufacturing equipment. Its lessees are subject to significant competition and uncertain economic conditions. If parties to PMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.
Altria Group, Inc.’sAltria’s tobacco subsidiaries and investees may be unsuccessful in developing and commercializing adjacent products or processes, including innovative tobacco products that may reduce the health risks associated with current tobacco products and that appeal to adult tobacco consumers, which may have an adverse effect on their ability to grow new revenue streams and/or put them at a competitive disadvantage.
Altria Group, Inc. and its subsidiaries have growth strategies involving moves and potential moves into adjacent products or processes, including innovative tobacco products. Some innovative tobacco products may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and outside the United States) products that meet their taste expectations and evolving preferences. Examples include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful. Theseharmful, such as electronically heated tobacco products, oral nicotine pouches such as Helix’s on! products, and e-vapor products. In addition to internal product development, these efforts may include arrangements with, or
investments in, third parties.parties such as our exclusive arrangement with PMI to sell IQOS and related heatstick products in the United States, which is dependent upon our continued ability to license these products from PMI, and our minority investment in JUUL. Our minority investment in JUUL subjects us to non-competition obligations restricting us from investing or engaging in the e-vapor business other than through JUUL, subject to certain exceptions. Our tobacco subsidiaries and investees may not succeed in their efforts to introduce such newdevelop and commercialize these adjacent products, which would have an adverse effect on the ability to grow new revenue streams.
Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of innovative products (including products with claims of reduced risk to adult consumers,consumers), the speed with which they may make such determinations or whether regulators will impose an unduly burdensome regulatory framework on such products. See Tobacco Space - Business Environment - FSPTCA and FDA Regulation in Item 7 for further discussion. Nor can we predict whether these products will appeal to adult tobacco consumers or whether adult tobacco consumers’ purchasing decisions would be affected by reduced riskreduced-risk claims on such products if permitted. Adverse developments on any of these matters could negatively impact the commercial viability of such products.
If our tobacco subsidiaries or investees do not succeed in their efforts to develop and commercialize innovative tobacco products or to obtain regulatory approval for the marketing or sale of products, including with claims of reduced risk, but one or more of their competitors dodoes succeed, our tobacco subsidiaries or investees may be at a competitive disadvantage.disadvantage, which could have an adverse effect on their financial performance.
Significant changes in tobacco leaf price, availability or quality of tobacco, other raw materials or component parts could have an adverse effect on the profitability and business of Altria Group, Inc.’sAltria’s tobacco subsidiaries.
Any significant change in tobacco leaf prices, quality or availability of tobacco, other raw materials or component parts could adversely affect our tobacco subsidiaries’ profitability and business. For further discussion, see Tobacco Space - Business Environment - Price, Availability and Qualityof Agricultural ProductsTobacco, Other Raw Materials and Component Parts in Item 7.
Because Altria Group, Inc.’sAltria’s tobacco subsidiaries rely on a few significant facilities and a small number of key suppliers, an extended disruption at a facility or in service by a supplier could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.
Altria Group, Inc.’sAltria’s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of key suppliers. For example, the Richmond, Virginia manufacturing facility is the primary facility for manufacturing all PM USA cigarettes and some of our other tobacco products. A natural or man-made disaster or other disruption that affects the manufacturing operations of any of Altria Group, Inc.’sAltria’s tobacco subsidiaries, or the operations of any key supplierssupplier of any of Altria Group, Inc.’sAltria’s tobacco subsidiaries including as a resultor any other disruption in the supply of goods or services from a key supplier (including a key supplier’s inability to comply with government regulations or unwillingness to supply goods or services to a tobacco company,company) could adversely impact the operations of the affected subsidiaries. An extended disruption in operations experienced
by one or more of Altria Group, Inc.’sAltria’s subsidiaries or in the supply of goods or services by a key supplierssupplier could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.
Altria Group, Inc.’sAltria’s subsidiaries could decide or be required to recall products, which could have a material adverse effect on the business, reputation, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its subsidiaries.
In addition to a recall required by the FDA, as referenced above, our subsidiaries could decide, or other laws or regulations could require them, to recall products due to the failure to meet quality standards or specifications, suspected or confirmed and deliberate or unintentional product contamination, or other adulteration, product misbranding or product tampering. In January 2017, USSTC announced that it was voluntarily recalling certain of its smokeless tobacco products manufactured at a USSTC facility due to product tampering. USSTC recorded a charge during the first quarter of 2017 related to this recall. While this charge was not material to Altria Group, Inc.’s financial statements, futureProduct recalls (if any) could have a material adverse effect on the business, reputation, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its subsidiaries.
Altria Group, Inc. may be unable to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions.
Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the impact of decreasing social acceptance of tobacco usage and tobacco regulation and control actions. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best talent.
Acquisitions or other events may adversely affect Altria Group, Inc.’s credit rating, and Altria Group, Inc. may not achieve its anticipated strategic or financial objectives of a transaction.
From time to time, Altria Group, Inc. considers acquisitions and may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings over time, it is possible that completing a given acquisition or the occurrence of other events could negatively impact our credit ratings or the outlook for those ratings. Any such change in ratings or outlook may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.
Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to acquire attractive businesses on favorable terms or that we will realize any of the anticipated benefits from an acquisition.
Disruption and uncertainty in the debt capital markets could adversely affect Altria Group, Inc.’s access to the debt capital markets, earnings and dividend rate.
Access to the debt capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the credit and debt capital markets and any resulting adverse impact on credit availability, pricing, credit terms or credit rating
may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.
Altria Group, Inc. may be required to write down intangible assets, including goodwill, due to impairment, which would reduce earnings.
We periodically calculate the fair value of our reporting units and intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. Certain events can also trigger an immediate review of intangible assets. If an impairment is determined to exist in either situation, we will incur impairment losses, which will reduce our earnings.
Competition, 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 subject to significant competition, including from many large, well-established domestic and international companies. 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 related to any one or more of these factors could increase production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle’s sales. In addition, federal, state and local governmental agencies 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 7.
The failure of Altria Group, Inc.’sAltria’s information systems or service providers’ information systems to function as intended, or cyber-attacks or security breaches, could have a material adverse effect on the business, reputation, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its subsidiaries.
Altria Group, Inc. and its subsidiaries rely extensively on information systems, many of which are managed by third-party service providers (such as cloud providers), to support a variety of business processes and activities, including: complying with regulatory, legal, financial reporting and tax requirements; engaging in marketing and e-commerce activities; managing and improving the effectiveness of our operations; manufacturing and distributing our products; collecting and storing sensitive data and confidential information; and communicating internally and externally with employees, investors, suppliers, trade customers,
adult consumers and others. We continue to make investments in administrative, technical and physical safeguards to protect our information systems and data from cyber-threats, including human error and malicious acts. Our safeguards include employee training, testing and auditing protocols, backup systems and business continuity plans, maintenance of security policies and procedures, monitoring of networks and systems, and third-party risk management.
To date, interruptions of our information systems have been infrequent and have not had a material impact on our operations. However, because technology is increasingly complex and cyber-attacks are increasingly sophisticated and more frequent, there can be no assurance that such incidents will not have a material adverse effect on us in the future. Failure of our systems or service providers’ systems to function as intended, or cyber-attacks or security breaches, could result in loss of revenue, assets, personal data, intellectual property, trade secrets or other sensitive and confidential data, violation of applicable privacy and data security laws, damage to the reputation of our companies and their brands, operational disruptions, legal challenges and significant remediation and other costs to Altria Group, Inc. and its subsidiaries.
Unfavorable outcomes of any governmental investigations could materially affect the businesses of Altria Group, Inc. and its subsidiaries.subsidiaries or its investees.
From time to time, Altria, Group, Inc.its subsidiaries and its subsidiariesinvestees are subject to governmental investigations on a range of matters. For further discussion, see Tobacco Space - Business Environment - Other International, Federal, State and Local Regulation and Governmental and Private Activity in Item 7. We cannot predict whether new investigations may be commenced or the outcome of any such investigation, and it is possible that our business or the businesses of our investees could be materially adversely affected by an unfavorable outcome of a future investigation.
Expanding internationalA challenge to our tax positions could adversely affect our tax rate, earnings or cash flow.
Tax laws and regulations, such as the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”), are complex and subject to varying interpretations. A successful challenge to one or more of Altria’s tax positions could give rise to additional liabilities, including interest and potential penalties, as well as adversely affect our tax rate, earnings or cash flows.
International business operations subjectssubject Altria Group, Inc. and its subsidiaries to various United States and foreign laws and regulations, and violations of such laws or regulations could result in reputational harm, legal challenges and/or significant costs.
While Altria Group, Inc. and its subsidiaries are primarily engaged in business activities in the United States, they do engage (directly or indirectly) in certain international business activities that are subject to various United States and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and other laws prohibiting bribery and corruption. Although we have a Code of Conduct and a compliance system designed to prevent and detect violations of applicable law, no system can provide assurance that it will always protect against improper actions by employees, investees or third parties. Violations of these laws, or allegations of such violations, could result in reputational harm, legal challenges and/or significant costs.
Altria Group, Inc.’smay be unable to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions.
Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the impact of decreasing social acceptance of tobacco usage and tobacco regulation and control actions. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best talent.
Acquisitions or other events may adversely affect Altria’s credit rating, and Altria may not achieve its anticipated strategic or financial objectives of a transaction.
From time to time, Altria considers acquisitions, investments or dispositions and may engage in confidential negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings
over time, it is possible that completing a given acquisition, investment, disposition or the occurrence of other events could negatively impact our credit ratings or the outlook for those ratings as occurred following our investment in JUUL (although we continue to maintain investment grade ratings). Any such change in ratings or outlook may negatively affect the amount of credit available to us and also may increase our costs and adversely affect our earnings or our dividend rate. Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to acquire attractive businesses on favorable terms or that we will realize any of the anticipated benefits from an acquisition or an investment. Additionally, there can be no assurance that we will be able to dispose of our businesses or investments on favorable terms, which may result in a loss in Altria’s consolidated statements of earnings.
Disruption and uncertainty in the credit and capital markets could adversely affect Altria’s access to these markets, earnings and dividend rate.
Access to the credit and capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in these markets and any resulting adverse impact on credit availability, pricing, credit terms or credit rating may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.
Altria may be required to write down intangible assets, including goodwill, due to impairment, which could have a material adverse effect on our results of operations or financial position.
We periodically calculate the fair value of our reporting units and intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. Certain events also can trigger an immediate review of intangible assets. If an impairment is determined to exist in either situation, we will incur impairment losses, which could have a material adverse effect on our results of operations or financial position. In the fourth quarter of 2018, Altria incurred $209 million in goodwill and other intangible asset impairment charges related to Altria’s decision to refocus its innovative product efforts and the impairment of the Columbia Crest trademark. In the fourth quarter of 2019, in the wine segment, Altria determined that the goodwill of $74 million was fully impaired as the wine reporting unit was impacted by a slowing growth rate in the premium wine category and higher inventory levels. (SeeNote 4. Goodwill and Other Intangible Assets, net to the consolidated financial statements in Item 8 (“Note 4”) for further discussion).
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 subject to significant competition, including from many large, well-established domestic and international companies. Ste. Michelle’s business also 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 higher inventory levels and have an 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, federal, state and local governmental agencies 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 7.
Antitrust clearance required for the conversion of our non-voting JUUL shares into voting shares may not be obtained in a timely manner or at all.
Antitrust clearance required for the conversion of the non-voting JUUL shares held by us into voting shares may not be obtained in a timely manner or at all, and such clearance may be subject to unanticipated conditions. The Federal Trade Commission (“FTC”) may challenge the investment through litigation or administrative proceedings, potentially seeking a range of resolutions, such as modifications to the investment structure or economic terms, up to divestiture of the investment. In April 2019, Altria and JUUL received a request for additional information (commonly referred to as a “second request”) from the FTC as part of the antitrust review process. A second request extends the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), while the FTC conducts its review, until 30 days after the parties have substantially complied with the second request or as otherwise agreed to by the parties. As of October 30, 2019, Altria and JUUL certified substantial compliance with the second request. Based on the timing agreement among Altria, JUUL and the FTC staff and related extensions for the convenience of the parties, Altria believes the FTC will complete its review in the first half of 2020. While conducting its review, 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.
Unless and until antitrust clearance is obtained, including expiration or termination of the waiting period under the HSR Act, our JUUL shares will not have voting rights and we will not be entitled to certain other rights, including the right to appoint any directors to the JUUL
board of directors. Accordingly, failure to obtain antitrust clearance, including a successful litigation challenge by the FTC to the investment, would adversely affect us, including by substantially limiting our rights with respect to our investment in JUUL.
The expected benefits of the JUUL transaction may not materialize in the expected manner or timeframe or at all.
Regardless of whether antitrust clearance is obtained, the expected benefits of the JUUL transaction may not materialize in the expected manner or timeframe or at all, including due to the risks encountered by JUUL in its business, such as operational risks and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity due to underage use of e-vapor products and other factors; unanticipated impacts on JUUL’s relationships with employees, customers, suppliers and other third parties; potential disruptions to JUUL’s management or current or future plans and operations; or domestic or international litigation developments, investigations, or otherwise. As discussed in Note 19, JUUL and Altria and/or its subsidiaries, including PM USA, are named as defendants in various individual and class action lawsuits. JUUL also is named in a significant number of additional individual and class action lawsuits to which neither Altria nor its subsidiaries is a party. See Tobacco Space - Business Environment in Item 7 for a discussion of certain FDA-related regulatory risks applicable to the e-vapor category, including the potential removal of certain e-vapor products from the market as a result of FDA enforcement action and the potential denial of new tobacco product applications for e-vapor products. Failure to realize the expected benefits of our JUUL investment could adversely affect the value of the investment.
As discussed in Note 7, in 2019, as part of the preparation of our financial statements for the periods ended September 30, 2019 and December 31, 2019, we performed valuations of our investment in JUUL. As a result, we determined that our investment in JUUL was impaired and recorded a total pre-tax impairment charge of $8.6 billion for the year ended December 31, 2019, reported as impairment of JUUL equity securities in our consolidated statements of earnings. Of this amount, Altria recorded pre-tax charges of $4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019. The third quarter impairment charge was due primarily to lower e-vapor sales volume assumptions in the U.S. and international markets and a delay in achieving operating margin performance, as compared to the assumptions at the time of the JUUL transaction. The fourth quarter impairment charge resulted substantially from increased discount rates applied to future cash flow projections, due to the increase in the number and type of legal cases pending against JUUL during the fourth quarter of 2019. While we believe the December 31, 2019 valuation of $4.2 billion is the appropriate current fair value of our investment, the risks identified in this paragraph, some of which are also further discussed in Note 19 and in Item 7. Tobacco Space - Business Environment, are ongoing with respect to the current fair value. If the fair value of our investment in JUUL continues to decrease, it could have a material adverse effect on Altria’s consolidated financial position or earnings.
Our investment in JUUL includes non-competition, standstill and transfer restrictions that prevent us from gaining control of JUUL. Furthermore, if we elect not to extend our non-competition obligations beyond December 20, 2024, we would lose certain of our governance, consent, preemptive and other rights with respect to our investment in JUUL.
The shares of JUUL we hold generally cannot be sold or otherwise transferred until December 20, 2024, subject to limited exceptions. We also generally agreed not to compete with JUUL in the e-vapor category until at least December 20, 2024, which may be extended at our election. If, however, JUUL is prohibited by federal law from selling e-vapor products in the U.S. for at least one year or if Altria’s carrying value of the JUUL investment is not more than 10% of its initial carrying value of $12.8 billion, we may compete with JUUL in the e-vapor category prior to December 20, 2024. In addition, following receipt of antitrust clearance, JUUL’s board of directors will include nine members, three of whom will be designated by Altria, including one independent designee. JUUL’s strategy and its material decisions are not and will not be controlled by us, and the terms of our agreements with JUUL mean that we are required to bear the risks associated with our investment in JUUL until at least December 20, 2024, subject to the exceptions mentioned above. Further, if we elect not to extend our non-competition obligations beyond that date, we would lose some or all of our board designation rights, preemptive rights, consent rights and other rights with respect to our investment in JUUL. Loss of these rights could adversely affect us by impairing our ability to influence JUUL.
Altria’s reported earnings from and carrying value of its equity investment in AB InBevABI and the dividends paid by AB InBevABI on shares owned by Altria Group, Inc. may be adversely affected by unfavorablevarious factors, including foreign currency exchange rates and other factors.ABI’s business results and stock price.
For purposes of financial reporting, the earnings from and carrying value of our equity investment in AB InBevABI are translated into U.S. dollars (“USD”) from various local currencies. In addition, AB InBevABI pays dividends in euros, which we convert into U.S. dollars.USD. During times of a strengthening U.S. dollarUSD against these currencies, our reported earnings from and carrying value of our equity investment in AB InBevABI will be reduced because these currencies will translate into fewer U.S. dollarsUSD and the dividends that we receive from AB InBevABI will convert into fewer U.S. dollars.USD.
Dividends and earnings from and carrying value of our equity investment in AB InBevABI are also subject to the risks encountered by AB InBevABI in its business. For example, in October 2018, ABI announced a 50% rebase in the dividends it pays to its shareholders, which has resulted in a reduction of cash dividends Altria receives from ABI. 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 AB InBevABI will successfully execute its business plans and strategies. Earnings from and carrying value of our equity investment in AB InBevABI are also subject to fluctuations in AB InBev’sABI’s stock price, for example through mark-to-market losses on AB InBev’sABI’s derivative financial instruments used to hedge certain share commitments.
We received a substantial portion of our consideration from the ABI Transaction in the form of restricted shares subject to a five-year lock-up. Furthermore, if our percentage ownership in AB InBevABI were to decrease below certain levels, we may be subject to additional tax liabilities, suffer a reduction in the number of directors that we can have appointed to the AB InBevABI Board of Directors and be unable to account for our investment under the equity method of accounting.
Upon completion of the ABI Transaction, we received a substantial portion of our consideration in the form of restricted shares that cannot be sold or transferred for a period of five years following the ABI Transaction, subject to limited exceptions. These transfer restrictions will require us to bear the risks associated with our investment in AB InBevABI for a five-year period that expires on October 10, 2021. Further, in the event that our ownership percentage in AB InBevABI were to decrease below certain levels, we may be subject to additional tax liabilities, the number of directors that we have the right to have appointed to the AB InBev BoardABI board of Directorsdirectors could be reduced from two to one or zero and our use of the equity method of accounting for our investment in AB InBevABI could be challenged.
OurThe tax treatment of the consideration Altria received in the ABI Transaction consideration may be challenged and the tax treatment of AB InBev dividendsthe ABI investment may not be as favorable as Altria Group, Inc. anticipates.
While we expect the equity consideration that we received from the ABI Transaction to qualify for tax-deferred treatment, we cannot provide any assurance that federal and state tax authorities will not challenge the expected tax treatment and, if they do, what the outcome of any such challenge will be. In addition, there is a risk that the tax treatment of the dividends Altria Group, Inc. expects to receive from AB InBevour investment in ABI may not be as favorable as we anticipate.
The expected benefits of the Cronos transaction may not materialize in the expected manner or timeframe or at all.
In March 2019, we acquired common shares representing a 45% equity interest in Cronos, a warrant to acquire common shares representing an additional 10% equity interest in Cronos and anti-dilution protections to purchase Cronos shares to maintain our ownership percentage. There can be no assurance that we will realize the expected benefits of the Cronos transaction, including due to the risks encountered by Cronos in its business, such as operational risks and legal and regulatory risks; unanticipated impacts on Cronos’s relationships with third parties, its management, or its current or future plans and operations due to the Cronos transaction or other factors; or domestic or international litigation developments, tax disputes, investigations, or otherwise. Further, a failure by Cronos or Altria Group, Inc. anticipates.to comply with applicable laws, including cannabis laws, could result in criminal, civil or tax liability for Altria. If the carrying value of our investment in Cronos 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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In 2017, Altria Client Services LLC purchased the previouslyAt December 31, 2019, ALCS owned one property and leased propertya second in Richmond, Virginia that servesVirginia. These properties serve as the headquarters facilityfacilities for Altria, Group, Inc., PM USA, USSTC, Middleton Nu Mark and certain other subsidiaries.
At December 31, 2017,2019, PM USA owned and operated a manufacturing sitefacility located in Richmond, Virginia (“Richmond Manufacturing Center”), that PM USA uses in the manufacturing of cigarettes. Portionscigarettes (smokeable products segment). PM USA leases portions of this facility are leased byto Middleton and USSTC for use in the manufacturing of cigars (smokeable products segment) and smokeless tobacco products, respectively.
At December 31, 2017, the smokeable products segment used five manufacturing and processing facilities, including the Richmond Manufacturing Center. In addition to the Richmond Manufacturing Center, PM USA owns and operates a cigarette tobacco processing facility located in the Richmond, Virginia area. Nat Sherman owns and operates a cigarette manufacturing facility in Greensboro, North Carolina. Middleton, in addition to the Richmond Manufacturing Center, operates two manufacturing and processing facilities - one, which it owns, in King of Prussia, Pennsylvania, and one, which it leases, in Limerick, Pennsylvania, that are used in the manufacturing and processing of cigars and pipe tobacco. In addition, PM USA ownsowned a research and technology center in Richmond, Virginia that is leased to an affiliate, Altria Client Services LLC.ALCS.
At December 31, 2017, in addition to the Richmond Manufacturing Center,2019, the smokeless products segment used five smokeless tobaccohad various manufacturing and processing facilities, located in Clarksville, Tennessee; Franklin Park, Illinois; Nashville, Tennessee; and two facilities in Hopkinsville, Kentucky, allthe most significant of which are located in in Nashville, Tennessee.
At December 31, 2019, the wine segment owned and operated by USSTC, with the exception of the facility leased by USSTC in Franklin Park, Illinois.
As disclosed in Note 4. Asset Impairment, Exit and Implementation Costs to the consolidated financial statements in Item 8 (“Note 4”), in October 2016, Altria Group, Inc. announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. Middleton is in the process of transferring its Limerick, Pennsylvania operations to the Richmond Manufacturing Center. USSTC is in the process of transferring its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. The consolidation is expected to be substantially completed by the end of the first quarter of 2018.
At December 31, 2017, the wine segment used 12various wine-making facilities - seven in Washington, four in California and one in Oregon. All of these facilities are owned and operated by Ste. Michelle, with the exception of a facility that is leased by Ste. Michelle in Washington. In addition, in order to support the production of its wines, the wine segment used vineyards in Washington, California and Oregon that are leased or owned by Ste. Michelle.Oregon.
The plants and properties owned or leased and operated by Altria Group, Inc. and its subsidiaries are maintained in good
condition and are believed to be suitable and adequate for present needs.
Item 3. Legal Proceedings.
The information required by this Item is included in Note 1819 and Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K. Altria Group, Inc.’sAltria’s consolidated financial statements and accompanying notes for the year ended December 31, 20172019 were filed on Form 8-K on February 1, 2018January 30, 2020 (such consolidated financial statements and accompanying notes are also included in Item 8). The following summarizes certain developments in Altria Group, Inc.’sAltria’s litigation since the filing of the Form 8-K.
Recent Developments
| |
| ▪ | Engle Progeny Trial Results: |
Smoking and Health Litigation
▪Engle Progeny Trial Results:
InGloger, Theis, in February 2018,2020, the Florida Second District Court of Appeal denied PM USA’s petition for review. In the first quarter of 2020, PM USA recorded a Miami-Dade Countypre-tax provision of approximately $17 million for the judgment plus interest and intends to pay this amount in the first quarter of 2020.
In Duignan, in February 2020, a Pinellas-County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds Tobacco Company (“R.J. Reynolds”) awarding $7.5approximately $3 million in compensatory damages. The jury also awarded plaintiff $5$12 million in punitive damages against each defendant. PM USA posted a bond in the amount of $2.5 million. Defendants filed variousintends to file post-trial motions, which remain pending, and appealed to the Florida Third District Court of Appeal.motions.
In WallaceFreeman, in February 2018, PM USA filed an appeal to2020, the Florida Fifth District Court of Appeal and posted a bond inplaintiff withdrew the amount of approximately $3 million.
In Allen, in February 2018,petition for review by the Florida Supreme Court deniedof the verdict in favor of PM USA’s petition to invoke the court’s discretionary jurisdiction. PM USA will record a pre-tax provision of approximately $10 million for the judgment plus interest in the first quarter of 2018.USA.
| |
| ▪ | Non- Engle Progeny Trial Results: |
In GorePrincipe, in February 2018, the Florida Fourth District Court of Appeal affirmed the judgment2020, a Miami-Dade county jury returned a verdict in favor of plaintiff withdrew the comparative fault reduction for the compensatory damages award and granted plaintiff leave to seek a new trial on punitive damages.against PM USA will record a pre-tax provision ofawarding approximately $1$11 million in compensatory damages. There was no claim for the judgment plus interest in the first quarter of 2018.punitive damages.
In Bryant, in February 2018, the trial court denied all post-trial motions and entered final judgment in favor of plaintiff.
Item 4. Mine Safety Disclosures.
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Performance Graph
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’sAltria’s common stock for the last five years with the cumulative total return for the same period of the S&P 500 Index, the S&P Food, Beverage and Tobacco Industry Group Total Return Index(1)and the Altria Group, Inc. Peer Group Group.(1)(2). The graph assumes the investment of $100 in common stock and each of the indices as of the market close on December 31, 20122014 and the reinvestment of all dividends on a quarterly basis.
| | | Date | | Altria Group, Inc. | | Altria Group, Inc. Peer Group | | S&P 500 | | Altria | | S&P Food, Beverage & Tobacco | | Altria Peer Group | | S&P 500 |
| December 2012 | | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
| |
| December 2013 | | $ | 128.56 |
| | $ | 124.66 |
| | $ | 132.37 |
| |
| December 2014 | | $ | 172.93 |
| | $ | 139.49 |
| | $ | 150.48 |
| | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
|
| December 2015 | | $ | 212.87 |
| | $ | 162.74 |
| | $ | 152.55 |
| | $ | 123.10 |
| | $ | 114.74 |
| | $ | 114.52 |
| | $ | 101.37 |
|
| December 2016 | | $ | 256.43 |
| | $ | 177.01 |
| | $ | 170.78 |
| | $ | 148.29 |
| | $ | 124.79 |
| | $ | 122.19 |
| | $ | 113.49 |
|
| December 2017 | | $ | 280.65 |
| | $ | 193.86 |
| | $ | 208.05 |
| | $ | 162.29 |
| | $ | 140.20 |
| | $ | 132.03 |
| | $ | 138.26 |
|
| December 2018 | | | $ | 118.33 |
| | $ | 119.28 |
| | $ | 125.88 |
| | $ | 132.19 |
|
| December 2019 | | | $ | 127.75 |
| | $ | 149.03 |
| | $ | 157.27 |
| | $ | 173.80 |
|
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1) To better align with comparable investment opportunities, Altria changed from the self-selected Altria Peer Group to the S&P Food, Beverage & Tobacco Industry Group Total Return Index for the year ended December 31, 2019. Both indices are presented, in accordance with SEC rules, which require that if a company selects a different index from that used in the immediately preceding fiscal year, the company’s stock performance must be compared against both the newly selected index and previous index in the year of change.
(2) In 2017,2019, the Altria Group, Inc. Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobaccoAltria’s operating companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-Palmolive Company, Conagra Brands, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Keurig Dr Pepper Inc., Kimberly-Clark Corporation, The Kraft Heinz Company, Molson Coors Brewing Company, Mondelēz International, Inc., and PepsiCo, Inc., Reynolds American Inc. and British American Tobacco p.l.c. headquartered in London, England.
Note - On July 2, 2015, Kraft Foods Group, Inc. merged with and into a wholly owned subsidiary of H.J. Heinz Holding Corporation, which was renamed The Kraft Heinz Company (KHC). On June 12, 2015, Reynolds American Inc. (RAI) acquired Lorillard, Inc. (LO). On November 9, 2016, ConAgra Foods, Inc. (CAG) spun off Lamb Weston Holdings, Inc. (LW) to its shareholders and then changed its name from ConAgra Foods, Inc. to Conagra Brands, Inc. (CAG). On July 24, 2017, British American Tobacco p.l.c. (BTI) acquired RAI. For 2017, Altria Group, Inc. Peer Group total shareholder return calculation includes RAI through July 24, 2017 and BTI American Depository Receipts for the remainder of the year.
Market and Dividend Information
The principal stock exchange on which Altria Group, Inc.’sAltria’s common stock (par value $0.33 1/3 per share) is listed is the New York Stock Exchange.Exchange under the trading symbol “MO”. At February 13, 2018,14, 2020, there were approximately 64,00059,000 holders of record of Altria Group, Inc.’sAltria’s common stock.
The table below disclosesAltria expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted earnings per share. Future dividend payments remain subject to the high and low sales prices and cash dividends declared per share for Altria Group, Inc.’s common stock as reported by the New York Stock Exchange.discretion of Altria’s Board of Directors (the “Board of Directors”).
|
| | | | | | | | | | | |
| | Price Per Share | | Cash Dividends Declared Per Share |
| | High | | Low | |
| 2017: | | | | | |
| Fourth Quarter | $ | 74.38 |
| | $ | 62.32 |
| | $ | 0.66 |
|
| Third Quarter | $ | 74.98 |
| | $ | 60.01 |
| | $ | 0.66 |
|
| Second Quarter | $ | 77.79 |
| | $ | 69.79 |
| | $ | 0.61 |
|
| First Quarter | $ | 76.55 |
| | $ | 67.25 |
| | $ | 0.61 |
|
| 2016: | | | | | |
| Fourth Quarter | $ | 68.03 |
| | $ | 60.82 |
| | $ | 0.61 |
|
| Third Quarter | $ | 70.15 |
| | $ | 62.46 |
| | $ | 0.61 |
|
| Second Quarter | $ | 69.26 |
| | $ | 59.48 |
| | $ | 0.565 |
|
| First Quarter | $ | 63.15 |
| | $ | 56.15 |
| | $ | 0.565 |
|
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 20172019
In July 2015, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) authorized a $1.0 billion share repurchase program that it expanded to $3.0 billion in October 2016 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”). The July 2015 share repurchase program was completed in January 2018. In January 2018,2019, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2019 share repurchase program”), which Altria Group, Inc. expects to complete by the end of 2018. The timing of share2020. Share repurchases under this program dependsdepend upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.
Altria Group, Inc.’sAltria’s share repurchase activity for each of the three months in the period ended December 31, 2017,2019, 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 |
| October 1- October 31, 2017 | | 2,983,437 |
| | $ | 64.36 |
| | 2,982,371 |
| | $ | 383,869,878 |
|
| November 1- November 30, 2017 | | 2,798,299 |
| | $ | 64.98 |
| | 2,790,984 |
| | $ | 202,512,372 |
|
| December 1- December 31, 2017 | | 2,587,120 |
| | $ | 71.16 |
| | 2,587,120 |
| | $ | 18,411,335 |
|
| For the Quarter Ended December 31, 2017 | | 8,368,856 |
| | $ | 66.67 |
| | 8,360,475 |
| |
|
| |
(1)
| The total number of shares purchased includes (a) shares purchased under the July 2015 share repurchase program (which totaled 2,982,371 shares in October, 2,790,984 shares in November and 2,587,120 shares in December) and (b) shares withheld by Altria Group, Inc. in an amount equal to the statutory withholding taxes for holders who vested in stock-based awards (which totaled 1,066 shares in October and 7,315 shares in November). |
|
| | | | | | | | | | | | | | |
| 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 |
| October 1- October 31, 2019 | | 51 |
| | $ | 42.02 |
| | — |
| | $ | 1,000,000,000 |
|
| November 1- November 30, 2019 | | 5,085,064 |
| | $ | 48.03 |
| | 5,085,064 |
| | $ | 755,740,364 |
|
| December 1- December 31, 2019 | | 5,059,921 |
| | $ | 50.54 |
| | 5,059,892 |
| | $ | 500,000,064 |
|
| For the Quarter Ended December 31, 2019 | | 10,145,036 |
| | $ | 49.29 |
| | 10,144,956 |
| |
|
(1) The total number of shares purchased includes (a) shares purchased under the July 2019 share repurchase program (which totaled 5,085,064 shares in November and 5,059,892 shares in December) and (b) shares withheld by Altria in an amount equal to the statutory withholding taxes for holders who vested in stock-based awards (which totaled 51 shares in October and 29 shares in December).
Item 6. Selected Financial Data.
(in millions of dollars, except per share and employee data)
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Summary of Operations: | | | | | | | | | |
| Net revenues | $ | 25,576 |
| | $ | 25,744 |
| | $ | 25,434 |
| | $ | 24,522 |
| | $ | 24,466 |
|
| Cost of sales | 7,543 |
| | 7,746 |
| | 7,740 |
| | 7,785 |
| | 7,206 |
|
| Excise taxes on products | 6,082 |
| | 6,407 |
| | 6,580 |
| | 6,577 |
| | 6,803 |
|
| Operating income | 9,556 |
| | 8,762 |
| | 8,361 |
| | 7,620 |
| | 8,084 |
|
| Interest and other debt expense, net | 705 |
| | 747 |
| | 817 |
| | 808 |
| | 1,049 |
|
| Earnings from equity investment in AB InBev/SABMiller | 532 |
| | 795 |
| | 757 |
| | 1,006 |
| | 991 |
|
| Gain on AB InBev/SABMiller business combination | 445 |
| | 13,865 |
| | 5 |
| | — |
| | — |
|
Earnings before income taxes (2) | 9,828 |
| | 21,852 |
| | 8,078 |
| | 7,774 |
| | 6,942 |
|
Pre-tax profit margin (2) | 38.4 | % | | 84.9 | % | | 31.8 | % | | 31.7 | % | | 28.4 | % |
(Benefit) provision for income taxes (1)(2) | (399 | ) | | 7,608 |
| | 2,835 |
| | 2,704 |
| | 2,407 |
|
Net earnings (1)(2) | 10,227 |
| | 14,244 |
| | 5,243 |
| | 5,070 |
| | 4,535 |
|
Net earnings attributable to Altria Group, Inc. (1)(2) | 10,222 |
| | 14,239 |
| | 5,241 |
| | 5,070 |
| | 4,535 |
|
Basic and Diluted EPS — net earnings attributable to Altria Group, Inc. (1)(2) | 5.31 |
| | 7.28 |
| | 2.67 |
| | 2.56 |
| | 2.26 |
|
| Dividends declared per share | 2.54 |
| | 2.35 |
| | 2.17 |
| | 2.00 |
| | 1.84 |
|
| Weighted average shares (millions) — Basic and Diluted | 1,921 |
| | 1,952 |
| | 1,961 |
| | 1,978 |
| | 1,999 |
|
| Capital expenditures | 199 |
| | 189 |
| | 229 |
| | 163 |
| | 131 |
|
| Depreciation | 188 |
| | 183 |
| | 204 |
| | 188 |
| | 192 |
|
| Property, plant and equipment, net | 1,914 |
| | 1,958 |
| | 1,982 |
| | 1,983 |
| | 2,028 |
|
| Inventories | 2,225 |
| | 2,051 |
| | 2,031 |
| | 2,040 |
| | 1,879 |
|
Total assets (2) | 43,202 |
| | 45,932 |
| | 31,459 |
| | 33,440 |
| | 33,858 |
|
| Long-term debt | 13,030 |
| | 13,881 |
| | 12,843 |
| | 13,610 |
| | 13,907 |
|
| Total debt | 13,894 |
| | 13,881 |
| | 12,847 |
| | 14,610 |
| | 14,432 |
|
Total stockholders’ equity (1)(2) | 15,380 |
| | 12,773 |
| | 2,873 |
| | 3,010 |
| | 4,118 |
|
Common dividends declared as a % of Basic and Diluted EPS (1)(2) | 47.8 | % | | 32.3 | % | | 81.3 | % | | 78.1 | % | | 81.4 | % |
Book value per common share outstanding (1)(2) | 8.09 |
| | 6.57 |
| | 1.47 |
| | 1.53 |
| | 2.07 |
|
| Market price per common share — high/low | 77.79-60.01 |
| | 70.15-56.15 |
| | 61.74-47.31 |
| | 51.67-33.80 |
| | 38.58-31.85 |
|
| Closing price per common share at year end | 71.41 |
| | 67.62 |
| | 58.21 |
| | 49.27 |
| | 38.39 |
|
Price/earnings ratio at year end — Basic and Diluted (1)(2) | 13 |
| | 9 |
| | 22 |
| | 19 |
| | 17 |
|
| Number of common shares outstanding at year end (millions) | 1,901 |
| | 1,943 |
| | 1,960 |
| | 1,971 |
| | 1,993 |
|
| Approximate number of employees | 8,300 |
| | 8,300 |
| | 8,800 |
| | 9,000 |
| | 9,000 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions of dollars, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Net revenues | $ | 25,110 |
| | $ | 25,364 |
| | $ | 25,576 |
| | $ | 25,744 |
| | $ | 25,434 |
|
Net earnings (losses) (1)(2)(3) | (1,298 | ) | | 6,967 |
| | 10,227 |
| | 14,244 |
| | 5,243 |
|
Net earnings (losses) attributable to Altria (1)(2)(3) | (1,293 | ) | | 6,963 |
| | 10,222 |
| | 14,239 |
| | 5,241 |
|
Basic EPS — net earnings (losses) attributable to Altria (1)(2)(3)(4) | (0.70 | ) | | 3.69 |
| | 5.31 |
| | 7.28 |
| | 2.67 |
|
Diluted EPS — net earnings (losses) attributable to Altria (1)(2)(3)(4) | (0.70 | ) | | 3.68 |
| | 5.31 |
| | 7.28 |
| | 2.67 |
|
| Dividends declared per share | 3.28 |
| | 3.00 |
| | 2.54 |
| | 2.35 |
| | 2.17 |
|
Total assets (1)(3)(5)(6) | 49,271 |
| | 55,459 |
| | 43,034 |
| | 45,764 |
| | 31,296 |
|
Long-term debt (5) | 27,042 |
| | 11,898 |
| | 13,030 |
| | 13,881 |
| | 12,843 |
|
Total debt (5) | 28,042 |
| | 25,746 |
| | 13,894 |
| | 13,881 |
| | 12,847 |
|
(1)Certain 2019 amounts include the impact of Altria’s impairment of its JUUL equity securities and the loss on Cronos-related financial instruments. For further discussion, see Note 7.
(2) Certain 2019, 2018 and 2017 amounts include the impact of the enactment of the Tax Reform Act (as defined in Item 7).Act. For further discussion, see Note 1415. Income Taxes to the consolidated financial statements in Item 8.8 (“Note 15”).
(2)(3) Certain 2016 amounts include the impact of the gain on AB InBev/the ABI/SABMiller business combination. For further information,discussion, see Note 67.
(4) “EPS” is defined as basic and diluted earnings (losses) per share.
(5) Certain 2019 and 2018 amounts include the impact of Altria’s investments in JUUL and Cronos. For further discussion, see Note 7, Note 9.Short-Term Borrowings and Borrowing Arrangements to the consolidated financial statements in Item 8.8 (“Note 9”) and Note 10. Long-Term Debt to the consolidated financial statements in Item 8 (“Note 10”).
(6) Certain immaterial prior year amounts have been adjusted to conform with the current year’s presentation.
The Selected Financial Data should be read in conjunction with Item 7 and Item 8.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionaryrisk factors that may affect future results in Item 1A.
Description of the Company
At December 31, 2017,For a description of Altria, Group, Inc.’s wholly-owned subsidiaries included PM USA, which is engagedsee Item 1. Business, and Background in the manufacture and saleNote 1.
Table of cigarettes in the United States; Middleton, which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; Nat Sherman, which is engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; and UST, which through its wholly-owned subsidiaries, including USSTC and Ste. Michelle, is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark, a wholly-owned subsidiary that is engaged in the manufacture and sale of innovative tobacco products, and PMCC, a wholly-owned subsidiary that maintains a portfolio of finance assets, substantially all of which are leveraged leases. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas, such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria Group, Inc. and its subsidiaries. In addition, Nu Mark, Middleton and Nat Sherman use third-party arrangements in the manufacture of their products. Altria Group, Inc.’s 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. At December 31, 2017, Altria Group, Inc.’s principal wholly-owned subsidiaries 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. At September 30, 2016, Altria Group, Inc. had an approximate 27% ownership of SABMiller, which Altria Group, Inc. accounted for under the equity method of accounting. In October 2016, Legacy AB InBev completed the Transaction, and AB InBev became the holding company for the combined SABMiller and Legacy AB InBev businesses. Upon completion of the Transaction, Altria Group, Inc. had a 9.6% ownership of AB InBev based on AB InBev’s shares outstanding. Subsequently, Altria Group, Inc. purchased approximately 12 million ordinary shares of AB InBev, increasing Altria Group, Inc.’s ownership to approximately 10.2% at December 31, 2016. At December 31, 2017, AltriaContents
Group, Inc. had an approximate 10.2% ownership of AB InBev, which Altria Group, Inc. accounts for under the equity method of accounting using a one-quarter lag. As a result of the one-quarter lag and the timing of the completion of the Transaction, no earnings from Altria Group, Inc.’s equity investment in AB InBev were recorded for the year ended December 31, 2016. Altria Group, Inc. receives cash dividends on its interest in AB InBev if and when AB InBev pays such dividends. For further discussion, see Note 6. Investment in AB InBev/SABMiller to the consolidated financial statements in Item 8 (“Note 6”).
Altria Group, Inc.’sAltria’s reportable segments are smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in an all other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’sAltria’s innovative tobacco products businesses to Altria Group, Inc.’sAltria’s consolidated results.
In January 2017, Altria Group, Inc. acquired Nat Sherman, which joined PM USAEffective with the first quarter of 2020, Altria’s smokeless products segment will be renamed as the oral tobacco products segment. Altria’s oral tobacco products segment will include financial results, volume and Middleton as part of Altria Group, Inc.’s smokeable products segment.
Executive Summary
The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.
Consolidated Results of Operations
The changes in Altria Group, Inc.’sAltria’s net earnings (losses) and diluted earnings per share (“EPS”)EPS attributable to Altria Group, Inc. for the year ended December 31, 2017,2019, from the year ended December 31, 2016,2018, were due primarily to the following:
|
| | | | | | | |
| (in millions, except per share data) | Net Earnings |
| | Diluted EPS |
|
| For the year ended December 31, 2016 | $ | 14,239 |
| | $ | 7.28 |
|
| 2016 NPM Adjustment Items | 11 |
| | 0.01 |
|
| 2016 Asset impairment, exit, implementation and acquisition-related costs | 135 |
| | 0.07 |
|
| 2016 Tobacco and health litigation items | 71 |
| | 0.04 |
|
| 2016 SABMiller special items | (57 | ) | | (0.03 | ) |
| 2016 Loss on early extinguishment of debt | 541 |
| | 0.28 |
|
| 2016 Patent litigation settlement | 13 |
| | 0.01 |
|
| 2016 Gain on AB InBev/SABMiller business combination | (9,001 | ) | | (4.61 | ) |
| 2016 Tax items | (30 | ) | | (0.02 | ) |
| Subtotal 2016 special items | (8,317 | ) | | (4.25 | ) |
| 2017 NPM Adjustment Items | (2 | ) | | — |
|
| 2017 Asset impairment, exit, implementation and acquisition-related costs | (55 | ) | | (0.03 | ) |
| 2017 Tobacco and health litigation items | (50 | ) | | (0.03 | ) |
| 2017 AB InBev special items | (105 | ) | | (0.05 | ) |
| 2017 Gain on AB InBev/SABMiller business combination | 289 |
| | 0.15 |
|
| 2017 Settlement charge for lump sum pension payments | (49 | ) | | (0.03 | ) |
| 2017 Tax items | 3,674 |
| | 1.91 |
|
| Subtotal 2017 special items | 3,702 |
| | 1.92 |
|
| Fewer shares outstanding | — |
| | 0.05 |
|
| Change in tax rate | 124 |
| | 0.06 |
|
| Operations | 474 |
| | 0.25 |
|
| For the year ended December 31, 2017 | $ | 10,222 |
| | $ | 5.31 |
|
|
| | | | | | | |
| (in millions, except per share data) | Net Earnings |
| | Diluted EPS |
|
| For the year ended December 31, 2018 | $ | 6,963 |
| | $ | 3.68 |
|
| 2018 NPM Adjustment Items | (109 | ) | | (0.06 | ) |
| 2018 Asset impairment, exit, implementation and acquisition-related costs | 432 |
| | 0.23 |
|
| 2018 Tobacco and health litigation items | 98 |
| | 0.05 |
|
| 2018 ABI-related special items | (68 | ) | | (0.03 | ) |
| 2018 (Gain) loss on ABI/SABMiller business combination | 26 |
| | 0.01 |
|
| 2018 Tax items | 197 |
| | 0.11 |
|
| Subtotal 2018 special items | 576 |
| | 0.31 |
|
| 2019 Asset impairment, exit, implementation and acquisition-related costs | (269 | ) | | (0.15 | ) |
| 2019 Tobacco and health litigation items | (58 | ) | | (0.03 | ) |
| 2019 Impairment of JUUL equity securities | (8,600 | ) | | (4.60 | ) |
| 2019 ABI-related special items | 280 |
| | 0.15 |
|
| 2019 Cronos-related special items | (640 | ) | | (0.34 | ) |
| 2019 Tax items | 99 |
| | 0.05 |
|
| Subtotal 2019 special items | (9,188 | ) | | (4.92 | ) |
| Fewer shares outstanding | — |
| | 0.04 |
|
| Change in tax rate | (65 | ) | | (0.03 | ) |
| Operations | 421 |
| | 0.22 |
|
| For the year ended December 31, 2019 | $ | (1,293 | ) | | $ | (0.70 | ) |
See the discussion of events affecting the comparability of statement of earnings (losses) amounts in the Consolidated Operating Results section of the following Discussion and Analysis.
| |
| ▪ | Fewer Shares Outstanding: Fewer shares outstanding during 20172019 compared with 20162018 were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase program.programs. |
| |
| ▪ | Change in Tax Rate: The change in tax rate was driven primarily by no tax being due on thelower dividends Altria Group, Inc. received from AB InBev during 2017 as a result of a deemed repatriation tax associated with the Tax Reform Act (as defined below). For further discussion, see Note 14. Income Taxes to the consolidated financial statements in Item 8 (“Note 14”).ABI. |
| |
| ▪ | Operations: The increase of $474$421 million in operations shown in the table above was due primarily to the following: |
| |
| ▪ | higher income from the smokeable products and smokeless products segments.segments; |
| |
| ▪ | lower spending as a result of Altria’s decision in 2018 to refocus its innovative product efforts; and |
| |
| ▪ | higher earnings from Altria’s equity investment in ABI; |
partially offset by higher interest and other debt expense, net, due to debt incurred in connection with the Cronos and JUUL transactions.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.
20182020 Forecasted Results
In February 2018, Altria Group, Inc. forecastedforecasts that its 20182020 full-year adjusted diluted EPS growth rate is expected to be in the range of 15%4% to 19%7% over 2017its 2019 full-year adjusted diluted EPS. EPS base of $4.22, as shown in the table below. Altria’s 2020 guidance reflects increased investments related to PM USA’s
commercialization efforts for IQOS, Helix’s plans to manufacture and expand U.S. distribution of on! and one extra shipping day in the first quarter of 2020.
This forecasted growth rate excludes estimated per share charges in 2020 of $0.05 for tax expense, representing a partial reversal of the income and expense itemstax basis benefit recorded in 2017 attributable to the table below. Altria Group, Inc.’s 2018 guidance reflects investmentsdeemed repatriation tax related to Altria’s investment in focus areas for long-term growth, including innovative product development and launches, regulatory science, brand equity, retail fixtures and future retail concepts. ABI. For further discussion, see Note 15.
Altria Group, Inc. expects its 20182020 full-year adjusted effective tax rate will be in a range of approximately 23%23.5% to 24%24.5%.
|
| | | |
| 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 | (0.15 | ) |
| Cronos-related special items | 0.34 |
|
| Tax items | (0.05 | ) |
| 2019 Adjusted diluted EPS | $ | 4.22 |
|
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 that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, gain onasset impairment charges, acquisition-related costs, equity investment-related special items (including any changes in fair value for the Transaction, AB InBev/SABMiller special items,equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain non-participating 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 Disputes in Note 18)19).
Altria Group, Inc.’sAltria’s management cannot estimate on a forward-looking basis the impact of certain income and expense items, including those items noted in the preceding paragraph, on Altria Group, Inc.’sAltria’s reported diluted EPS and 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 Group, Inc. does not provide a corresponding United States generally accepted accounting principles (“U.S. GAAP”) measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast.
In addition, theThe factors described in Item 1A represent continuing risks to this forecast.
Expense (Income), Net Excluded from Adjusted Diluted EPS
|
| | | | | | | |
| | 2018 |
| | 2017 |
|
| Asset impairment, exit, implementation and acquisition-related costs | $ | — |
| | $ | 0.03 |
|
| Tobacco and health litigation items | — |
| | 0.03 |
|
| AB InBev special items | — |
| | 0.05 |
|
Gain on AB InBev/SABMiller business combination | — |
| | (0.15 | ) |
| Settlement charge for lump sum pension payments | — |
| | 0.03 |
|
| Tax items | 0.09 |
| (1) | (1.91 | ) |
| | $ | 0.09 |
| | $ | (1.92 | ) |
(1) Represents tax expense for a tax basis adjustment related to the deemed repatriation tax associated with the Tax Reform Act (as defined below). For further discussion, see Note 14.
While Altria Group, Inc. reports its financial results in accordance with U.S. GAAP. Altria Group, Inc.’sGAAP, its management reviews certain financial results, including diluted EPS, on an adjusted basis, which excludes certain income and expense items, including those items noted above. Altria Group, Inc.’sAltria’s management does not view any of these special items to be part of Altria Group, Inc.’sAltria’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 Group, Inc.’sAltria’s management also reviews income tax rates on an adjusted basis. Altria Group, Inc.’sAltria’s adjusted effective tax rate may exclude certain tax items from its reported effective tax rate. Altria Group, Inc.’sAltria’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 the CODMAltria’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 consistent with U.S. 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 U.S. GAAP.
Discussion and Analysis
Critical Accounting Policies and Estimates
Note 2 includes a summary of the significant accounting policies and methods used in the preparation of Altria Group, Inc.’sAltria’s consolidated financial statements. In most instances, Altria Group, Inc. must use an accounting policy or method because it is the only policy or method permitted under U.S. GAAP.
The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts
of net revenues and expenses during the reporting periods. If actual amounts are ultimately different from previous estimates, the revisions are included in Altria Group, Inc.’sAltria’s consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between Altria Group, Inc.’sAltria’s estimates and actual amounts in any year have not had a significant impact on its consolidated financial statements.
The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods, used in the preparation of Altria Group, Inc.’sAltria’s consolidated financial statements:
▪Consolidation: The consolidated financial statements include Altria, Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria Group, Inc.currently has the ability to exercise significant influence over the operating and financial policies of the investee are accounted for under the equity method of accounting. Equity investments in which Altria does not have the ability to exercise significant influence over the operating and financial policies of the investee are accounted for as an investment in an equity security. All intercompany transactions and balances have been eliminated.
Upon antitrust clearance, Altria expects to account for its equity method investment in JUUL using the fair value option. Under the fair value option, Altria’s consolidated statements of earnings (losses) will include any cash dividends from its investment in JUUL and any changes in the fair value of its investment, which will be calculated quarterly. Altria believes the fair value option provides quarterly transparency to investors as to the fair market value of Altria’s investment in JUUL, given the changes and volatility in the e-vapor category since Altria’s initial investment, as well as the lack of publicly available information regarding JUUL’s business or a market-derived valuation.
▪Revenue Recognition: Altria Group, Inc.’s Altria’s businesses recognizegenerate substantially all of their revenue from sales contracts with customers. While Altria’s businesses enter into separate sales contracts with each customer for each product type, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. All performance obligations are satisfied within one year; therefore, costs to obtain contracts are expensed as incurred and unsatisfied performance obligations are not disclosed. There is no financing component because Altria’s businesses expect, at contract inception, that the period between when Altria’s businesses transfer product to the customer and when the customer pays for that product will be one year or less.
Altria’s businesses define net revenues net of sales incentivesas revenues, which include excise taxes and sales returns, and including shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns (also referred to as returned goods) and sales incentives. Altria’s businesses exclude from the transaction price sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on cigarettes, cigars, smokeless tobacco or wine billed to customers).
Altria’s businesses recognize revenues from sales contracts with customers upon shipment of goods when control of such products is obtained by the customer. Altria’s businesses determine that a customer obtains control of the product upon shipment when title of such product and risk of loss passtransfers to customers. Payments received in advance of revenue recognition are deferred and recorded in other accrued liabilities until revenue is recognized. Altria Group, Inc.’sthe customer. Altria’s businesses also include excise taxes billed to customers in net revenues. Shippingaccount for shipping and handling costs as fulfillment costs and such amounts are classified as part of cost of sales.sales in Altria’s consolidated statements of earnings. Altria’s businesses record an allowance for returned goods, based principally on historical volume and return rates, which is included in other accrued liabilities on Altria’s consolidated balance sheets. Altria’s businesses record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction to revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period) based principally on historical volume, utilization and redemption rates. Expected payments for sales incentives are included in accrued marketing liabilities on Altria’s consolidated balance sheets.
Payment terms vary depending on product type. Altria’s businesses consider payments received in advance of product shipment as deferred revenue, which is included in other accrued liabilities on Altria’s consolidated balance sheets until revenue is recognized. PM USA receives payment in advance of a customer obtaining control of the product. USSTC receives substantially all payments within one business day of the customer obtaining control of the product. Ste. Michelle receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in receivables on Altria’s consolidated balance sheets.
For further discussion, see Note 3. Revenues from Contracts with Customers to the consolidated financial statements in Item 8.
▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Altria Group, Inc. depreciates property, plant and equipment and amortizes its definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. These analyses are affected by general economic conditions and projected growth rates. For purposes of recognition and measurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If Altria determines that an impairment is determined to exist,exists, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
Substantially all of the goodwill and indefinite-lived intangible assets recorded by Altria Group, Inc. at December 31, 2017 relate to the acquisitions of Nat Sherman in 2017, Green Smoke in 2014, UST in 2009 and Middleton in 2007. Altria Group, Inc. conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the implied fair value.value of a reporting unit, but is limited to the total
amount of goodwill allocated to a reporting unit. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the indefinite-lived intangible asset is considered impaired and is reduced to fair value. For substantially all goodwill and indefinite-lived intangible assets,value in the fair values are determined using discounted cash flows.period identified.
Goodwill by reporting unit and indefinite-lived intangible assets at December 31, 20172019 were as follows:
| | | (in millions) | Goodwill |
| | Indefinite-Lived Intangible Assets |
| Goodwill |
| | Indefinite-Lived Intangible Assets |
|
| Cigarettes | $ | 22 |
| | $ | 172 |
| $ | 22 |
| | $ | 2 |
|
| Smokeless products | 5,023 |
| | 8,801 |
| 5,078 |
| | 8,801 |
|
| Cigars | 77 |
| | 2,640 |
| 77 |
| | 2,640 |
|
| Wine | 74 |
| | 287 |
| — |
| | 233 |
|
| E-vapor | 111 |
| | 31 |
| |
| Other | — |
| | 194 |
| |
| Total | $ | 5,307 |
| | $ | 12,125 |
| $ | 5,177 |
| | $ | 11,676 |
|
During 2017, 2016 and 2015,2019, Altria Group, Inc. completed its quantitative annual impairment test of goodwill and indefinite-lived intangible assets performed as of October 1, 2019. Upon completion of this testing, Altria concluded that the goodwill of $74 million in the wine segment was fully impaired as the wine reporting unit was impacted by a slowing growth rate in the premium wine category and nohigher inventories. In performing the 2019 quantitative annual impairment charges resulted. Attest for the wine reporting unit, Altria concluded that the fair value of the unit as a whole was approximately 25% below its carrying value of approximately $1.5 billion after the impairment charge discussed above. Altria also evaluated all wine reporting unit assets, including current assets, property, plant and equipment, and other long-lived assets other than goodwill and concluded that these assets were fairly stated at December 31, 2017,2019.
The results of the 2019 quantitative annual impairment test of goodwill and indefinite-lived intangible assets for the other reporting units and trademarks are indicated below.
The estimated fair values of allthe cigarettes and cigars reporting units and the indefinite-lived intangible assets within thosethe cigars reporting unitsunit substantially exceeded their carrying values.
The estimated fair values of the smokeless products reporting unit and the indefinite-lived intangible assets within the reporting unit substantially exceeded their carrying values, except forwith the Columbia Crest exception of the Skoal trademark. At December 31, 2019, the estimated fair value of the Skoaltrademark exceeded its carrying value of $3.9 billion by approximately 18%. Skoal continues to be impacted by slowing category volumes and increased competitive activities due to higher pricing and adult tobacco consumer movement among tobacco products, including oral nicotine pouch products.
The estimated fair values of the indefinite-lived intangible assets within the wine reporting unit. Atunit substantially exceeded their carrying values, with the exception of the Patz & Hall trademark, which at December 31, 2017, the fair2019, exceeded its carrying value of the Columbia Crest trademark exceeded its book value of $54$30 million by approximately 9%11%. Results for Columbia Crest
During 2018, Altria’s quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in $54 million of impairment charges. During 2017, were negatively impacted by increased competitive activityAltria’s quantitative annual impairment test of goodwill and continued trade inventory reductions.indefinite-lived intangible assets resulted in no impairment charges.
In 2017,2019, Altria Group, Inc. used an income approach to estimate the fair values of substantially all of its reporting units and indefinite-lived intangible assets. The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. The weighted-average discount rate used in performing the valuations was approximately 9%10%.
In performing the 20172019 discounted cash flow analysis, Altria Group, Inc. made various judgments, estimates and assumptions, the most significant of which were volume, income, growth rates and discount rates. The analysis incorporated assumptions used in Altria Group, Inc.’sAltria’s long-term financial forecast, which is used by Altria Group, Inc.’s
Altria’s management to evaluate business and financial performance, including allocating resources and evaluating results relative to setting employee compensation targets. The assumptions incorporated the highest and best use of Altria Group, Inc.’sAltria’s indefinite-lived intangible assets and also included perpetual growth rates for periods beyond the long-term financial forecast. The perpetual growth rate used in performing all of the valuations was 2%. Fair value calculations are sensitive to changes in these estimates and assumptions, some of which relate to broader macroeconomic conditions outside of Altria Group, Inc.’sAltria’s control.
Although Altria Group, Inc.’sAltria’s discounted cash flow analysis is based on assumptions that are considered reasonable and based on the best available information at the time that the discounted cash flow analysis is developed, there is significant judgment used in determining future cash flows. The following factors have the most potential to impact expected future cash flows and, therefore, Altria Group, Inc.’sAltria’s impairment conclusions: general economic conditions; federal, state and local regulatory developments; category growth rates; consumer preferences; success of planned product expansions; competitive activity; and income and tobacco-related taxes. For further discussion of these factors, see Operating Results by Business Segment - Tobacco Space - Business Environment below.
While Altria Group, Inc.’sAltria’s management believes that the estimated fair values of each reporting unit and indefinite-lived intangible asset are reasonable, actual performance in the short-term or long-term could be significantly different from forecasted performance, which could result in impairment charges in future periods.
For additional information onfurther discussion of goodwill and other intangible assets, see Note 3.4.
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. The factors used to make this determination include the duration and magnitude of the fair value decline, the financial condition and near-term prospects of the investee, and Altria’s intent and ability to hold its investment until recovery.
The fair value of Altria’s equity investment in ABI at December 31, 2019 and 2018 was $16.1 billion (carrying value of $18.1 billion) and $13.1 billion (carrying value of $17.7 billion), respectively, which was less than its carrying value by 11% and 26%, respectively, at December 31, 2019 and 2018. During 2019, the fair value increased and at September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value by 4%. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value. At February 24, 2020, the fair value of Altria’s equity investment in ABI was approximately $13.7 billion (approximately 24% below its carrying value). Altria concluded that the decline in fair value of its investment in ABI below its carrying value is temporary and, therefore, no impairment was recorded. This conclusion is based on: (i) the fair value of Altria’s equity investment in ABI having historically exceeded its carrying value since October 2016, when Altria obtained its ownership interest in ABI, with the exception of certain periods starting in September 2018; (ii) the period of time that ABI shares have traded below Altria’s carrying value (although ABI shares began to trade below Altria’s carrying value in September 2018, the fair value of ABI’s shares have exceeded Altria’s carrying value as recently as September 30, 2019) and the magnitude by which the carrying value of Altria’s investment in ABI exceeds its fair value; (iii) ABI’s global platform (world’s largest brewer by volume and one of the world’s top five consumer products companies by revenue) with strong market positions in key markets, geographic diversification, experienced management team, financial condition, expected earnings and history of performance; and (iv) 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.
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.
The fair value of Altria’s acquired common shares in Cronos at December 31, 2019 was $1.2 billion compared with its carrying value of $1.0 billion. At February 24, 2020, the fair value of Altria’s acquired common shares in Cronos was approximately $1.0 billion (which approximates its carrying value). Altria will continue to assess the fair value of its acquired common shares in Cronos to determine if any decline in fair value below its carrying value is other than temporary.
For further discussion of Altria’s investments in ABI and Cronos, see Note 7.
Investment in JUUL
Altria reviews its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicates that Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value, and the impairment is recognized in the period identified.
As part of the preparation of its financial statements for the periods ended September 30, 2019 and December 31, 2019, Altria performed its respective qualitative assessments of impairment indicators for its investment in JUUL and determined that indicators of impairment existed.
At September 30, 2019, these indicators included recent significant adverse changes in both the e-vapor regulatory environment and the industry in which JUUL operates. At December 31, 2019, Altria determined that a significant increase in the number and types of legal cases pending against JUUL in the fourth quarter of 2019 and the expectation that this trend will continue resulted in an additional indicator of impairment.
Given the existence of these impairment indicators, Altria performed quantitative valuations of its investment in JUUL as of September 30, 2019 and December 31, 2019 and recorded total pre-tax charges of $8.6 billion for the year ended December 31, 2019, reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). Of this amount, Altria recorded pre-tax charges of $4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019. The third-quarter impairment charge was due primarily to lower e-vapor sales volume assumptions in the U.S. and international markets and a delay in achieving operating margin performance, as compared to the assumptions at the time of the JUUL Transaction. The fourth-quarter impairment charge results substantially from increased discount rates applied to future cash flow projections, due to the significant risk created by the increase in number and types of legal cases pending against JUUL in the fourth quarter. Although Altria has not made any assumptions or drawn any conclusions regarding the merits or likelihood of success of any of any of these cases, litigation is subject to uncertainty, and it is possible that there could be adverse developments in pending or future cases. While JUUL secured approximately $720 million in financing in early February 2020, the uncertainty has
increased the risk that JUUL may not be able to obtain financing and/or fund working capital requirements, financial obligations and international expansion plans.
Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows. Future cash flows in the U.S. were based on a range of scenarios that consider various potential regulatory and market outcomes.
In determining the fair value of its investment in JUUL, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. The discount rates used in performing the valuations ranged from 13.5% to 16.5% at September 30, 2019 and 19.5% to 23.0% at December 31, 2019. The perpetual growth rates used in performing the valuations ranged from (0.5%) to 0.0% at both September 30, 2019 and December 31, 2019. Additionally, Altria made significant assumptions regarding the likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy.
Although Altria’s discounted cash flow analyses were based on assumptions that Altria’s management considered reasonable and are based on the best available information at the time that the analyses were developed, there is significant judgment used in determining future cash flows. Altria believes the following factors have the most potential to impact projected future cash flows and, therefore, Altria’s valuation of JUUL: federal, state, local and international regulatory developments; JUUL’s execution of its strategy, including the success of its planned international market expansions; category growth rates; e-vapor-related litigation against JUUL; consumer preferences; and competitive activity.
While Altria’s management believes that the estimated fair value of its investment in JUUL as of December 31, 2019 is appropriate, JUUL’s actual performance in the short term or long term could be significantly different from forecasted performance due to changes in the factors noted above. One or more such changes could result in additional impairment charges to Altria’s investment in JUUL in future periods.
For additional information on Altria’s investment in JUUL and the impairment indicators that Altria considered, see Note 7. Investments in Equity Securities - Investment in JUUL.
▪Marketing Costs: Altria Group, Inc.’s Altria’s businesses promote their products with consumer incentives, trade promotions and consumer engagement programs,programs. These consumer incentivesincentive and trade promotions. Such programspromotion activities, which include discounts, coupons, rebates, in-store display incentives event marketing and volume-based incentives. Consumer engagement programsincentives, do not create a distinct deliverable and are, expensed as incurred. Consumer incentive and trade promotion activities aretherefore, recorded as a reduction of revenues, a portionrevenues. Consumer engagement program payments are made to third parties. Altria’s businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs in Altria’s consolidated statements of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period, based principally on historical volume, utilization and redemption rates.earnings (losses). For interim reporting purposes, Altria’s businesses charge consumer engagement programs and certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated sales and related expenses for the full year.
▪Contingencies: As discussed in Note 1819 and Item 3, legal proceedings covering a wide range of matters are pending or threatened in various United StatesU.S. and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees.indemnitees and Altria’s investees. In 1998, PM USA and certain other U.S. tobacco product manufacturers entered into the 1998 Master Settlement
Agreement (the “MSA”) with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other U.S. 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”). PM USA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. 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. Payments under the State Settlement Agreements and the FDA user fees are based on variable factors, such as volume, operating income, market share and inflation, depending on the subject payment. Altria Group, Inc.’sAltria’s subsidiaries account for the cost of the State Settlement Agreements and FDA user fees as a component of cost of sales. Altria Group, Inc.’sAltria’s subsidiaries recorded approximately $4.7$4.5 billion, $4.9$4.5 billion and $4.8$4.7 billion of charges to cost of sales for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, in connection with the State Settlement Agreements and FDA user fees.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed in Note 1819 and Item 3: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs in the consolidated statements of earnings.earnings (losses).
▪Employee Benefit Plans: As discussed in Note 16. Benefit Plans to the consolidated financial statements in Item 8 (“Note 16”), Altria Group, Inc. provides a range of benefits to itscertain employees and retired employees, including pension, postretirement health care and postemployment benefits. Altria Group, Inc. records annual amounts relating to these plans based on calculations specified
by U.S. GAAP, which include various actuarial assumptions as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates. Altria Group, Inc. reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. Any effect of the modifications is generally amortized over future periods.
Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. The gains or losses and prior service costs or credits recorded as components of other comprehensive earnings (losses) are subsequently amortized into net periodic benefit cost in future years.
At December 31, 2017, Altria Group, Inc.’sAltria’s discount rate assumptions for its pension and postretirement plans obligations decreased from 4.1% to 3.7%3.4% at December 31, 2017.2019 from 4.4% at December 31, 2018. Altria Group, Inc. presently anticipates an increasea decrease of approximately $30$36 million in its 20182020 pre-tax pension and postretirement expense versus 2017,2019, excluding amounts in each year related to termination, settlement and curtailment. This anticipated increasedecrease is due primarily to higher amortization of unrecognized losses,(i) lower interest costs, driven by the impact of lower discount rates,rates; and (ii) lower amortization due to a change in the recognition period, based on the culmination of pension population changes to primarily inactive status following the plan’s closure to new entrants in 2008. This decrease is partially offset by thelower expected return on postretirement assets resulting from the December 2017 $270 million contributiondue to fund certain postretirement benefits.a change in asset allocation strategy. Assuming no change to the shape of the yield curve, a 50 basis point decrease (increase) in Altria Group, Inc.’sAltria’s discount rates would increase Altria Group, Inc.��s(decrease) Altria’s pension and postretirement expense by approximately $53 million, and a 50 basis point increase in Altria Group, Inc.’s discount rates would decrease Altria Group, Inc.’s pension and postretirement expense by approximately $49$15 million. Similarly, a 50 basis point decrease (increase) in the expected return on plan assets would increase (decrease) Altria Group, Inc.’sAltria’s pension and postretirement expense by approximately $38$40 million. See
For additional information see Note 16 for a sensitivity discussion of17. Benefit Plans to the assumed health care cost trend rates.consolidated financial statements in Item 8 (“Note 17”).
▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions. Altria Group, Inc.’s deferredDeferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Altria Group, Inc. records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes in its consolidated statements of earnings.earnings (losses).
Altria Group, Inc. recognized income tax benefits and charges in the consolidated statements of earnings (losses) during 2017, 20162019, 2018 and 20152017 as a result of various tax events, including the impact of the Tax Reform Act (as defined below).
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The main provisions of the Tax Reform Act that impact Altria Group, Inc. include: (i) a reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system.
The transition to a modified territorial tax system required Altria Group, Inc. to record a deemed repatriation tax and an associated tax basis benefit in 2017. The tax impact related to the tax basis benefit and the deemed repatriation tax was based on provisional estimates as of January 18, 2018, substantially all of which were related to Altria Group, Inc.’sAltria’s share of AB InBev’sABI’s accumulated earnings and associated taxes. Altria Group, Inc. may be required to adjust these provisional estimates based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information to be received from AB InBev, including information regarding AB InBev’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. This additional guidance and information could result in increases or decreasesrecorded adjustments to the provisional estimates which may be significant in relation to these estimates. Altria Group, Inc. will record any such adjustmentsand completed the accounting for the repatriation tax in 2018.
For additional information on income taxes, see Note 14.15.
Consolidated Operating Results
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Net Revenues: | | | | | |
| Smokeable products | $ | 22,636 |
| | $ | 22,851 |
| | $ | 22,792 |
|
| Smokeless products | 2,155 |
| | 2,051 |
| | 1,879 |
|
| Wine | 698 |
| | 746 |
| | 692 |
|
| All other | 87 |
| | 96 |
| | 71 |
|
| Net revenues | $ | 25,576 |
| | $ | 25,744 |
| | $ | 25,434 |
|
| Excise Taxes on Products: | | | | | |
| Smokeable products | $ | 5,927 |
| | $ | 6,247 |
| | $ | 6,423 |
|
| Smokeless products | 132 |
| | 135 |
| | 133 |
|
| Wine | 23 |
| | 25 |
| | 24 |
|
| Excise taxes on products | $ | 6,082 |
| | $ | 6,407 |
| | $ | 6,580 |
|
| Operating Income: | | | | | |
| Operating companies income (loss): | | | | | |
| Smokeable products | $ | 8,408 |
| | $ | 7,768 |
| | $ | 7,569 |
|
| Smokeless products | 1,300 |
| | 1,177 |
| | 1,108 |
|
| Wine | 147 |
| | 164 |
| | 152 |
|
| All other | (51 | ) | | (99 | ) | | (169 | ) |
| Amortization of intangibles | (21 | ) | | (21 | ) | | (21 | ) |
| General corporate expenses | (227 | ) | | (222 | ) | | (237 | ) |
| Reductions of PMI tax-related receivable | — |
| | — |
| | (41 | ) |
| Corporate asset impairment and exit costs | — |
| | (5 | ) | | — |
|
| Operating income | $ | 9,556 |
| | $ | 8,762 |
| | $ | 8,361 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Net Revenues: | | | | | |
| Smokeable products | $ | 21,996 |
| | $ | 22,297 |
| | $ | 22,636 |
|
| Smokeless products | 2,367 |
| | 2,262 |
| | 2,155 |
|
| Wine | 689 |
| | 691 |
| | 698 |
|
| All other | 58 |
| | 114 |
| | 87 |
|
| Net revenues | $ | 25,110 |
| | $ | 25,364 |
| | $ | 25,576 |
|
| Excise Taxes on Products: | | | | | |
| Smokeable products | $ | 5,166 |
| | $ | 5,585 |
| | $ | 5,927 |
|
| Smokeless products | 127 |
| | 131 |
| | 132 |
|
| Wine | 21 |
| | 21 |
| | 23 |
|
| Excise taxes on products | $ | 5,314 |
| | $ | 5,737 |
| | $ | 6,082 |
|
| Operating Income: | | | | | |
| Operating companies income (loss): | | | | | |
| Smokeable products | $ | 9,009 |
| | $ | 8,408 |
| | $ | 8,426 |
|
| Smokeless products | 1,580 |
| | 1,431 |
| | 1,306 |
|
| Wine | (3 | ) | | 50 |
| | 146 |
|
| All other | (16 | ) | | (421 | ) | | (51 | ) |
| Amortization of intangibles | (44 | ) | | (38 | ) | | (21 | ) |
| General corporate expenses | (199 | ) | | (315 | ) | | (213 | ) |
| Corporate asset impairment and exit costs | (1 | ) | | — |
| | — |
|
| Operating income | $ | 10,326 |
| | $ | 9,115 |
| | $ | 9,593 |
|
As discussed further in Note 15,16. Segment Reporting to the consolidated financial statements in Item 8 (“Note 16”), the CODM reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.
The following events that occurred during 2017, 20162019, 2018 and 20152017 affected the comparability of statement of earnings (losses) amounts.
▪Gain on AB InBev/SABMiller Business Combination: Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax asset impairment, exit, implementation and acquisition-related costs were $331 million, $538 million and $89 million for the years ended December 31, 2019, 2018 and 2017, respectively.
For the year ended December 31, 2019, Altria recorded pre-tax acquisition-related costs of $115 million. These costs were primarily for the write-off of debt issuance costs related to Altria’s short-term borrowings under the term loan agreement that Altria entered into in connection with its investments in Cronos and JUUL.
In December 2018, Altria:
| |
| ▪ | refocused its innovative product efforts, which included Nu Mark’s discontinuation of production and distribution of alle-vapor products; |
| |
| ▪ | implemented a cost reduction program (which included workforce reductions and third-party spending reductions across the businesses) that delivered $600 million in annualized cost savings in 2019, exceeding the targeted $575 million annualized cost savings; and |
| |
| ▪ | incurred $85 million of pre-tax acquisition-related costs, consisting primarily of advisory fees, substantially all of which were recorded in marketing, administration and research costs. |
In October 2016, Altria announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. The consolidation was completed in the first quarter of 2018 and delivered Altria’s goal of approximately $50 million in annualized cost savings as of December 31, 2018.
In January 2016, Altria announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness. The initiative, which reduced spending on certain selling, general and administrative infrastructure and implemented a leaner organizational structure, delivered Altria’s goal of approximately $300 million in annualized productivity savings as of December 31, 2017.
For further discussion on asset impairment, exit and implementation costs, including a breakdown of these costs by segment, see Note 5. Asset Impairment, Exit and Implementation Costs to the consolidated financial statements in Item 8.
▪Gain/loss on ABI/SABMiller Business Combination: For the years ended December 31, 2018 and 2017, Altria Group, Inc. recorded a pre-tax gainsloss of $33 million and a pre-tax gain of $445 million, respectively, related to the planned completion of the remaining AB InBevABI’s divestitures of certain SABMiller assets and businesses in connection with Legacy AB InBevABI obtaining necessary regulatory clearances for the ABI Transaction. As a result of the Transaction, for the year ended December 31, 2016, Altria Group, Inc. recorded a pre-tax gain of approximately $13.9 billion. For further discussion, see Note 6.
▪NPM Adjustment Items:For the years ended December 31, 2017, 2016 and 2015, pre-tax expense (income) fora discussion of NPM Adjustment Items was recorded in Altria Group, Inc.’s consolidated statementsand a breakdown of earnings as follows:
|
| | | | | | | | | | | |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Smokeable products segment | $ | (5 | ) | | $ | 12 |
| | $ | (97 | ) |
| Interest and other debt expense, net | 9 |
| | 6 |
| | 13 |
|
| Total | $ | 4 |
| | $ | 18 |
| | $ | (84 | ) |
The amounts shown in the table above for the smokeable productsthese items by segment, were recorded by PM USA as increases (reductions) to costs of sales, which decreased (increased) operating companies income in the smokeable products segment. For further discussion, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18.19 and NPM Adjustment Items in Note 16, respectively.
▪Tobacco and Health Litigation Items: For the years ended December 31, 2017, 2016 and 2015, pre-tax charges related to certaina discussion of tobacco and health litigationslitigation items were recorded in Altria Group, Inc.’s consolidated statementsand a breakdown of earnings as follows:
|
| | | | | | | | | | | |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Smokeable products segment | $ | 72 |
| | $ | 88 |
| | $ | 127 |
|
| Interest and other debt expense, net | 8 |
| | 17 |
| | 23 |
|
| Total | $ | 80 |
| | $ | 105 |
| | $ | 150 |
|
During 2017, PM USA recorded pre-tax charges of $72 million in marketing, administration and researchthese costs and $8 million in interest costs, substantially all of which related to 11 Engle progeny cases.
During 2016, PM USA recorded pre-tax charges of $88 million in marketing, administration and research costs, primarily
related to settlements in the Miner and Aspinall cases totaling approximately $67 million and $16 million related to a judgment in the Merino case. In addition, during 2016, PM USA recorded $17 million in interest costs primarily related to Aspinall.
During 2015, PM USA recorded pre-tax charges in marketing, administration and research costs in seven state Engle progeny cases and Schwarz of $59 million and $25 million, respectively, as well as $14 million and $9 million, respectively, in interest costs related to these cases. Additionally in 2015, PM USA and certain other cigarette manufacturers reached an agreement to resolve approximately 415 pending federal Engle progeny cases. As a result of the agreement, PM USA recorded a pre-tax provision of approximately $43 million in marketing, administration and research costs.
For further discussion,by segment, see Note 18.19 and Tobacco and Health Litigation Items in Note 16, respectively.
▪Settlement for Lump Sum Pension Payments: In the third quarter of 2017, Altria Group, Inc. made a voluntary, limited-time offer to former employees with vested benefits in the Altria Retirement Plan who had not commenced receiving benefit payments and who met certain other conditions. Eligible participants were offered the opportunity to make a one-time election to receive their pension benefit as a single lump sum payment or as a monthly annuity. As a result of the 2017 lump sum distributions, a one-time pre-tax settlement charge of $81 million was recorded in 2017 in Altria Group, Inc.’snet periodic benefit (income) cost, excluding service cost, in Altria’s consolidated statement of earnings as follows:
|
| | | | | | | | | | | |
| For the Year Ended December 31, 2017 |
| (in millions) | Cost of Sales |
| | Marketing, Administration and Research Costs |
| | Total |
|
| Smokeable products | $ | 39 |
| | $ | 18 |
| | $ | 57 |
|
| Smokeless products | — |
| | 16 |
| | 16 |
|
| General corporate and other | — |
| | 8 |
| | 8 |
|
| Total | $ | 39 |
| | $ | 42 |
| | $ | 81 |
|
(losses). For further discussion, see Note 16.17.
▪Asset Impairment Exit, Implementation, Integration and Acquisition-Related Costs: Pre-tax asset impairment, exit, implementation, integration and acquisition-related costs forof JUUL Equity Securities: For the yearsyear ended December 31, 2017, 2016 and 2015 were $89 million, $206 million and $11 million, respectively.
In October 2016,2019, Altria Group, Inc. announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. The consolidation is expected to be substantially completed by the end of the first quarter of 2018 and deliver approximately $50 million in annualized cost savings by the end of 2018.
As a result of the consolidation, Altria Group, Inc. expects to record totalrecorded pre-tax impairment charges of approximately $150$8,600 million or $0.05 per share. Of this amount, during 2017, Altria Group, Inc.
reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). A full tax valuation allowance was recorded pre-tax charges of $78 million and, in 2016, recorded $71 million.
In January 2016, Altria Group, Inc. announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness. The initiative, which reduces spending on certain selling, general and administrative infrastructure and implements a leaner organizational structure, delivered Altria Group, Inc.’s goal of approximately $300 million in annualized productivity savings as of December 31, 2017. As a result of the initiative, during 2016, Altria Group, Inc. incurred total pre-tax restructuring charges of $132 million. Total pre-tax charges related2019 attributable to the initiative have been completed.
For further discussion on assettax benefit associated with the impairment exit and implementation costs, including a breakdown of these costs by segment, see Note 4.
▪Loss on Early Extinguishment of Debt: During 2016 and 2015, Altria Group, Inc. completed debt tender offers to purchase for cash certain of its senior unsecured notes in aggregate principal amounts of $0.9 billion and $0.8 billion, respectively.
As a result of these debt tender offers, pre-tax losses on early extinguishment of debt were recorded as follows:
|
| | | | | | | | |
| (in millions) | | 2016 |
| | 2015 |
|
| Premiums and fees | | $ | 809 |
| | $ | 226 |
|
| Write-off of unamortized debt discounts and debt issuance costs | | 14 |
| | 2 |
|
| Total | | $ | 823 |
| | $ | 228 |
|
charges. For further discussion, see Note 9. Long-Term Debt to the consolidated financial statements in Item 8 (“7 and Note 9”).15.
▪AB InBev/SABMillerABI-Related Special Items: Altria Group, Inc.’sAltria’s earnings from its equity investment in AB InBevABI for the year ended December 31, 2019 included net pre-tax income of $354 million, consisting primarily of a gain related to the completion in September 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited, and Altria’s share of ABI’s mark-to-market gains on ABI’s derivative financial instruments used to hedge certain share commitments.
Altria’s earnings from its equity investment in ABI for the year ended December 31, 2018 included net pre-tax income of $85 million, consisting primarily of Altria’s share of ABI’s estimated effect of the Tax Reform Act and gains related to ABI’s merger and acquisition activities, partially offset by Altria’s share of ABI’s mark-to-market losses on ABI’s derivative financial instruments used to hedge certain share commitments.
Altria’s earnings from its equity investment in ABI for the year ended December 31, 2017 included net pre-tax charges of $160 million, consisting primarily of Altria Group, Inc.’sAltria’s share of AB InBev’sABI’s Brazilian tax item and Altria Group, Inc.’sAltria’s share of AB InBev’sABI’s mark-to-market losses on AB InBev’sABI’s derivative financial instruments used to hedge certain share commitments.
▪Cronos-Related Special Items: For the year ended December 31, 2019, Altria Group, Inc.’s earnings from its equity investmentrecorded net pre-tax losses of $928 million consisting of the following:
|
| | | |
| (in millions) | 2019 |
Loss on Cronos-related financial instruments(1) | $ | 1,442 |
|
Earnings from Equity Investments(2) | (514 | ) |
| Total Cronos-related special items - (Income) Expense | $ | 928 |
|
(1) Of this amount, $1,411 million represents the changes in SABMillerfair value related to 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 changes in fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.
For further discussion, see Note 7 and Note 8. Financial Instruments to the consolidated financial statements in Item 8.
▪Tax Items: Tax items for 2016the year ended December 31, 2019 included net pre-tax incometax benefits of $89$99 million, due primarily to tax benefits of $105 million for adjustments as a pre-tax non-cash gainresult of $309amended returns and tax benefits of $100 million reflecting Altria Group, Inc.’s sharefor the reversal of SABMiller’s increase to shareholders’ equity, resulting from the completion of the SABMiller, The Coca-Cola Company and Gutsche Family Investments transaction, combining bottling operations in Africa,tax accruals no longer required, partially offset by Altria Group, Inc.’s sharetax expense of SABMiller’s costs$84 million for a tax basis adjustment to Altria’s equity investment in ABI and $38 million for a valuation allowance on foreign tax credits not realizable.
Tax items for the year ended December 31, 2018 included tax expense of $188 million related to the TransactionTax Reform Act as follows: (i) tax expense of $140 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017; (ii) tax expense of $34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017; and asset impairment charges. Altria Group, Inc.’s earnings from its equity investment(iii) tax expense of $14 million for an adjustment to the provisional estimates for the repatriation tax recorded in SABMiller for 2015 included net pre-tax charges2017.
▪Tax Items:
Tax items for the year ended December 31, 2017 included net tax benefits of $3,367 million related to the Tax Reform Act recorded in the
fourth quarter of 2017 as follows: (i) a tax benefit of $3,017 million to re-measure Altria Group, Inc. and its consolidated subsidiaries’ net deferred tax liabilities based on the new U.S. federal statutory rate; and (ii) a net tax benefit of $763 million for a tax basis adjustment associated with the deemed repatriation tax, partially offset by tax expense of $413 million for the deemed repatriation tax. Additional tax items for 2017 included tax benefits for the release of a valuation allowance related to deferred income tax assets for foreign tax credit carryforwards; and tax benefits related primarily to the effective settlement in 2017 of the Internal Revenue Service (“IRS”) audit of Altria Group, Inc. and its consolidated subsidiaries’ 2010-2013 tax years (“IRS 2010-2013 Audit”), partially offset by tax expense for tax reserves related to the calculation of certain foreign tax credits. Tax items for 2016 primarily included the reversal of tax accruals no longer required. Tax items for 2015 primarily included the reversal of tax reserves and associated interest due primarily to the closure in August 2015 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years, partially offset by a reversal of foreign tax credits primarily associated with SABMiller dividends.
For further discussion, see Note 14.15.
20172019 Compared with 2016
The following discussion compares consolidated operating results for the year ended December 31, 2017 with the year ended December 31, 2016.2018
Net revenues, which include excise taxes billed to customers, decreased $168$254 million (0.7%(1.0%), due primarily to lower net revenues in the smokeable products and wine segments,segment, partially offset by higher net revenues in the smokeless products segment.
Cost of sales decreased $203$288 million (2.6%(3.9%), due primarily to lower shipment volume in the smokeable products segment and lower costs as a result of Altria’s decision in 2018 to refocus its innovative product efforts, partially offset by favorable NPM Adjustment Items in 2018 and higher per unit settlement costs.
Excise taxes on products decreased $423 million (7.4%), due primarily to lower smokeable products segment shipment volume, partially offset by higher per unit settlement charges.
Excise taxes on products decreased $325 million (5.1%), due primarily to lower smokeable products segment shipment volume.
Marketing, administration and research costs decreased $288$530 million (10.9%(19.2%), due primarily to lower spending as a result of the cost reduction program and Altria’s decision in 2018 to refocus its innovative product efforts, acquisition-related costs to effect the investment in the smokeable products segment.JUUL in 2018 and lower tobacco and health litigation items.
Operating income increased $794$1,211 million (9.1%(13.3%), due primarily to higher operating results from the smokeable and smokeless products segments (which included lower spending as a result of the cost reduction program) and lower spending as a result of Altria’s decision in 2018 to refocus its innovative product efforts (which included lower asset impairment, exit and exitimplementation costs). and acquisition-related costs to effect the investment in JUUL in 2018.
Interest and other debt expense, net, increased $615 million (92.5%), due primarily to higher interest costs and debt issuance costs for borrowings associated with the Cronos and JUUL transactions.
Earnings from Altria’s equity investments, which increased $835 million (93.8%), were positively impacted by special items related to Altria’s equity investments in Cronos and ABI.
Altria’s income tax rate increased 244.1 percentage points to 269.5%, due primarily to a valuation allowance on a deferred tax asset recorded in 2019 attributable to Altria’s impairment of its investment in JUUL equity securities. For further discussion, see Note 15.
Net losses attributable to Altria of $1,293 million as compared with 2018 net earnings attributable to Altria of $6,963 million changed by $8,256 million (100.0%+), due primarily to the 2019 impairment of JUUL equity securities, 2019 loss on Cronos-related financial instruments and higher interest and other debt expense, net, partially offset by higher operating income, higher earnings from Altria’s equity investments in Cronos and ABI and favorable tax items. Diluted and basic net losses per share attributable to Altria of $0.70, each decreased $42by 100.0%+, due to lower net earnings attributable to Altria, partially offset by fewer shares outstanding.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers, decreased $212 million (5.6%(0.8%), due primarily to lower interest costs on debtnet revenues in 2017 as a resultthe smokeable products segment, partially offset by higher net revenues in the smokeless products segment.
Cost of debt refinancing activitiessales decreased $158 million (2.1%), due primarily to lower shipment volume in 2016the smokeable products segment and higher interest incomeNPM Adjustment Items, partially offset by higher costs in the smokeable products segment and higher implementation costs.
Excise taxes on products decreased $345 million (5.7%), due primarily to lower smokeable products segment shipment volume.
Marketing, administration and research costs increased $418 million (17.9%), due primarily to higher interest ratescosts in 2017.the smokeable products segment and the wine segment, acquisition-related costs to effect the investment in JUUL and higher investment spending in the innovative tobacco products businesses.
Operating income decreased $478 million (5.0%), due primarily to lower operating results from the innovative tobacco products businesses (which included asset impairment, exit and implementation costs) and wine segment, and acquisition-related costs to effect the investment in JUUL, partially offset by higher operating results from the smokeless products segment.
Earnings from Altria Group, Inc.’sAltria’s equity investment in AB InBev/SABMiller,ABI, which decreased $263increased $358 million (33.1%(67.3%), were negativelypositively impacted by AB InBev/SABMillerABI special items.
Altria Group, Inc.’sAltria’s effective income tax rate decreased 38.9increased 29.5 percentage points to an effective income tax benefitprovision rate of 4.1%25.4%, substantially all of which iswas due to the Tax Reform Act. For further discussion, see Note 14.15.
Net earnings attributable to Altria Group, Inc. of $10,222$6,963 million decreased $4,017$3,259 million (28.2%(31.9%), due primarily to a lower gain on the Transaction in 2017 and lower earnings from Altria Group, Inc.’s equity investment in AB InBev/SABMiller, partially offset by a lowerhigher effective income tax rate, lower operating income and a loss2017 gain on early extinguishment of debtthe ABI Transaction, partially offset by higher earnings from Altria’s equity investment in 2016ABI. Basic and higher operating income. Diluted and basicdiluted EPS attributable to Altria Group, Inc. of $5.31, each$3.69 and $3.68, respectively, decreased by 27.1%30.5% and 30.7%, respectively, due to lower net earnings attributable to Altria, Group, Inc., partially offset by fewer shares outstanding.
2016 Compared with 2015
The following discussion compares consolidated operating results for the year ended December 31, 2016 with the year ended December 31, 2015.
Net revenues, which include excise taxes billed to customers, increased $310 million (1.2%), due primarily to higher net revenues in the smokeless products, smokeable products and wine segments.
Cost of sales was essentially unchanged as higher per unit settlement charges and NPM Adjustment Items in 2015 were offset by lower shipment volume and lower pension and benefit costs in the smokeable products segment.
Excise taxes on products decreased $173 million (2.6%), due primarily to lower smokeable products shipment volume.
Marketing, administration and research costs decreased $58 million (2.1%), due primarily to lower costs in the smokeable products segment (which included lower tobacco and health litigation items), partially offset by higher costs in the smokeless products segment.
Operating income increased $401 million (4.8%), due primarily to higher operating results from the smokeable products and smokeless products segments (which included asset impairment, exit and implementation costs in connection with the facilities consolidation and productivity initiative in 2016), lower investment spending in the innovative tobacco products businesses, a reduction of a PMI tax-related receivable in 2015 and higher operating results from the financial services business.
Interest and other debt expense, net, decreased $70 million (8.6%), due primarily to lower interest costs on debt as a result of a debt maturity in 2015 and debt tender offers in 2016 and 2015.
Earnings from Altria Group, Inc.’s equity investment in SABMiller, which increased $38 million (5.0%), were positively impacted by SABMiller special items, mostly offset by three fewer months of SABMiller’s earnings in 2016 versus 2015, as a result of the timing of the completion of the Transaction.
Net earnings attributable to Altria Group, Inc. of $14,239 million increased $8,998 million (171.7%), due primarily to the gain on the Transaction, higher operating income and lower interest and other debt expense, partially offset by a higher loss on early extinguishment of debt. Diluted and basic EPS attributable to Altria Group, Inc. of $7.28, each increased by
172.7% due to higher net earnings attributable to Altria Group, Inc. and fewer shares outstanding.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The United StatesU.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 ourAltria’s tobacco subsidiaries and ourinvestees 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 18,19, Item 1A and Item 3, include:
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| ▪ | pending and threatened litigation and bonding requirements; |
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| ▪ | the requirement to issue “corrective statements” in various media in connection with the federal government’s lawsuit; |
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▪ | restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”),FSPTCA, and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the U.S. Food and Drug Administration (“FDA”);FDA; |
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| ▪ | actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements; |
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| ▪ | bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers; |
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| ▪ | other federal, state and local government actions, including: |
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| ▪ | increases inrestrictions on the minimum age to purchasesale of certain tobacco products, above the current federal minimum age of 18; |
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▪ | restrictions on the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors (such as menthol) and the sale of tobacco products in certain package sizes; |
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| ▪ | additional restrictions on the advertising and promotion of tobacco products; |
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| ▪ | other actual and proposed tobacco product legislation and regulation; and |
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| ▪ | governmental investigations; |
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| ▪ | the diminishing prevalence of cigarette smoking and smoking; |
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| ▪ | increased efforts by tobacco control advocates and othersother private sector entities (including retail establishments) to further restrict the availability and use of tobacco use;products; |
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| ▪ | 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; |
conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower priced tobacco products;
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| ▪ | the highly competitive nature of the tobacco categories in which ourAltria’s tobacco subsidiaries operate, including competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation; |
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| ▪ | illicit trade in tobacco products; and |
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| ▪ | potential adverse changes in tobacco leaf and other raw material prices, availability and quality.quality of tobacco, other raw materials and components. |
In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences pose challenges for Altria Group, Inc.’sAltria’s tobacco subsidiaries. OurAltria’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch betweenamong tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products.products and oral nicotine pouches. In fact, a growing number of adult smokers are converting from cigarettes to exclusive use of non-combustible tobacco product alternatives. The e-vapor category grew rapidly from 2012 through early 2015 offhas experienced significant growth in recent years, and the number of adults who exclusively use e-vapor products also has increased which, along with growth in oral nicotine pouches, has negatively impacted consumption levels and sales volume of cigarettes and smokeless tobacco.(1) Continued growth in the e-vapor category may be negatively impacted by legislative and regulatory activities discussed below. Based on the accelerated adult smoker movement across categories and the federal government raising the legal age 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 volume for 2020 to decline by 4% - 6%. Due to the expected continued volatility across tobacco categories, Altria is no longer providing a small base, but then slowed. The growth trend resumed in 2017. Nu Mark believesmulti-year forecast for U.S. cigarette industry volume decline. Altria and its tobacco subsidiaries believe the categoryinnovative tobacco product categories will continue to be dynamic as adult tobacco consumers explore a variety of tobacco product options.options and as the regulatory environment for these innovative tobacco products evolves.
___________________________
(1) “Smokeless tobacco,” as used in this section of this Annual Report on Form 10-K, refers to smokeless tobacco products first regulated by the FDA in 2009. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
Altria Group, Inc. 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 United StatesU.S. through innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties). See the discussions regarding new product technologies, adjacency growth strategy and evolving consumer preferences in Item1A for certain risks associated with the foregoing discussion.
We have provided additional detail on the following topics below:
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▪ | FSPTCA and FDA Regulation; |
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▪ | International Treaty on Tobacco Control; |
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▪ | State Settlement Agreements; |
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▪ | Other Federal, State and Local Regulation and Activity; |
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▪ | Illicit Trade in Tobacco Products; |
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▪ | Price, Availability and Quality of Agricultural Products; and |
FSPTCA and FDA Regulation
▪The Regulatory Framework: The FSPTCA expressly establishes certain 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 disclosures of related information; and (3) enforce the FSPTCA and related regulations. The FSPTCA went into effect in 2009 forapplies to cigarettes, cigarette tobacco and smokeless tobacco products, and in Augustas of 2016, for
all other tobacco products, including cigars, e-vapor products, pipe tobacco and oral tobacco-derived nicotine products (“Other Tobacco Products”).Products. See FDA Regulatory Actions - Deeming Regulations below.
Among other measures, the FSPTCA or its implementing regulations:
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| ▪ | imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail; |
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| ▪ | bans descriptors such as “light,” “mild” or “low” or similar descriptors when used as descriptors of modified risk unless expressly authorized by the FDA; |
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| ▪ | requires extensive product disclosures to the FDA and may require public disclosures; |
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| ▪ | prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization; |
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| ▪ | 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; |
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| ▪ | changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size 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 products;products (see FDA Regulatory Actions - Graphic Warnings below); |
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| ▪ | 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 (e.g., related to the use of menthol in cigarettes, nicotine yields and other constituents or ingredients) 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); |
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| ▪ | 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 |
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| ▪ | 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, new and modified tobacco products, requiring FDA review to beginand authorization before marketing a new product or continue marketing a 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 after August 8, 2016, are subjectedsubject 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”Provisional Products”) for which a manufacturer submitted substantial equivalence reports, that the FDA determinesmay determine that such products are not “substantially equivalent” to products commercially marketed as of February 15, 2007,2007. 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, that the FDA determines are not “substantially equivalent” to products commercially marketed as of February 15, 2007, or rejectsreject 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-marketedcurrently 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, or a manufacturer being unable to obtain the ingredients with the required specifications, 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 new comprehensive plan for tobacco and nicotine regulation that will serve as the FDA’s multi-year regulatory road map (the “July 2017 Comprehensive Plan”). The FDA has stated its belief that this approach willdesigned to strike an appropriatea 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. 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 July 2017 Comprehensive PlanFDA’s comprehensive plan include the following:
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| ▪ | 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; |
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| ▪ | taking actions to restrict youth access to e-vapor products; |
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| ▪ | establishing content requirements for “new tobacco product” and “modified risk tobacco product” applications; |
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| ▪ | reconsidering the FDA review processes of substantial equivalence reports for Provisional Products and establishing review processes for e-vapor new product applications; and |
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| ▪ | revisiting the timelines (previously extended by the FDA) to submit applications for Other Tobacco Products. |
▪the FDA’s planned issuance of advance notices of proposed rulemaking (“ANPRM”) seeking comments for potential future regulations establishing product standards for (i) nicotine in combustible cigarettes, (ii) flavors in tobacco products and (iii) e-vapor products (see See FDA Regulatory Actions - Product Standards below); below for further discussion.
▪the FDA’s planned extension of the timelines to submit applications for Other Tobacco Products that were on the market as of August 8, 2016, which the FDA extended in August 2017 (see FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways below);
▪the FDA’s reconsideration of whether its current plan, which is to review all “provisional” products pending in the substantial equivalence queue, is an effective use of its resources and, if not, whether it should continue to pursue its current approach to these reviews (see FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways below). As previously noted, a “provisional” product refers to cigarettes, cigarette tobacco and smokeless tobacco products modified or first commercially available after February 15, 2007 and before March 22, 2011; and
▪the FDA’s planned issuance of foundational regulations identifying the information the FDA expects to be included in substantial equivalence reports and applications for “new tobacco products” and “modified risk tobacco products.” The FDA also plans to finalize guidance on how it intends to review new product applications for e-vapor products.
▪Implementation Timing, Rulemaking and Guidance: The implementation of the FSPTCA began in 2009 for cigarettes, cigarette tobacco and smokeless tobacco products and in August 2016 for Other Tobacco Products and will continue over time. 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. From time to time, the FDA issues guidance, that also generally involves public comment, which may be issued in draft or final form.
Altria Group, Inc.’sform, and generally involves public comment. Altria’s tobacco subsidiaries participate actively in processes established by the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA proposals and participation in public hearings and engagement sessions.
The 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 the United States 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 ourthe ability of Altria’s tobacco subsidiaries’ abilitysubsidiaries and investees to market and sell regulated tobacco products in those states, territories and localities.
▪Impact on Our Business; Compliance Costs and User Fees: Regulations imposed and other regulatory actions taken by the FDA under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries in a number of different ways. For example, actions by the FDA could:
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| ▪ | impact the consumer acceptability of tobacco products; |
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| ▪ | delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products; |
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| ▪ | limit adult tobacco consumer choices; |
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| ▪ | impose restrictions on communications with adult tobacco consumers; |
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| ▪ | create a competitive advantage or disadvantage for certain tobacco companies; |
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| ▪ | impose additional manufacturing, labeling or packaging requirements; |
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| ▪ | impose additional restrictions at retail; |
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| ▪ | result in increased illicit trade in tobacco products; or |
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| ▪ | otherwise significantly increase the cost of doing business. |
The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could also have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.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 productor oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA regulation and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed 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 of the impact of the FDA user fee payments on Altria, Group, Inc., see Financial Review - Off-Balance Sheet Arrangements and Aggregate Contractual Obligations - 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 ourAltria’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 ourAltria’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 FDA could result in significant costs to the tobacco businesses of Altria Group, Inc. or otherwise have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.
▪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 (instituted as part of the FDA’s deeming regulations) apply certain provisions to certain “covered tobacco products,” which include cigars, e-vapor products containing nicotine or other tobacco derivatives, pipe tobacco and oral tobacco-derived nicotine products,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:
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| ▪ | bans the use of color and graphics in cigarette and smokeless tobacco product labeling and advertising; |
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| ▪ | prohibits the sale of cigarettes, smokeless tobacco and covered tobacco products to persons under the age of 18; |
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| ▪ | restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products; |
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| ▪ | requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions; |
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| ▪ | prohibits sampling of cigarettes and covered tobacco products and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities; |
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| ▪ | prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos; and |
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| ▪ | 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 thecertain limitations described below,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. PM USA and USSTC submitted comments on this ANPRM.
Since enactment in 2009, several lawsuits have been filed challenging various provisions of the FSPTCA, the Final Tobacco Marketing Rule and the deeming regulations, including their constitutionality and the scope of the FDA’s authority thereunder. One lawsuit challenged the constitutionality of an FDA regulation that restricts tobacco manufacturers from using the trade or brand name of a non-tobacco product on cigarettes or smokeless tobacco products. The case was dismissed and the FDA agreed not to enforce the current or any amended trade name rule until at least 180 days after rulemaking on the amended rule concludes. In November 2011, the FDA proposed an amended rule, but has not yet issued a final rule. PM USA and USSTC submitted comments on the proposed amended rule.
▪FDA Regulatory Actions
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| ▪ | Graphic Warnings:In June 2011, as required by the FSPTCA, the FDA issued its final rule to modify the required warnings that appear on cigarette packages and in cigarette advertisements. The FSPTCA requires the warnings to consist ofspecifies nine new textual warning statements to be accompanied by color graphics depicting the negative health consequences of smoking. 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. After a legal challenge to the rule, initiated by R.J. Reynolds, Lorillard and several other plaintiffs, in which plaintiffs prevailed both at the federal trial and appellate levels, the FDA decided not to seek further review of the U.S. Court of Appeals’ decision and announced its plans to propose a new graphic warnings rule in the future. |
In March 2019, in a case filed by the American Academy of Pediatrics and other plaintiffs, a federal district court in Massachusetts ordered the FDA to propose a new rule relating to graphic health warnings by August 2019, and to submit the final version of the rule for publication by March 2020. In May 2019, the FDA appealed the district court’s order to the United States Court of Appeals for the First Circuit. Currently, the appeal is stayed pending the FDA’s timely issuance of a final rule on graphic health warnings. In August 2019, the FDA proposed a new graphic warnings rule, which was subject to public comment. PM USA and Nat Sherman filed comments with the FDA. As of February 21, 2020, the FDA has not issued a final rule.
▪Substantial Equivalence and Other New Product Processes/Pathways
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| ▪ | Substantial EquivalenceCigarettes and Other New Product Processes/PathwaysSmokeless Tobacco Products:In general, in order to continue marketing provisional products,Provisional Products, manufacturers of such products were required to send to the FDA a reportreports demonstrating substantial equivalence by March 22, 2011 for the FDA to determine if such tobacco products are “substantially equivalent” to products commercially available as of February 15, 2007. AllMost cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are provisional products,Provisional Products, as are some of the products currently marketed by Nat Sherman. OurAltria’s subsidiaries submitted timely substantial equivalence reports for these provisional productsProvisional Products and can continue marketing these products unless the FDA makes a determination that a specific provisional productProvisional Product is not substantially equivalent. If the FDA ultimately makes such a determination, it could require the removal of such products from the marketplace. PM USA and USSTC also submitted substantial equivalence reports on products proposed to be marketed after March 22, 2011 (“non-provisional” products). While our 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 consistent with its guidance.
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require the removal of such products 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.
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 decisionssubstantial equivalence determinations on certain provisionalProvisional and non-provisional products, some of which were found to be substantially equivalent and othersNon-Provisional Products. The Provisional Products that were found to be not substantially equivalent. The provisional products (allequivalent (certain smokeless tobacco products) found to be not substantially equivalent had been discontinued for business reasons prior to the FDA’s determination;determinations; therefore, the determinations did not impact business results. In February 2018, USSTC filed a lawsuit challenging the FDA’s determination that certain of its non-provisional products are not substantially equivalent. There remain a significant number of substantial equivalence reports for products for
which the FDA has not announced decisions. At the request of the FDA, ourWhile Altria’s cigarette and smokeless tobacco subsidiaries have provided additional information with respect to certainbelieve all of these substantial equivalence reports. Wetheir current products meet the statutory requirements of the FSPTCA, they cannot predict whether, this additional informationwhen 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.
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| ▪ | 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 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 satisfactorysubject 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. If JUUL is unable to meet the May 12, 2020 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 May 12, 2020 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 has filed substantial equivalence reports with the FDA that cover nearly all of its remaining cigar product volume. Middleton continues to prepare and file substantial equivalence reports with the FDA and plans to submit all required filings by the May 12, 2020 filing deadline. Helix plans to file all required new tobacco product applications for its oral nicotine pouches by the May 12, 2020 filing deadline.
Failure of Other Tobacco Product manufacturers, including Middleton, Helix and JUUL, to meet the May 12, 2020 filing deadline for currently marketed products or to ultimately obtain market authorization from the FDA following proper submission, could result in substantial equivalence determinationsOther 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 coveredfrom 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, independent of the above-mentioned federal court order, the FDA adopted the May 12, 2020 filing deadline 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 a negative decision. See FDA Regulation - Underage Access and Use of Certain Tobacco Products below 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 those reports. 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.
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| ▪ | 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 February 21, 2020, no final rule has issued.
It is also 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 Group, Inc. and its tobacco subsidiaries.
In order to continue marketing Other Tobacco Products modified or introduced intosubsidiaries, including adversely affecting the market for the first time between February 15, 2007 and August 8, 2016, manufacturers originally were required to send to the FDA a report demonstrating substantial equivalence by May 8, 2018 or a new tobacco product application by November 8, 2018. In August 2017, the FDA extended the filing deadlines for combustible Other Tobacco Products, such as cigars and pipe tobacco, to August 8, 2021, and for non-combustible Other Tobacco Products, such as e-vapor and oral nicotine products, to August 8, 2022. The FDA also announced that it will permit manufacturers to continue to market such Other Tobacco Products until the FDA renders a decision on the applicable substantial equivalence report or new tobacco product application.
Becausevalue of the limited number of e-vapor products on the market as of February 15, 2007, Nu Mark may not be able to file substantial equivalence reports with the FDA on its e-vapor productsAltria’s investment in the market as of August 8, 2016. In such case, Nu Mark would have to file new tobacco product applications which, among other things, demonstrate that the marketing of the e-vapor products would be appropriate for the protection of the public health. It is uncertain how the FDA will interpret the requirements for obtaining a “new tobacco product marketing order,” although as noted above the FDA has indicated its intention to issue appropriate regulations to clarify the requirements.
Manufacturers intending to first introduce new and modified cigarette, cigarette tobacco and smokeless tobacco products into the market after March 22, 2011 or intending to first introduce new and modified Other Tobacco Products into the market after August 8, 2016, must submit substantial equivalence reports to the FDA and obtain “substantial equivalence orders” from the FDA or submit new tobacco product applications to the FDA and obtain “new tobacco product marketing orders” from the FDA before introducing the products into the market.
In March 2015, the FDA issued a document entitled “Guidance for Industry: Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked Questions” (“Substantial Equivalence
Guidance”). In that document, the FDA announced that (i) certain label changes and (ii) changes to the quantity of tobacco product(s) in a package would each require submission of newly required substantial equivalence reports and authorization from the FDA prior to marketing tobacco products with such changes, even when the tobacco product itself is not changed. Our cigarette and smokeless tobacco subsidiaries market various products that fall within the scope of the Substantial Equivalence Guidance.
In September 2015, after industry objections to the Substantial Equivalence Guidance, the FDA issued a second edition of the guidance (the “Revised SE Guidance”), which continued to require FDA pre-authorization for certain label changes and for product quantity changes. PM USA, USSTC and other tobacco product manufacturers initiated litigation challenging the Revised SE Guidance. In August 2016, the court held that a modification to an existing product’s label does not result in a “new tobacco product” and therefore such a label change does not give rise to the substantial equivalence review process. However, the court upheld the Revised SE Guidance in all other respects, including its treatment of product quantity changes as modifications that give rise to a new tobacco product requiring substantial equivalence review.JUUL.
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| ▪ | Deeming Regulations:Regulations:As discussed above under FSPTCA and FDA Regulation - The Regulatory Framework, in May 2016, the FDA issued final regulations for all Other Tobacco Products, imposing the FSPTCA regulatory framework on the tobaccocigar products manufactured, marketed and sold by Middleton and Nu Mark.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.Under the new regulations, for Other Tobacco Products modified or introduced into the market for the first time between February 15, 2007 and August 8, 2016, manufacturers must demonstrate substantial equivalence to a product on the market as of February 15, 2007 or obtain a “new tobacco marketing order” by certain specified dates to continue marketing those products. For further details, see FSPTCA and FDA Regulation - FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways above. |
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 Mayconnection with a 2016 Middleton filed a lawsuit in the U.S. District Court for the District of Columbia against the FDA challenging the application of the descriptor ban on the use of the word “mild” as it relates to the “Black & Mild” trademark. In July 2016,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 mindposition at some later date, Middleton would have the opportunity to make a submission to the FDA and ultimately, if necessary, to bring another lawsuit.
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| ▪ | Underage Access and Use of Certain Tobacco Products:The FDA announced in September 2018 that it is using its regulatory authority to address underage access and use of e-vapor products. Altria engaged with the FDA on this topic in 2018 before discontinuing its Nu Mark e-vapor business and also after acquiring a 35% economic interest in JUUL in December 2018. Altria reaffirmed to the FDA its ongoing and long-standing investment in underage tobacco use prevention efforts. 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 about youth e-vapor use. 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:
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| ▪ | cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and |
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| ▪ | all e-vapor products (in any format or flavor): |
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| ▪ | 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”); |
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| ▪ | that are targeted to minors and the marketing for which is likely to promote use of such products by minors; or |
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| ▪ | offered for sale after the May 12, 2020 filing deadline and for which the manufacturer has either not submitted a pre-market application or for which an application was timely filed but a negative decision on the application was issued by the FDA. |
The January 2020 Final Guidance became effective in early February 2020. 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.
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| ▪ | Potential Product Standards |
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| ▪ | Menthol in cigarettes: As required by the FSPTCA, the TPSAC submitted a report on the impact of the use of mentholNicotine in cigarettes on the public health and related recommendations topotentially other combustible tobacco products:In March 2018, the FDA in March 2011. It recommended, among other things, that the “[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States” and also noted that any ban on menthol cigarettes could lead toissued an increase in contraband cigarettes and other potential unintended consequences. Also in March 2011, PM USA submitted a report to the FDA outlining its position that regulatory actions related to the use of menthol cigarettes are not warranted based on available science and evidence and that any significant restrictions on the use of menthol in cigarettes would have unintended consequences detrimental to public health and society.
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In July 2013, the FDA released its preliminary scientific evaluation on menthol, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” At the same time, the FDA also issued an ANPRM requestingANPRM through which it sought comments on the FDA’s preliminary scientific evaluation and information that may inform potential regulatory actions regarding menthol in cigarettes. PM USA submitted comments to the FDA raising a number of concerns about the preliminary scientific evidence and unintended consequences.
The July 2017 Comprehensive Plan contemplates the issuance of an ANPRM seeking comments on the role that flavors including menthol in tobacco products play in attracting youth. No future action can be taken by the FDA to regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) until the completion of a full rulemaking process.
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▪ | NNN in Smokeless Tobacco: In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. USSTC believes that the FDA has not adequately considered whether the proposed standard is technically achievable and further believes it would have a significant negative impact on farmers and manufacturers. USSTC is advocating for withdrawal of the proposed rule. In March 2017, the FDA extended the comment period and acknowledged what it described as a “typographical error” in a formula it used in documentation supporting the proposed rule. USSTC submitted comments to the FDA in July 2017. If the proposed rule as presently proposed 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 Group, Inc. and USSTC.
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▪ | Nicotine and Flavors: As noted above, the FDA announced in the July 2017 Comprehensive Plan its intent to seek comments through an ANPRM on the following matters, among others:
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▪ | Nicotine in cigarettes: 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 intends to seeksought comments on the potential unintended consequences of such 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; andFDA. 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 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.
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| ▪ | Flavors in all tobacco products: Theproducts: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. 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 the FDA to 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. |
TheseIn the March 2019 Draft Guidance, noted above under FDA Regulatory Action - Underage Access and Use of Certain Tobacco Products,the FDA also announced its intention to prioritize 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 take enforcement action against such cigars before the May 12, 2020 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 processesregarding flavors in tobacco products and to the March 2019 Draft Guidance. Any proposed rules ultimately may ultimately lead to the FDA’s developmentFDA banning characterizing flavors in not only cigars, but in all tobacco products including oral nicotine pouches. If these regulations become final and are upheld in the courts, it could have a material adverse effect on the business, consolidated results of product standards for nicotineoperations, cash flows or financial position of Altria and flavors. The July 2017 Comprehensive Plan also includesits tobacco subsidiaries, including adversely affecting the FDA’s intent to develop e-vapor product standards to protect against known public health risks such as battery issues and concerns about children’s exposure to liquid nicotine.value of Altria’s investment in JUUL.
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| ▪ | 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. |
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| ▪ | Good Manufacturing 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. |
Excise Taxes
Tobacco products are subject to substantial excise taxes in the United States.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 United States.U.S.
Federal, state and local cigarette excise taxes have increased substantially over the past decade,two decades, far outpacing the rate of inflation. By way of example, in 2009, the federal excise tax (“FET”) on cigarettes increased from $0.39 per pack to approximately $1.01 per pack, in 2010, the New York state excise tax increased by $1.60 to $4.35 per pack, in October 2014, Philadelphia, Pennsylvania enacted a $2.00 per pack local cigarette excise tax and in November 2016, California passed a ballot measure to increase its cigarette excise tax by $2.00 per pack and its smokeless tobacco ad valorem excise tax from 27.30% to 65.08%, which went into effect on April 1, 2017 and July 1, 2017, respectively. Between the end of 1998 and February 23, 2018,21, 2020, the weighted-average state and certain local cigarette excise taxestax increased from $0.36 to $1.75$1.82 per pack. During
2017, Rhode Island, Delaware, Connecticut and Puerto Rico enacted legislation to increase their cigarette excise taxes. As of February 23, 2018,21, 2020, no state has increased its cigarette excise taxtaxes in 2018,2020, but various increases are under consideration or have been proposed.
Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our 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 other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of tobacco products of Altria Group, Inc.’s tobacco subsidiaries.
A majority of states currently tax smokeless tobacco products 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 Group, Inc.’sAltria’s subsidiaries support legislation to convert ad valorem taxes on smokeless tobacco 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 February 23, 2018,21, 2020, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for smokeless tobacco.
Tax increases are expected to continue to have an adverse impact on sales of cigarettes and smokeless tobacco 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 smokeless tobacco products of Altria’s tobacco subsidiaries.
An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As of February 21, 2020, 21 states, the District of Columbia, Puerto Rico and a number of cities and counties tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, nine states and the District of Columbia tax oral nicotine pouches.
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 February 23, 2018,21, 2020, 180 countries, as well as the European Community, have become parties to the FCTC. While the United StatesU.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 among other things: establish specific actions to prevent youth tobacco product use; restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship; initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke and the benefits of quitting; implement regulations imposing product testing, disclosure and performance standards; impose health warning requirements on packaging; adopt measures intended to combat tobacco product smuggling and counterfeit tobacco products, including tracking and tracing of tobacco products through the distribution chain; and restrict smoking in public places.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. In addition, the
Protocol to Eliminate Illicit Trade in Tobacco Products (the “Protocol”) was approved by the Conference of Parties to the FCTC in November 2012. It includes provisions related to the tracking and tracing of tobacco products through the distribution chain and numerous other provisions regarding the regulation of the manufacture, distribution and sale of tobacco products. The Protocol has not yet entered into force, but in any event will not apply to the United States until the Senate ratifies the FCTC and until the President signs, and the Senate ratifies, the Protocol. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States,U.S., either indirectly or as a result of the United StatesU.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 18,19, during 1997 and 1998, PM USA and other major domestic tobacco product 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, Group, Inc., seeFinancial Review - Debt Off-Balance Sheet Arrangements and LiquidityAggregate Contractual Obligations - Payments Under State Settlement Agreements and FDA Regulation below and Note 18.19. 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 are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place 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 United StatesU.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: Regulation: A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including e-vapor and other innovative tobacco products, such as e-vapor products), such as legislation that (1) prohibits the sale of certaintobacco product categories, such as e-vapor, and/or the sale of tobacco products with certain characterizing flavors, includingsuch as menthol cigarettes, (2) requires the disclosure of health information separate from or in addition to federally-mandatedfederally mandated health warnings and (3) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales). 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.
Whether other As of February 21, 2020, 23 states or localities will enact legislation in these areas, and the precise natureDistrict of Columbia have proposed legislation to ban flavors in one or more tobacco products, including e-vapor products, oral nicotine pouches and cigarettes and two states, Massachusetts and New Jersey, have passed such legislation. Additionally, Massachusetts has passed legislation if enacted, cannot be predicted. Altria Group, Inc.’scapping the amount of nicotine in e-vapor products. Similar legislation has been proposed in six other states.
In addition to legislation, some state governors have 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. Similar executive action and/or proposed legislation is being considered in 12 additional states. Restrictions on e-vapor products also have been instituted or proposed internationally. For example, in September 2019, India instituted a ban on e-vapor products.
Altria’s tobacco subsidiaries have challenged and will continue to challenge certain 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: An increasingAfter a number of states and localities have proposed and enacted legislation to increase the minimum age to purchase all tobacco products, aboveincluding e-vapor products, in December 2019, the current Federalfederal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. Although an increase in the minimum age to purchase tobacco products may have a negative impact on sales volume of 18. The following states have enacted such legislation: California (21), Hawaii (21), Alabama (19), Alaska (19), New Jersey (21), Utah (19), Oregon (21)our tobacco businesses, as discussed above under Underage Access and Maine (21). Various localities (such as New York City (21)Use of Certain Tobacco Products, Altria supported raising the minimum legal age to purchase all tobacco products to 21 at the federal and Chicago (21)) have taken similar actions.state levels, reflecting its longstanding commitment to combat underage tobacco use.
▪Health Effects of Tobacco Product Consumption and Exposure to Environmental Tobacco Smoke (“ETS”): Products, Including E-vapor 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. More recently, there have been public health advisories concerning vaping-related lung injuries and deaths. Altria Group, Inc. and its tobacco subsidiaries believe that the public should be guided by the messages of the United StatesU.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.
Most jurisdictions within the United StatesU.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 minors.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 regulation.
▪Other Legislation or Governmental 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, 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 (such as reduced cigarette ignition propensity standards);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 moist smokeless tobacco (“MST”) 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. 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 Group, Inc. and its tobacco subsidiaries.subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪Governmental Investigations: From time to time, Altria, Group, Inc.its subsidiaries and its subsidiariesinvestees are subject to governmental investigations on a range of matters. For example, (i) the FTC issued a Civil Investigative Demand to Altria Group, Inc.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 its subsidiaries cannot predict whether newthe hiring by JUUL of any current or former Altria director, executive or employee and (ii) the SEC has commenced an investigation relating to Altria’s disclosures and controls in connection with the JUUL investment. Additionally, JUUL is currently under investigation by various federal and state agencies, including the FDA and the FTC, and state attorneys general. Such investigations may be commenced.vary in scope but at least some appear to include JUUL’s marketing practices, particularly as such practices relate to youth.
Private Sector Activity
An increasing number of retailers, including national chains, have discontinued or are in the process of discontinuing 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, Group, Inc. and its tobacco subsidiaries.subsidiaries and investees. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the United StatesU.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 Group, Inc.’sAltria’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 Group, Inc.’sAltria’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;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 Group, Inc. and itsAltria’s tobacco subsidiaries devote significant resources to help prevent illicit trade in tobacco products and to protect legitimate trade channels. For example, Altria Group, Inc.’s tobacco subsidiaries are engaged in a number of initiatives to help prevent illicit trade in tobacco products, including communicationcommunicate with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforcement ofenforce wholesale and retail trade programs and policies that address illicit trade in tobacco products; engagement withproducts and, support of law enforcement and regulatory agencies; litigationwhen necessary, litigate to protect their trademarks; and support for a variety of federal and state legislative initiatives. Legislative initiatives to address illicit trade in tobacco products are designed to protect the legitimate channels of distribution, impose more stringent penalties for the violation of illegal trade laws and provide additional tools for law enforcement. Regulatory measures and related governmental actions to prevent the illicit manufacture and trade of tobacco products continue to evolve as the nature of illicit tobacco products evolves.trademarks.
Price, Availability and Quality of Agricultural ProductsTobacco, 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, economic trade sanctions, import duties and tariffs, geopolitical instability and production control programs may increase or decrease the cost or reduce the supply or quality of tobacco, and other agricultural productsraw materials or component parts used to manufacture our companies’ products. AsAny significant change in the price, quality or availability of tobacco, other raw materials or component parts used to manufacture our products could restrict our subsidiaries’ ability to continue marketing existing products or impact adult consumer product acceptability and adversely affect our subsidiaries’ profitability and businesses.
With respect to tobacco, as with other agricultureagricultural commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand, and crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could impact tobacco leaf prices and tobacco supply. Certain types of tobacco are only available in limited geographies, including geographies experiencing political instability, and loss of their availability could impact adult tobacco consumer product acceptability. Any significant change in the price, quality or availability of tobacco leaf or other agricultural products used to manufacture our products could restrictimpair our subsidiaries’ ability to continue marketing existing products or impact adult tobacco consumer product acceptability, adversely affecting our subsidiaries’ profitability and businesses.acceptability.
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
The following table summarizes operating results for the smokeable and smokeless products segments:
| | | | For the Years Ended December 31, | For the Years Ended December 31, | | |
| | Net Revenues | | Operating Companies Income | Net Revenues | | Operating Companies Income |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Smokeable products | $ | 22,636 |
| | $ | 22,851 |
| | $ | 22,792 |
| | $ | 8,408 |
| | $ | 7,768 |
| | $ | 7,569 |
| $ | 21,996 |
| | $ | 22,297 |
| | $ | 22,636 |
| | $ | 9,009 |
| | $ | 8,408 |
| | $ | 8,426 |
|
| Smokeless products | 2,155 |
| | 2,051 |
| | 1,879 |
| | 1,300 |
| | 1,177 |
| | 1,108 |
| 2,367 |
| | 2,262 |
| | 2,155 |
| | 1,580 |
| | 1,431 |
| | 1,306 |
|
| Total smokeable and smokeless products | $ | 24,791 |
| | $ | 24,902 |
| | $ | 24,671 |
| | $ | 9,708 |
| | $ | 8,945 |
| | $ | 8,677 |
| $ | 24,363 |
| | $ | 24,559 |
| | $ | 24,791 |
| | $ | 10,589 |
| | $ | 9,839 |
| | $ | 9,732 |
|
Smokeable Products Segment
The smokeable products segment’s operating companies income increased during 2017 due primarily to higher pricing and lower costs, partially offset by lower shipment volume. Shipment volume and retail share were negatively impacted in 2017 by a large cigarette excise tax increase in California.
The following table summarizes the smokeable products segment shipment volume performance:
| | | | Shipment Volume | Shipment Volume |
| | For the Years Ended December 31, | For the Years Ended December 31, |
| (sticks in millions) | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Cigarettes: | | | | | | | | | | |
| Marlboro | 99,974 |
| | 105,297 |
| | 108,113 |
| 88,473 |
| | 94,770 |
| | 99,974 |
|
| Other premium | 5,967 |
| | 6,382 |
| | 6,753 |
| 4,869 |
| | 5,552 |
| | 5,967 |
|
| Discount | 10,665 |
| | 11,251 |
| | 11,152 |
| 8,457 |
| | 9,469 |
| | 10,665 |
|
| Total cigarettes | 116,606 |
| | 122,930 |
| | 126,018 |
| 101,799 |
| | 109,791 |
| | 116,606 |
|
| Cigars: | | | | | | | | | | |
| Black & Mild | 1,527 |
| | 1,379 |
| | 1,295 |
| 1,641 |
| | 1,590 |
| | 1,527 |
|
| Other | 15 |
| | 24 |
| | 30 |
| 10 |
| | 11 |
| | 15 |
|
| Total cigars | 1,542 |
| | 1,403 |
| | 1,325 |
| 1,651 |
| | 1,601 |
| | 1,542 |
|
| Total smokeable products | 118,148 |
| | 124,333 |
| | 127,343 |
| 103,450 |
| | 111,392 |
| | 118,148 |
|
Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament and Benson & Hedgesand Nat’s; and Discount brands, which include L&M, Basicand Basic. 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 | Retail Share |
| | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Cigarettes: | | | | | | | | | | |
| Marlboro | 43.3 | % | | 43.7 | % | | 43.8 | % | 43.1 | % | | 43.2 | % | | 43.5 | % |
| Other premium | 2.7 |
| | 2.8 |
| | 2.8 |
| 2.4 |
| | 2.6 |
| | 2.7 |
|
| Discount | 4.7 |
| | 4.6 |
| | 4.5 |
| 4.2 |
| | 4.4 |
| | 4.6 |
|
| Total cigarettes | 50.7 | % | | 51.1 | % | | 51.1 | % | 49.7 | % | | 50.2 | % | | 50.8 | % |
Retail share results for cigarettes are based on data from IRI/Management Science Associate 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.
PM USA and Middleton executed the following pricing and promotional allowance actions during 20172019, 2018 and 2017:
▪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, 2016which had no list price change.
▪Effective February 24, 2019, PM USA increased the list price on Marlboro and 2015: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 September 23, 2018, PM USA increased the list price on Marlboro and L&M by $0.10 per pack and Parliament and Virginia Slims by $0.15 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.50 per pack.
▪Effective May 6, 2018, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.11 per five-pack.
▪Effective March 25, 2018, PM USA increased the list price on all of its cigarette brands by $0.09 per pack.
▪Effective September 24, 2017, PM USA increased the list price on all of its cigarette brands by $0.10 per pack.
▪Effective May 21, 2017, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.10 per five-pack.
▪Effective March 19, 2017, PM USA increased the list price on Parliament by $0.12 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.08 per pack.
In addition:
▪Effective November 13, 2016, PM USA reduced its wholesale promotional allowance on Marlboro by $0.02 per pack and L&M by $0.08 per pack. In addition, PM USA increased the list price on Marlboro by $0.06 per pack and on all of its other cigarette brands by $0.08 per pack, except for L&M, which had no list price change.
▪Effective May 15, 2016,February 16, 2020, PM USA increased the list price on all of its cigarette brands by $0.07$0.08 per pack.
▪Effective November 15, 2015, PM USAJanuary 12, 2020, Middleton increased thevarious list price onprices across substantially all of its cigarettecigar brands by $0.07resulting in a weighted-average increase of approximately $0.08 per pack.
five-pack.▪Effective May 17, 2015, PM USA increased the list price on all of its cigarette brands by $0.07 per pack.
The following discussion compares operating results for the smokeable products segment for the year ended December 31, 20172019 Compared with the year ended December 31, 2016.2018
Net revenues, which include excise taxes billed to customers, decreased $215$301 million (0.9%(1.3%), due primarily to lower shipment volume ($1,2731,780 million), partially offset by higher pricing ($1,497 million), which includes higherlower promotional investments.
Operating companies income increased $640$601 million (8.2%(7.1%), due primarily to higher pricing, ($1,023 million), which includes higherlower promotional investments, lower marketing, administration and researchlower costs ($251420 million), which includes 2016 state excise tax ballot initiative spending and lower product liability defense costs, and lower asset impairment and exit costs ($120 million). These factors were partially offset by lower shipment volume ($691996 million), 2018 NPM Adjustment Items ($145 million), and higher per unit settlement charges.
Marketing, administration and research costs for the smokeable products segment include PM USA’s cost of administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, including the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For further discussion on these matters, see Note 1819 and Item 3. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, product liability defense costs for PM USA were $151 million, $179 million $234 million and $228$179 million, respectively. The factors that have influenced past product liability defense costs are expected to continue to influence future costs. PM USA does not expect future product liability defense costs to be significantly different from product liability defense costs incurred in the last few years.
Total smokeable products segment’s reported shipment volume decreased 5.0%. The smokeable products segment’s reported domestic cigarettes shipment volume decreased 5.1%7.3%, driven primarily by the industry’s rate of decline, retail share declineslosses, trade inventory movements and other factors. When adjusted for trade inventory movements and other factors, the smokeable products segment’s domestic cigarettes shipment volume decreased by an estimated 7%. When adjusted for trade inventory movements and other factors, total domestic cigarette industry volumes declined by an estimated 5.5%.
Shipments of premium cigarettes accounted for 91.7% of smokeable products’ reported domestic cigarettes shipment volume for 2019, versus 91.4% for 2018.
Total cigarettes industry discount category retail share was 24.2% in 2019, an increase of 0.4 percentage points versus 2018.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers, decreased $339 million (1.5%), due primarily to lower shipment volume ($1,438 million), partially offset by higher pricing ($1,104 million), which includes lower promotional investments.
Operating companies income was essentially unchanged as lower shipment volume ($779 million), higher costs ($343 million, which includes investments in strategic initiatives, higher asset impairment, exit and implementation costs and higher tobacco and health litigation items) and higher per unit settlement charges, were offset by higher pricing ($1,092 million), which includes lower promotional investments, and higher NPM Adjustment Items ($140 million).
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 5.8%, driven primarily by the industry’s rate of decline, retail share losses and trade inventory movements, partially offset by one fewerextra shipping day. When adjusted for calendar differences,trade inventory
movements and one extra shipping day, the smokeable products segment’s domestic cigarettes shipment volume decreased an estimated 5%5.5%. Total domestic cigarette industry volumes declined by an estimated 4%4.5%.
Shipments of premium cigarettes accounted for 90.9%91.4% of smokeable products’ reported domestic cigarettes shipment volume for 2017,2018, versus 90.8%90.9% for 2016.2017.
The smokeable products segment’s reported cigars shipment volume increased 9.9%.
Marlboro’sPM USA stabilized Marlboro retail share declined 0.4in 2018 at a full-year share of 43.2 share points, driven primarily by competitive activity and the effect of the cigarette excise tax increase in California. PM USA’s total retailunchanged compared to Marlboro’s share decreased 0.4 share points.
The following discussion compares operating results for the smokeable products segment for the year ended December 31, 2016 with the year ended December 31, 2015.
Net revenues, which include excise taxes billed to customers, increased $59 million (0.3%), due primarily to higher pricing, which includes higher promotional investments, partially offset by lower shipment volume ($577 million).
Operating companies income increased $199 million (2.6%), due primarily to higher pricing, which includes higher promotional investments, lower costs (due primarily to lower pension and benefit costs) and lower tobacco and health litigation items ($39 million). These factors were partially offset by lower shipment volume ($298 million), higher per unit settlement charges, costs in connection with the productivity initiative and facilities consolidation ($134 million) and NPM Adjustment Items in 2015 ($97 million).
Total smokeable products segment’s reported shipment volume decreased 2.4%. The smokeable products segment’s reported and adjusted domestic cigarettes shipment volume decreased approximately 2.5% driven primarily by the industry’s rate of decline. Total cigarette industry volumes declined by an estimated 2.5%.
Shipments of premium cigarettes accounted for 90.8% of smokeable products’ reported domestic cigarettes shipment volume for 2016, versus 91.2% for 2015.
Middleton’s reported cigars shipment volume increased 5.9%, driven primarily by Black & Mild in the tipped cigars segment.
Marlboro’s retail share declined 0.1 share point in 2016. PM USA’s total retail share was unchanged in 2016.fourth quarter of 2017.
Smokeless Products Segment
During 2017, the smokeless products segment grew net revenues and operating companies income, primarily through higher pricing, partially offset by unfavorable mix and lower shipment volume.
During 2017, USSTC voluntarily recalled certain smokeless tobacco products manufactured at its Franklin Park, Illinois facility due to a product tampering incident (the “Recall”). USSTC has concluded the Recall and trade inventories have been replenished. USSTC estimates that the Recall reduced smokeless products segment operating companies income by approximately $60 million in 2017.
The following table summarizes smokeless products segment shipment volume performance:
| | | | Shipment Volume For the Years Ended December 31, | Shipment Volume For the Years Ended December 31, |
| (cans and packs in millions) | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Copenhagen | 531.6 |
| | 525.1 |
| | 474.7 |
| 522.2 |
| | 531.7 |
| | 531.6 |
|
| Skoal | 241.9 |
| | 260.9 |
| | 267.9 |
| 217.8 |
| | 231.1 |
| | 241.9 |
|
Copenhagen and Skoal | 773.5 |
| | 786.0 |
| | 742.6 |
| 740.0 |
| | 762.8 |
| | 773.5 |
|
| Other | 67.8 |
| | 67.5 |
| | 70.9 |
| 67.0 |
| | 69.8 |
| | 67.8 |
|
| Total smokeless products | 841.3 |
| | 853.5 |
| | 813.5 |
| 807.0 |
| | 832.6 |
| | 841.3 |
|
Smokeless products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume and oral nicotine pouch volume, which isare currently not material to the smokeless products segment. New types of smokeless products, as well as new packaging configurations of existing smokeless 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, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST.
The following table summarizes smokeless products segment retail share performance (excluding international and oral nicotine pouch volume):
| | | | Retail Share For the Years Ended December 31, | Retail Share For the Years Ended December 31, |
| | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Copenhagen | 33.7 | % | | 33.2 | % | | 31.0 | % | 34.8 | % | | 34.5 | % | | 34.0 | % |
| Skoal | 16.7 |
| | 18.1 |
| | 19.4 |
| 15.6 |
| | 16.2 |
| | 16.7 |
|
Copenhagen and Skoal | 50.4 |
| | 51.3 |
| | 50.4 |
| 50.4 |
| | 50.7 |
| | 50.7 |
|
| Other | 3.3 |
| | 3.4 |
| | 3.7 |
| 3.5 |
| | 3.3 |
| | 3.2 |
|
| Total smokeless products | 53.7 | % | | 54.7 | % | | 54.1 | % | 53.9 | % | | 54.0 | % | | 53.9 | % |
Retail share results for smokeless 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. Smokeless products is defined by IRI as moist smokeless and spit-free tobacco products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus, irrespective of the number of pouches in the pack, 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.
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.
USSTC executed the following pricing actions during 2017, 20162019, 2018 and 2015:2017:
▪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.
▪Effective November 20, 2018, USSTC increased the list price on its Skoal X-TRA products andselect Copenhagen products by $0.17 per can. USSTC also increased the list price on its Husky brand and on the balance of its Copenhagen and Skoal products by $0.07 per can. In addition, USSTC decreased the price on its Red Seal brand by $0.08 per can.
▪Effective June 5, 2018, USSTC increased the list price onall its brands by $0.07 per can.
▪Effective September 26, 2017, USSTC increased the list price on Copenhagen and Skoal popular price products by $0.12 per can. In addition, USSTC increased the list price on all its brands, except for Copenhagen and Skoal popular price products, by $0.07 per can.
▪Effective April 25, 2017, USSTC increased the list price on all its brands by $0.07 per can.
▪Effective December 6, 2016,In addition, effective February 18, 2020, USSTC increased the list price on Copenhagen and its Skoal popular priceX-TRA products by $0.12$0.56 per can. In addition, USSTC also increased the list price on all its Skoal Blend products by $0.16 cents per can and increased the list price on its Husky, Red Seal and Copenhagenbrands except for Copenhagenand the balance of its Skoal popular price products by $0.07 per can.
▪Effective May 10, 2016, USSTC increased the list price on all its brands by $0.07 per can.
▪Effective December 8, 2015, USSTC increased the list price on Copenhagen and Skoal popular price products by $0.12 per can. In addition, USSTC increased the list price
on all its brands, except for Copenhagen and Skoal popular price products, by $0.07 per can.
▪Effective May 5, 2015, USSTC increased the list price on all its brands by $0.07 per can.
The following discussion compares operating results for the smokeless products segment for the year ended December 31, 20172019 Compared with the year ended December 31, 2016.2018
Net revenues, which include excise taxes billed to customers, increased $104$105 million (5.1%(4.6%), due primarily to higher pricing ($168197 million), which includes lower promotional investments, partially offset by unfavorable mix and lower shipment volume ($2498 million).
Operating companies income increased $123$149 million (10.5%(10.4%), due primarily to higher pricing, ($168 million), which includes lower promotional investments, and lower manufacturing costs, partially offset by unfavorable mix, lower shipment volume ($18 million) and a settlement charge for lump sum pension payments ($1687 million).
USSTC’sThe smokeless products segment’s reported domestic shipment volume decreased 1.4%declined 3.1%, driven primarily by declines in Skoal. After adjustingthe industry’s rate of decline, calendar differences, retail share losses and other factors, partially offset by trade inventory movements. When adjusted for trade inventory movements and other factors, USSTC estimates that its domesticcalendar differences, the smokeless products segment’s domestic shipment volume declined approximately 2%an estimated 3%. USSTC estimates that the
The smokeless products category industry volume was essentially unchangeddeclined an estimated 1% over the six months ended December 31, 2017.2019.
Copenhagen’s 0.5 retail share point growth was offset by Skoal’s 1.4 retail share point loss, contributing to a combined retail share decline of 0.9 share points.
The following discussion compares operating results for the smokeless products segment for the year ended December 31, 20162018 Compared with the year ended December 31, 2015.2017
Net revenues, which include excise taxes billed to customers, increased $172$107 million (9.2%(5.0%), due primarily to higher shipment volumepricing ($111138 million) and higher pricing,, which includes higherlower promotional investments, partially offset by mix due to growth in popular price products.lower shipment volume.
Operating companies income increased $69$125 million (6.2%(9.6%), due primarily to higher shipment volumepricing ($98138 million) and higher pricing,, which includes higherlower promotional investments, and lower asset impairment, exit and implementation costs ($33 million), partially offset by costs in connection with the productivity initiative and facilities consolidation ($57 million), product mix, higher marketing, administration and research costslower shipment volume and higher manufacturing costs.costs (including investments in strategic investments).
The smokeless products segment’s reported domestic shipment volume increased 4.9%decreased 1.0%, driven primarily by Copenhagen, partially offset by declines in Skoal and Other portfolio brands. Copenhagen and Skoal’s combined reported domestic shipment volume increased 5.8%.
After adjustingthe industry’s rate of decline. When adjusted for trade inventory movements and other factors, USSTC estimates that its domestic smokeless products shipment volume grew approximately 5% for 2016. USSTC estimates thatcalendar differences, the smokeless products segment’s domestic shipment volume declined an estimated 1%.
The smokeless products category industry volume grew approximately 2.5%declined an estimated 1.5% over the six months ended December 31, 2016.
2018.Copenhagen and Skoal’s combined retail share increased 0.9 share points to 51.3%. Copenhagen’s retail shareincreased 2.2 share points and Skoal’s retail share declined 1.3 share points.
Total smokeless products retail share increased 0.6 share points to 54.7%.
Wine Segment
Business Environment
Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest 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, Torres and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. Key elements of Ste. Michelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products. 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. Evolving adult consumer preferences pose challenges to the wine category, which has seen slowing volume growth in the premium wine category and increases in inventory levels.
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 maycould have an adverse effect on Ste. Michelle’s wine business.
Operating Results
Ste. Michelle’s results for 2017 were negatively impacted by competitive activity, continued trade inventory reductions and slower premium wine category growth.
The following table summarizes operating results for the wine segment:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Net revenues | $ | 698 |
| | $ | 746 |
| | $ | 692 |
|
| Operating companies income | $ | 147 |
| | $ | 164 |
| | $ | 152 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Net revenues | $ | 689 |
| | $ | 691 |
| | $ | 698 |
|
| Operating companies income (loss) | $ | (3 | ) | | $ | 50 |
| | $ | 146 |
|
2019 Compared with 2018
33
The following discussion compares operating results for the wine segment forgoodwill ($74 million), higher costs and higher promotional investments, partially offset by the year ended December 31,2018 impairment of the Columbia Crest trademark ($54 million).
For 2019, Ste. Michelle’s reported wine shipment volume of 8,294 thousand cases increased 0.6%.
2018 Compared with 2017 with the year ended December 31, 2016.
Net revenues, which include excise taxes billed to customers, decreased $48$7 million (6.4%(1.0%), due primarily to lower shipment volume, partially offset by improvedfavorable premium mix.
Operating companies income decreased $17$96 million (10.4%(65.8%), due primarily to the impairment of the Columbia Crest trademark ($54 million), higher costs and lower shipment volume.volume, partially offset by favorable premium mix.
For 2017,2018, Ste. Michelle’s reported wine shipment volume of 8,5308,246 thousand cases decreased 8.6%3.3%.
The following discussion compares operating results for the wine segment for the year ended December 31, 2016 with the year ended December 31, 2015.
Net revenues, which include excise taxes billed to customers, increased $54 million (7.8%), due primarily to higher shipment volume. Operating companies income increased $12 million (7.9%), due primarily to higher shipment volume and improved premium mix, partially offset by higher costs.
For 2016, Ste. Michelle’s reported wine shipment volume of 9,333 thousand cases grew 5.3%, driven primarily by growth among its core premium brands.
Financial Review
Net Cash Provided byby/Used in Operating Activities
During 2017,2019, net cash provided by operating activities was $4.9$7.8 billion compared with $3.8$8.4 billion during 2016. This increase was due primarily to the following:
| |
▪ | income taxes paid on both the cash proceeds from the Transaction and gains from exercising derivative financial instruments associated with the Transaction in 2016; |
| |
▪ | higher operating companies income in the smokeable and smokeless products segments; |
| |
▪ | lower contributions to Altria Group, Inc.’s pension and postretirement plans in 2017; and |
| |
▪ | lower payments for tobacco and health litigation items in 2017; |
partially offset by:
| |
▪ | higher payments of settlement charges in 2017. |
During 2016, net cash provided by operating activities was $3.8 billion compared with $5.8 billion during 2015.2018. This decrease was due primarily to the following:
| |
| ▪ | income taxes paid on both the cash proceedslower payments of settlement charges in 2018; |
| |
| ▪ | lower dividends received from the Transaction and gains from exercising derivative financial instruments associated with the Transaction in 2016;ABI; and |
| |
| ▪ | voluntary contributions totaling $500 million to Altria Group, Inc.’s pension plans during 2016;higher payments of interest on long-term debt in 2019; |
partially offset by:
| |
| ▪ | higher cumulative dividends received from AB InBevlower costs as a result of the cost reduction program announced in December 2018, net of cash paid under this program in 2019; and SABMiller in 2016. |
| |
| ▪ | lower federal income tax payments in 2019. |
During 2018, net cash provided by operating activities was $8.4 billion compared with $4.9 billion during 2017. This increase was due primarily to lower payments of settlement charges and income taxes in 2018.
Altria Group, Inc. had a working capital deficit at December 31, 20172019 and 2016. Altria Group, Inc.’s2018. Altria’s management believes that itAltria has the ability to fund these working capital deficits with cash provided by operating activities and/or short-term borrowings under its commercial paper program as discussed in the Debt and Liquidity section below.borrowings through its access to credit and capital markets.
Net Cash Provided by/Used in Investing Activities
During 2017,2019, net cash used in investing activities was $2.4 billion compared with $13.0 billion during 2018. This decrease was due primarily to the following:
| |
| ▪ | Altria’s $12.8 billion investment in JUUL in 2018; |
partially offset by:
| |
| ▪ | Altria’s $1.9 billion investment in Cronos in 2019; and |
| |
| ▪ | Helix’s acquisition of the Burger Group in 2019. |
During 2018, net cash used in investing activities was $13.0 billion compared with $0.5 billion during 2017. This increase was due primarily to Altria’s $12.8 billion investment in JUUL in 2018.
Capital expenditures for 2019 increased 3.4% to $246 million. Capital expenditures for 2020 are expected to be in the range of $225 million to $275 million, and are expected to be funded from operating cash flows.
Net Cash Provided by/Used in Financing Activities
During 2019, net cash used in financing activities was $4.7 billion compared with net cash provided by investingfinancing activities of $3.7$4.7 billion during 2016.2018. This change was due primarily to the following:
| |
| ▪ | proceeds of $4.8$12.8 billion from the Transaction during 2016;short-term borrowings in 2018; |
| |
| ▪ | proceedsrepayments of $0.5$12.8 billion from exercising derivative financial instruments associated with the Transactionof short-term borrowings in 2019; |
| |
| ▪ | higher dividends paid during 2016;2019; and |
| |
| ▪ | higher acquisitionsrepayments of businesses and assetslong-term debt at maturity in 2017;2019; |
partially offset by:
| |
| ▪ | paymentproceeds of approximately $1.6$16.3 billion forfrom the purchaseissuance of ordinary shareslong-term senior unsecured notes during 2019; and |
| |
| ▪ | lower repurchases of AB InBevcommon stock during 2016.2019. |
During 2016,2018, net cash provided by investingfinancing activities was $3.7$4.7 billion compared with net cash used in investingfinancing activities of $15 million$7.8 billion during 2015.2017. This change was due primarily to the following:
| |
| ▪ | proceeds$12.8 billion of $4.8 billion from the Transaction during 2016;short-term borrowings used to finance Altria’s investment in JUUL in 2018; and |
| |
| ▪ | proceeds of $0.5 billion from exercising derivative financial instruments associated with the Transaction during 2016; |
partially offset by:
| |
▪ | payment of approximately $1.6 billion for the purchase of ordinary shares of AB InBev during 2016. |
Capital expenditures for 2017 increased 5.3% to $199 million, due primarily to the acquisition of the previously leased headquarters in Richmond, Virginia in 2017, partially offset by lower spending related to manufacturing. Capital expenditures for 2018 are expected to be in the range of $200 million to $250 million, and are expected to be funded from operating cash flows. The increase in expected capital expenditures in 2018 compared with 2017 is due primarily to spending related to manufacturing.
Net Cash Used in Financing Activities
During 2017, net cash used in financing activities was $7.8 billion compared with $5.3 billion during 2016. This increase was due to the following:
| |
▪ | debt issuance of $2.0 billion of senior unsecured notes during 2016 used in part to repurchase senior unsecured notes in connection with the 2016 debt tender offer; |
| |
▪ | higher repurchases of common stock during 2017; and |
| |
▪ | higher dividends paid during 2017; |
partially offset by:
| |
▪ | debt repayments of $0.9 billion and premiums and fees of $0.8 billion in connection with the debt tender offer during 2016. |
During 2016, net cash used in financing activities was $5.3 billion compared with $6.8 billion during 2015. This decrease was due primarily to the following:
| |
▪ | debt issuance of $2.0 billion of senior unsecured notes during 2016 used in part to repurchase senior unsecured notes in connection with the 2016 debt tender offer; and |
| |
▪ | $1.0 billion repayment of Altria Group, Inc. senior unsecured notes at scheduled maturity in 2015;2018; |
partially offset by:
| |
| ▪ | higher premiums, fees and repayments of debt in connection with debt tender offersdividends paid during 2016; |
| |
▪ | higher repurchases of common stock during 2016;2018; and |
| |
| ▪ | higher dividends paid during 2016.$0.9 billion repayment of Altria senior unsecured notes at scheduled maturity in 2018. |
Debt and Liquidity
Credit Ratings - Altria Group, Inc.’sAltria’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 Altria Group, Inc.’sAltria’s credit agreement is discussed below.in Note 9. See the discussion in Item 1A regarding the potential adverse impact of certain events on Altria Group, Inc.’sAltria’s credit ratings.
At December 31, 2017,2019, the credit ratings and outlook for Altria Group, Inc.’sAltria’s indebtedness by major credit rating agencies were:
|
| | | | | |
| | Short-term Debt | | Long-term Debt | | Outlook |
| Moody’s Investor Service, Inc. (“Moody’s”) | P-2 | | A3 | | StableNegative |
| Standard & Poor’s Ratings Services (“Standard & Poor’s”) | A-1A-2 | | A-BBB | | Stable |
Fitch Ratings Ltd. (“Fitch”)1 | F2 | | A-BBB | | Stable |
1 On April 3, 2017, Fitch raised the long-term debt credit rating for Altria Group, Inc. to A- from BBB+.
Credit Lines- From time to time, Altria Group, Inc. has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs.
At December 31, 2017, 20162019 and 2015,2018, Altria Group, Inc. had no short-term borrowings.borrowings under its commercial paper program.
In December 2018, Altria entered into a senior unsecured term loan agreement (the “Term Loan Agreement”) in connection with its investments in JUUL and Cronos. At December 31, 2018, Altria had aggregate short-term borrowings under the Term Loan Agreement of $12.8 billion at an interest rate of approximately 3.5%. Borrowings under the Term Loan Agreement were set to mature on December 19, 2019. In February 2019, Altria repaid all of the outstanding $12.8 billion of short-term borrowings under the Term Loan Agreement with net proceeds from the issuance of long-term senior unsecured notes. Upon such repayment, the Term Loan Agreement terminated in accordance with its terms. For further discussion, see the Debt section below.
At December 31, 2017,2019, Altria Group, Inc. had in place a senior unsecured 5-year revolving credit agreement (the “Credit Agreement”). The Credit Agreement, which is used for general corporate purposes, provides for borrowings up to an aggregate principal amount of $3.0 billionbillion. The Credit Agreement expires on August 1, 2023 and expires August 19, 2020.
Pricingincludes an option, subject to certain conditions, for interest and fees underAltria to extend the Credit Agreement may be modified in the event of a change in the rating offor two additional one-year periods. At December 31, 2019 and 2018, Altria Group, Inc.’s long-term senior unsecured debt. Interest rates onhad no borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”) plus a percentage based on the higher of the ratings of Altria Group, Inc.’s long-term senior unsecured debt from Moody’s and Standard & Poor’s. The applicable percentage based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, 2017 for borrowings under the Credit Agreement was 1.125%. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral.Agreement. At December 31, 2017,2019, credit available to Altria Group, Inc. under the Credit Agreement was $3.0 billion.
The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.’s commercial paper issuances. The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, 2017, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated2019, Altria was in accordancecompliance with its covenants associated with the Credit Agreement, were 1.3 to 1.0 and 14.8 to 1.0, respectively.Agreement. Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms “consolidated EBITDA,” “debt” and “consolidated interest expense,” as defined in the Credit Agreement, include certain adjustments. Exhibit 99.3 to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 sets forth the definitions of these terms as they appear in the Credit Agreement and is incorporated herein by reference.For further discussion, see Note 9.
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 19. 20. Condensed Consolidating Financial Informationto the consolidated financial statements in Item 8 (“Note 19”20”).
Financial Market Environment - Altria Group, Inc. believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria Group, Inc. continues to monitormonitors the credit quality of its bank group and is not aware of any potential
non-performing credit provider in that group. Altria Group, Inc. believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations. See Item
1A for certainthe risk factors associated with the foregoing discussion.
Tax Reform Act - As a result of the Tax Reform Act’s reductionfactor relating to disruption and uncertainty in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, Altria Group, Inc. expects increased liquidity. Altria Group, Inc. plans to make strategic long-term investments with the increased liquidity, reinvesting approximately one-third of the total tax reform benefit in 2018, with a moderating level of investment in subsequent years.credit and capital markets.
Debt - At December 31, 20172019 and 2016, Altria Group, Inc.’s2018, Altria’s total debt was $13.9$28.0 billion for each period.and $25.7 billion, respectively. The increase in debt was due to Altria’s February 2019 issuance of long-term senior unsecured notes, partially offset by the repayment in full in February 2019 of $12.8 billion of short-term borrowings under the Term Loan Agreement and the repayment in full of $1.1 billion of long-term senior unsecured notes at scheduled maturity in August 2019.
All of Altria Group, Inc.’sAltria’s long-term debt was fixed-rate debtoutstanding at December 31, 20172019 and 2016.2018 was fixed-rate debt. The weighted-average coupon interest rate on total long-term debt was approximately 4.9%4.2% and 4.6% at December 31, 20172019 and 2016. 2018, respectively.
In February 2019, Altria issued USD and Euro denominated long-term senior unsecured notes in the aggregate principal amounts of $11.5 billion and €4.25 billion, respectively. Altria immediately converted the proceeds of the Euro denominated notes into USD of $4.8 billion. The net proceeds from the Euro notes and a portion of the net proceeds from the USD notes were used to repay in full the $12.8 billion of short-term borrowings under the Term Loan Agreement. The remaining net proceeds from the USD notes were used to finance Altria’s investment in Cronos in the first quarter of 2019 and for other general corporate purposes. Altria designated its Euro denominated notes as a net investment hedge of its investment in ABI.
In January 2020, Altria repaid in full at maturity notes in the aggregate principal amount of $1.0 billion.
For further details on short-term borrowings and long-term debt, see Note 9.9 and Note 10, respectively.
In October 2017, Altria Group, Inc. filed a registration statement on Form S-3 with the SEC, under which Altria Group, Inc. may offer debt securities or warrants to purchase debt securities from time to time over a three-year period from the date of filing.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria Group, Inc. has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below.
Guarantees and Other Similar Matters - As discussed in Note 18,19, Altria Group, Inc. 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 December 31, 2017.2019. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated entities. In addition, as discussed in Note 19,20, PM USA has issued guarantees relating to Altria Group, Inc.’sAltria’s obligations under its outstanding debt securities, borrowings under theits Credit Agreement and amounts outstanding under its commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’sAltria’s liquidity. For further discussion regarding Altria’s liquidity, see the Debt and Liquidity section above.
Aggregate Contractual Obligations - The following table summarizes Altria Group, Inc.’sAltria’s contractual obligations at December 31, 2017:2019:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due |
| (in millions) | Total |
| | 2020 |
| | 2021 - 2022 |
| | 2023 - 2024 |
| | 2025 and Thereafter |
|
Long-term debt (1) | $ | 28,275 |
| | $ | 1,000 |
| | $ | 4,400 |
| | $ | 4,152 |
| | $ | 18,723 |
|
Interest on borrowings (2) | 17,923 |
| | 1,194 |
| | 2,182 |
| | 1,909 |
| | 12,638 |
|
Operating leases (3) | 196 |
| | 53 |
| | 72 |
| | 28 |
| | 43 |
|
Purchase obligations: (4) |
| |
| |
| |
| |
|
| Inventory and production costs | 4,038 |
| | 1,039 |
| | 1,343 |
| | 761 |
| | 895 |
|
| Other | 886 |
| | 585 |
| | 247 |
| | 54 |
| | — |
|
| | 4,924 |
| | 1,624 |
| | 1,590 |
| | 815 |
| | 895 |
|
Other long-term liabilities (5) | 1,944 |
| | 81 |
| | 180 |
| | 198 |
| | 1,485 |
|
| | $ | 53,262 |
| | $ | 3,952 |
| | $ | 8,424 |
| | $ | 7,102 |
| | $ | 33,784 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due |
| (in millions) | Total |
| | 2018 |
| | 2019 - 2020 |
| | 2021 - 2022 |
| | 2023 and Thereafter |
|
Long-term debt (1) | $ | 14,017 |
| | $ | 864 |
| | $ | 2,144 |
| | $ | 3,400 |
| | $ | 7,609 |
|
Interest on borrowings (2) | 8,403 |
| | 693 |
| | 1,100 |
| | 849 |
| | 5,761 |
|
Operating leases (3) | 192 |
| | 38 |
| | 61 |
| | 49 |
| | 44 |
|
Purchase obligations: (4) |
| |
| |
| |
| |
|
| Inventory and production costs | 3,452 |
| | 1,023 |
| | 1,250 |
| | 600 |
| | 579 |
|
| Other | 634 |
| | 456 |
| | 159 |
| | 19 |
| | — |
|
| | 4,086 |
| | 1,479 |
| | 1,409 |
| | 619 |
| | 579 |
|
Other long-term liabilities (5) | 2,084 |
| | 78 |
| | 166 |
| | 194 |
| | 1,646 |
|
| | $ | 28,782 |
| | $ | 3,152 |
| | $ | 4,880 |
| | $ | 5,111 |
| | $ | 15,639 |
|
(1) Amounts represent the expected cash payments of Altria Group, Inc.’sAltria’s long-term debt.
(2) Amounts represent the expected cash payments of Altria Group, Inc.’sAltria’s interest expense on its long-term debt. Interest on Altria Group, Inc.’sAltria’s long-term debt, which was all fixed-rate debt at December 31, 2017,2019, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts and debt issuance costs, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net in the consolidated statements of earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and services, contract manufacturing, packaging, storage and distribution) are commitments for projected needs to be used in the normal course of business. Other purchase obligations include commitments for marketing, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities primarily consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table above for accrued pension costs consist of the actuarially determined anticipated minimum funding requirements for each year from 20182020 through 2022.2024. Contributions beyond 20222024 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals. Altria Group, Inc. is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee payments, and payments for FDA user fees, as discussed below and in Note 18,19, are excluded from the table above, as the payments are subject to adjustment for several factors, including inflation, operating income, market share and industry volume. Litigation escrow deposits, as discussed below and in Note 18,19, are also excluded from the table above since these deposits will be returned to PM USA should it prevail on appeal.
Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 18,19, PM USA and Nat Sherman have 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. Payments under the State Settlement Agreements and the FDA user fees are based on variable factors, such as volume, operating income, market share and inflation, depending on the subject payment. Altria Group, Inc.’s subsidiaries account for the cost of the State Settlement Agreements and FDA user fees as a component of cost of sales. Altria Group, Inc.’sAltria’s subsidiaries recorded approximately $4.7$4.5 billion, $4.9$4.5 billion and $4.8$4.7 billion of charges to cost of sales for each of the years ended December 31, 2017, 20162019, 2018 and 2015,2017, 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, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18.19.
Based on current agreements, 20172019 market share and historicalestimated annual industry volume decline rates, the estimated amounts that Altria Group, Inc.’sAltria’s subsidiaries may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees approximate $4.8$4.5 billion in 20182020 and $4.4 billion each year thereafter. These amounts exclude the potential impact of the NPM Adjustment provision applicable under the MSA and the revised NPM Adjustment provisions applicable under the resolutions of the NPM Adjustment disputes.
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 December 31, 2017,2019, PM USA had posted various forms of securityappeal bonds totaling approximately $61$43 million, the majority of which have been collateralized with restricted cash deposits. These cash depositsthat are included in assets on the 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 or Altria Group, Inc. in a particular fiscal quarter or fiscal year, as more fully
disclosed in Note 18,19, Item 3 and Item 1A, management expects cash flow from operations, together with Altria Group, Inc.’sAltria’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 11. 12. Stock Plans to the consolidated financial statements in Item 8, during 20172019 Altria Group, Inc. granted an aggregate of 0.60.7 million restricted stock units and 0.2 million performance stock units to eligible employees.
At December 31, 2017,2019, the number of shares to be issued upon vesting of restricted stock units and performance stock units was not significant.
Dividends paid in 20172019 and 20162018 were approximately $4.8$6.1 billion and $4.5$5.4 billion, respectively, an increase of 6.5%12.1%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria Group, Inc. under its share repurchase program.programs.
During the third quarter of 2017,2019, the Board of Directors approved an 8.2%a 5% increase in the quarterly dividend rate to $0.66$0.84 per share of Altria Group, Inc. common stock versus the previous rate of $0.61$0.80 per share. Altria Group, Inc. expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is $2.64$3.36 per share. Future dividend payments remain subject to the discretion of the Board of Directors.
At December 31, 2017, Altria Group, Inc. had approximately $18 million remaining in the July 2015 share repurchase program, which it subsequently completed in January 2018. In January 2018, the Board of Directors authorizedFor a new $1.0 billion share repurchase program, which Altria Group, Inc. expects to complete by the end of 2018. For further discussion of Altria Group, Inc.’sAltria’s share repurchase programs, see Note 10. 11. Capital Stock to the consolidated financial statements in Item 8 and Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K.
RecentNew Accounting Guidance Not Yet Adopted
See Note 2for a discussion of recently issued accounting guidance applicable to, but not yet adopted by, Altria Group, Inc.
In addition, in February 2018, the Financial Accounting Standards Board issued Accounting Standards Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU No. 2018-02”). Under ASU No. 2018-02, an entity may elect to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period for which
financial statements have not yet been issued. The guidance in ASU No. 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate tax rate in the Tax Reform Act is recognized. Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.Altria.
Contingencies
See Note 1819 and Item 3 for a discussion of contingencies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rates
At December 31, 20172019 and 2016,2018, the fair value of Altria Group, Inc.’s totalAltria’s long-term debt, all of which is fixed-rate debt, was $15.3$30.7 billion and $15.1$12.5 billion, respectively. The fair value of Altria Group, Inc.’sAltria’s long-term debt is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at December 31, 20172019 and 20162018 would decrease the fair value of Altria Group, Inc.’s totalAltria’s long-term debt by approximately $1.2$2.4 billion for each period.and $0.8 billion, respectively. A 1% decrease in market interest rates at December 31, 20172019 and 20162018 would increase the fair value of Altria Group, Inc.’s totalAltria’s long-term debt by approximately $1.3$2.7 billion and $1.4$0.9 billion, respectively.
Interest rates on borrowings under the Credit Agreement are expected to be based on LIBORthe London Interbank Offered Rate (“LIBOR”), or a mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria Group, Inc.’sAltria’s long-term senior unsecured debt from Moody’s and Standard & Poor’s. The applicable percentage based on Altria Group, Inc.’sAltria’s long-term senior unsecured debt ratings at December 31, 20172019 for borrowings under the Credit Agreement was 1.125%1.0%. At December 31, 2017,2019 and 2018, Altria Group, Inc. had no borrowings under the Credit 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 December 31, 2019, the fair values of the Fixed-price Preemptive Rights and Cronos warrant were $69 million and $234 million, respectively. A 10% increase or decrease in the quoted market price of Cronos shares at December 31, 2019 would increase or decrease the fair values of the Fixed-price Preemptive Rights and Cronos warrant by approximately $13 million and $37 million, respectively.
Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
| | | at December 31, | 2017 |
| | 2016 |
| 2019 |
| | 2018 |
|
| Assets | | | | | | |
| Cash and cash equivalents | $ | 1,253 |
| | $ | 4,569 |
| $ | 2,117 |
| | $ | 1,333 |
|
| Receivables | 142 |
| | 151 |
| 152 |
| | 142 |
|
| Inventories: | | | | | | |
| Leaf tobacco | 941 |
| | 892 |
| 874 |
| | 940 |
|
| Other raw materials | 170 |
| | 164 |
| 192 |
| | 186 |
|
| Work in process | 560 |
| | 512 |
| 696 |
| | 647 |
|
| Finished product | 554 |
| | 483 |
| 531 |
| | 558 |
|
| | 2,225 |
| | 2,051 |
| 2,293 |
| | 2,331 |
|
| Income taxes | 461 |
| | 269 |
| 116 |
| | 167 |
|
| Other current assets | 263 |
| | 220 |
| 146 |
| | 326 |
|
| Total current assets | 4,344 |
| | 7,260 |
| 4,824 |
| | 4,299 |
|
| | | | | | | |
| Property, plant and equipment, at cost: | | | | | | |
| Land and land improvements | 302 |
| | 316 |
| 353 |
| | 309 |
|
| Buildings and building equipment | 1,437 |
| | 1,481 |
| 1,461 |
| | 1,442 |
|
| Machinery and equipment | 2,975 |
| | 2,917 |
| 2,998 |
| | 2,981 |
|
| Construction in progress | 165 |
| | 121 |
| 262 |
| | 218 |
|
| | 4,879 |
| | 4,835 |
| 5,074 |
| | 4,950 |
|
| Less accumulated depreciation | 2,965 |
| | 2,877 |
| 3,075 |
| | 3,012 |
|
| | 1,914 |
| | 1,958 |
| 1,999 |
| | 1,938 |
|
| | | | | | | |
| Goodwill | 5,307 |
| | 5,285 |
| 5,177 |
| | 5,196 |
|
| Other intangible assets, net | 12,400 |
| | 12,036 |
| 12,687 |
| | 12,279 |
|
| Investment in AB InBev | 17,952 |
| | 17,852 |
| |
| Finance assets, net | 899 |
| | 1,028 |
| |
| Investments in equity securities | | 23,581 |
| | 30,496 |
|
| Other assets | 386 |
| | 513 |
| 1,003 |
| | 1,251 |
|
| Total Assets | $ | 43,202 |
| | $ | 45,932 |
| $ | 49,271 |
| | $ | 55,459 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
|
| | | | | | | |
| at December 31, | 2019 |
| | 2018 |
|
| Liabilities | | | |
| Short-term borrowings | $ | — |
| | $ | 12,704 |
|
| Current portion of long-term debt | 1,000 |
| | 1,144 |
|
| Accounts payable | 325 |
| | 399 |
|
| Accrued liabilities: | | | |
| Marketing | 393 |
| | 586 |
|
| Settlement charges | 3,346 |
| | 3,454 |
|
| Other | 1,545 |
| | 1,403 |
|
| Dividends payable | 1,565 |
| | 1,503 |
|
| Total current liabilities | 8,174 |
| | 21,193 |
|
| | | | |
| Long-term debt | 27,042 |
| | 11,898 |
|
| Deferred income taxes | 5,083 |
| | 4,993 |
|
| Accrued pension costs | 473 |
| | 544 |
|
| Accrued postretirement health care costs | 1,797 |
| | 1,749 |
|
| Other liabilities | 345 |
| | 254 |
|
| Total liabilities | 42,914 |
| | 40,631 |
|
| Contingencies (Note 19) |
| |
|
| Redeemable noncontrolling interest | 38 |
| | 39 |
|
| Stockholders’ Equity | | | |
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) | 935 |
| | 935 |
|
| Additional paid-in capital | 5,970 |
| | 5,961 |
|
| Earnings reinvested in the business | 36,539 |
| | 43,962 |
|
| Accumulated other comprehensive losses | (2,864 | ) | | (2,547 | ) |
Cost of repurchased stock (947,979,763 shares at December 31, 2019 and 931,903,722 shares at December 31, 2018) | (34,358 | ) | | (33,524 | ) |
| Total stockholders’ equity attributable to Altria | 6,222 |
| | 14,787 |
|
| Noncontrolling interests | 97 |
| | 2 |
|
| Total stockholders’ equity | 6,319 |
| | 14,789 |
|
| Total Liabilities and Stockholders’ Equity | $ | 49,271 |
| | $ | 55,459 |
|
|
| | | | | | | |
| at December 31, | 2017 |
| | 2016 |
|
| Liabilities | | | |
| Current portion of long-term debt | $ | 864 |
| | $ | — |
|
| Accounts payable | 374 |
| | 425 |
|
| Accrued liabilities: | | | |
| Marketing | 695 |
| | 747 |
|
| Employment costs | 188 |
| | 289 |
|
| Settlement charges | 2,442 |
| | 3,701 |
|
| Other | 971 |
| | 1,025 |
|
| Dividends payable | 1,258 |
| | 1,188 |
|
| Total current liabilities | 6,792 |
| | 7,375 |
|
| | | | |
| Long-term debt | 13,030 |
| | 13,881 |
|
| Deferred income taxes | 5,247 |
| | 8,416 |
|
| Accrued pension costs | 445 |
| | 805 |
|
| Accrued postretirement health care costs | 1,987 |
| | 2,217 |
|
| Other liabilities | 283 |
| | 427 |
|
| Total liabilities | 27,784 |
| | 33,121 |
|
| Contingencies (Note 18) |
| |
|
| Redeemable noncontrolling interest | 38 |
| | 38 |
|
| Stockholders’ Equity | | | |
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) | 935 |
| | 935 |
|
| Additional paid-in capital | 5,952 |
| | 5,893 |
|
| Earnings reinvested in the business | 42,251 |
| | 36,906 |
|
| Accumulated other comprehensive losses | (1,897 | ) | | (2,052 | ) |
Cost of repurchased stock (904,702,125 shares at December 31, 2017 and 862,689,093 shares at December 31, 2016) | (31,864 | ) | | (28,912 | ) |
| Total stockholders’ equity attributable to Altria Group, Inc. | 15,377 |
| | 12,770 |
|
| Noncontrolling interests | 3 |
| | 3 |
|
| Total stockholders’ equity | 15,380 |
| | 12,773 |
|
| Total Liabilities and Stockholders’ Equity | $ | 43,202 |
| | $ | 45,932 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings (Losses)
(in millions of dollars, except per share data)
| | | for the years ended December 31, | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Net revenues | $ | 25,576 |
| | $ | 25,744 |
| | $ | 25,434 |
| $ | 25,110 |
| | $ | 25,364 |
| | $ | 25,576 |
|
| Cost of sales | 7,543 |
| | 7,746 |
| | 7,740 |
| 7,085 |
| | 7,373 |
| | 7,531 |
|
| Excise taxes on products | 6,082 |
| | 6,407 |
| | 6,580 |
| 5,314 |
| | 5,737 |
| | 6,082 |
|
| Gross profit | 11,951 |
| | 11,591 |
| | 11,114 |
| 12,711 |
| | 12,254 |
| | 11,963 |
|
| Marketing, administration and research costs | 2,362 |
| | 2,650 |
| | 2,708 |
| 2,226 |
| | 2,756 |
| | 2,338 |
|
| Reduction of PMI tax-related receivable | — |
| | — |
| | 41 |
| |
| Asset impairment and exit costs | 33 |
| | 179 |
| | 4 |
| 159 |
| | 383 |
| | 32 |
|
| Operating income | 9,556 |
| | 8,762 |
| | 8,361 |
| 10,326 |
| | 9,115 |
| | 9,593 |
|
| Interest and other debt expense, net | 705 |
| | 747 |
| | 817 |
| 1,280 |
| | 665 |
| | 705 |
|
| Loss on early extinguishment of debt | — |
| | 823 |
| | 228 |
| |
| Earnings from equity investment in AB InBev/SABMiller | (532 | ) | | (795 | ) | | (757 | ) | |
| Gain on AB InBev/SABMiller business combination | (445 | ) | | (13,865 | ) | | (5 | ) | |
| Earnings before income taxes | 9,828 |
| | 21,852 |
| | 8,078 |
| |
| (Benefit) provision for income taxes | (399 | ) | | 7,608 |
| | 2,835 |
| |
| Net earnings | 10,227 |
| | 14,244 |
| | 5,243 |
| |
| Net earnings attributable to noncontrolling interests | (5 | ) | | (5 | ) | | (2 | ) | |
| Net earnings attributable to Altria Group, Inc. | $ | 10,222 |
| | $ | 14,239 |
| | $ | 5,241 |
| |
| Net periodic benefit (income) cost, excluding service cost | | (37 | ) | | (34 | ) | | 37 |
|
| Earnings from equity investments | | (1,725 | ) | | (890 | ) | | (532 | ) |
| Impairment of JUUL equity securities | | 8,600 |
| | — |
| | — |
|
| Loss on Cronos-related financial instruments | | 1,442 |
| | — |
| | — |
|
| (Gain) loss on ABI/SABMiller business combination | | — |
| | 33 |
| | (445 | ) |
| Earnings (losses) before income taxes | | 766 |
| | 9,341 |
| | 9,828 |
|
| Provision (benefit) for income taxes | | 2,064 |
| | 2,374 |
| | (399 | ) |
| Net earnings (losses) | | (1,298 | ) | | 6,967 |
| | 10,227 |
|
| Net (earnings) losses attributable to noncontrolling interests | | 5 |
| | (4 | ) | | (5 | ) |
| Net earnings (losses) attributable to Altria | | $ | (1,293 | ) | | $ | 6,963 |
| | $ | 10,222 |
|
| Per share data: | | | | | | | | | | |
| Basic and diluted earnings per share attributable to Altria Group, Inc. | $ | 5.31 |
| | $ | 7.28 |
| | $ | 2.67 |
| |
| Basic earnings (losses) per share attributable to Altria | | $ | (0.70 | ) | | $ | 3.69 |
| | $ | 5.31 |
|
| Diluted earnings (losses) per share attributable to Altria | | $ | (0.70 | ) | | $ | 3.68 |
| | $ | 5.31 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings (Losses)
(in millions of dollars)
_______________________
|
| | | | | | | | | | | | |
| for the years ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
| Net earnings | | $ | 10,227 |
| | $ | 14,244 |
| | $ | 5,243 |
|
| Other comprehensive earnings (losses), net of deferred income taxes: | | | | | | |
| Currency translation adjustments | | — |
| | 1 |
| | (3 | ) |
| Benefit plans | | 209 |
| | (38 | ) | | 30 |
|
| AB InBev/SABMiller | | (54 | ) | | 1,265 |
| | (625 | ) |
| Other comprehensive earnings (losses), net of deferred income taxes | | 155 |
| | 1,228 |
| | (598 | ) |
| | | | | | | |
| Comprehensive earnings | | 10,382 |
| | 15,472 |
| | 4,645 |
|
| Comprehensive earnings attributable to noncontrolling interests | | (5 | ) | | (5 | ) | | (2 | ) |
| Comprehensive earnings attributable to Altria Group, Inc. | | $ | 10,377 |
| | $ | 15,467 |
| | $ | 4,643 |
|
|
| | | | | | | | | | | | |
| for the years ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
| Net earnings (losses) | | $ | (1,298 | ) | | $ | 6,967 |
| | $ | 10,227 |
|
| Other comprehensive earnings (losses), net of deferred income taxes: | | | | | | |
| Benefit plans | | (24 | ) | | 68 |
| | 209 |
|
| ABI | | (319 | ) | | (309 | ) | | (54 | ) |
| Currency translation adjustments and other | | 26 |
| | (1 | ) | | — |
|
| Other comprehensive earnings (losses), net of deferred income taxes | | (317 | ) | | (242 | ) | | 155 |
|
| | | | | | | |
| Comprehensive earnings (losses) | | (1,615 | ) | | 6,725 |
| | 10,382 |
|
| Comprehensive (earnings) losses attributable to noncontrolling interests | | 5 |
| | (4 | ) | | (5 | ) |
| Comprehensive earnings (losses) attributable to Altria | | $ | (1,610 | ) | | $ | 6,721 |
| | $ | 10,377 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
__________________
|
| | | | | | | | | | | | | |
| for the years ended December 31, | 2017 |
| | 2016 |
| | 2015 |
|
| Cash Provided by (Used in) Operating Activities | | | | | |
| Net earnings | $ | 10,227 |
| | $ | 14,244 |
| | $ | 5,243 |
|
| Adjustments to reconcile net earnings to operating cash flows: | | | | | |
| Depreciation and amortization | 209 |
| | 204 |
| | 225 |
|
| Deferred income tax (benefit) provision | (3,126 | ) | | 3,119 |
| | (132 | ) |
| Earnings from equity investment in AB InBev/SABMiller | (532 | ) | | (795 | ) | | (757 | ) |
| Gain on AB InBev/SABMiller business combination | (445 | ) | | (13,865 | ) | | (5 | ) |
| Dividends from AB InBev/SABMiller | 806 |
| | 739 |
| | 495 |
|
| Asset impairment and exit costs, net of cash paid | (38 | ) | | 106 |
| | 1 |
|
| Loss on early extinguishment of debt | — |
| | 823 |
| | 228 |
|
| Cash effects of changes: | | | | | |
| Receivables | 10 |
| | (27 | ) | | 3 |
|
| Inventories | (171 | ) | | (34 | ) | | (33 | ) |
| Accounts payable | (55 | ) | | 24 |
| | 26 |
|
| Income taxes | (294 | ) | | (231 | ) | | (12 | ) |
| Accrued liabilities and other current assets | (85 | ) | | (113 | ) | | 184 |
|
| Accrued settlement charges | (1,259 | ) | | 111 |
| | 90 |
|
| Pension and postretirement plans contributions | (294 | ) | | (531 | ) | | (28 | ) |
| Pension provisions and postretirement, net | (11 | ) | | (73 | ) | | 114 |
|
| Other | (20 | ) | | 120 |
| | 201 |
|
| Net cash provided by operating activities | 4,922 |
| | 3,821 |
| | 5,843 |
|
| Cash Provided by (Used in) Investing Activities | | | | | |
| Capital expenditures | (199 | ) | | (189 | ) | | (229 | ) |
| Acquisitions of businesses and assets | (415 | ) | | (45 | ) | | — |
|
| Proceeds from finance assets | 133 |
| | 231 |
| | 354 |
|
| Proceeds from AB InBev/SABMiller business combination | — |
| | 4,773 |
| | — |
|
| Purchase of AB InBev ordinary shares | — |
| | (1,578 | ) | | — |
|
| Payment for derivative financial instruments | (5 | ) | | (3 | ) | | (132 | ) |
| Proceeds from derivative financial instruments | — |
| | 510 |
| | — |
|
| Other | 19 |
| | 9 |
| | (8 | ) |
| Net cash (used in) provided by investing activities | (467 | ) | | 3,708 |
| | (15 | ) |
| Cash Provided by (Used in) Financing Activities | | | | | |
| Long-term debt issued | — |
| | 1,976 |
| | — |
|
| Long-term debt repaid | — |
| | (933 | ) | | (1,793 | ) |
| Repurchases of common stock | (2,917 | ) | | (1,030 | ) | | (554 | ) |
| Dividends paid on common stock | (4,807 | ) | | (4,512 | ) | | (4,179 | ) |
| Premiums and fees related to early extinguishment of debt | — |
| | (809 | ) | | (226 | ) |
| Other | (47 | ) | | (21 | ) | | (28 | ) |
| Net cash used in financing activities | (7,771 | ) | | (5,329 | ) | | (6,780 | ) |
| Cash and cash equivalents: | | | | | |
| (Decrease) increase | (3,316 | ) | | 2,200 |
| | (952 | ) |
| Balance at beginning of year | 4,569 |
| | 2,369 |
| | 3,321 |
|
| Balance at end of year | $ | 1,253 |
| | $ | 4,569 |
| | $ | 2,369 |
|
| Cash paid: Interest | | | $ | 696 |
| | $ | 775 |
| | $ | 776 |
|
| Income taxes | | $ | 3,036 |
| | $ | 4,664 |
| | $ | 3,029 |
|
|
| | | | | | | | | | | | | |
| for the years ended December 31, | 2019 |
| | 2018 |
| | 2017 |
|
| Cash Provided by (Used in) Operating Activities | | | | | |
| Net earnings (losses) | $ | (1,298 | ) | | $ | 6,967 |
| | $ | 10,227 |
|
| Adjustments to reconcile net earnings (losses) to operating cash flows: | | | | | |
| Depreciation and amortization | 226 |
| | 227 |
| | 209 |
|
| Deferred income tax provision (benefit) | (95 | ) | | (57 | ) | | (3,126 | ) |
| Earnings from equity investments | (1,725 | ) | | (890 | ) | | (532 | ) |
| (Gain) loss on ABI/SABMiller business combination | — |
| | 33 |
| | (445 | ) |
| Dividends from ABI | 396 |
| | 657 |
| | 806 |
|
| Loss on Cronos-related financial instruments | 1,442 |
| | — |
| | — |
|
| Impairment of JUUL equity securities | 8,600 |
| | — |
| | — |
|
| Asset impairment and exit costs, net of cash paid | 41 |
| | 354 |
| | (38 | ) |
| Cash effects of changes: | | | | | |
| Receivables | (8 | ) | | — |
| | 10 |
|
| Inventories | 42 |
| | (129 | ) | | (171 | ) |
| Accounts payable | (79 | ) | | 27 |
| | (55 | ) |
| Income taxes | 89 |
| | 218 |
| | (294 | ) |
| Accrued liabilities and other current assets | 11 |
| | (21 | ) | | (85 | ) |
| Accrued settlement charges | (108 | ) | | 980 |
| | (1,259 | ) |
| Pension and postretirement plans contributions | (56 | ) | | (41 | ) | | (294 | ) |
| Pension provisions and postretirement, net | (52 | ) | | (13 | ) | | (11 | ) |
| Other, net | 411 |
| | 79 |
| | (41 | ) |
| Net cash provided by (used in) operating activities | 7,837 |
| | 8,391 |
| | 4,901 |
|
| Cash Provided by (Used in) Investing Activities | | | | | |
| Capital expenditures | (246 | ) | | (238 | ) | | (199 | ) |
| Acquisitions of businesses and assets | (421 | ) | | (15 | ) | | (415 | ) |
| Investment in JUUL | (5 | ) | | (12,800 | ) | | — |
|
| Investment in Cronos | (1,899 | ) | | — |
| | — |
|
| Other, net | 173 |
| | 65 |
| | 147 |
|
| Net cash provided by (used in) investing activities | (2,398 | ) | | (12,988 | ) | | (467 | ) |
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
__________________
|
| | | | | | | | | | | | | |
| for the years ended December 31, | 2019 |
| | 2018 |
| | 2017 |
|
| Cash Provided by (Used in) Financing Activities | | | | | |
| Proceeds from short-term borrowings | $ | — |
| | $ | 12,800 |
| | $ | — |
|
| Repayment of short-term borrowings | (12,800 | ) | | — |
| | — |
|
| Long-term debt issued | 16,265 |
| | — |
| | — |
|
| Long-term debt repaid | (1,144 | ) | | (864 | ) | | — |
|
| Repurchases of common stock | (845 | ) | | (1,673 | ) | | (2,917 | ) |
| Dividends paid on common stock | (6,069 | ) | | (5,415 | ) | | (4,807 | ) |
| Other, net | (119 | ) | | (132 | ) | | (47 | ) |
| Net cash provided by (used in) financing activities | (4,712 | ) | | 4,716 |
| | (7,771 | ) |
| Cash, cash equivalents and restricted cash: | | | | | |
| Increase (decrease) | 727 |
| | 119 |
| | (3,337 | ) |
| Balance at beginning of year | 1,433 |
| | 1,314 |
| | 4,651 |
|
| Balance at end of year | $ | 2,160 |
| | $ | 1,433 |
| | $ | 1,314 |
|
| Cash paid: | Interest | $ | 1,102 |
| | $ | 704 |
| | $ | 696 |
|
| | Income taxes | $ | 1,977 |
| | $ | 2,307 |
| | $ | 3,036 |
|
| The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s consolidated balance sheets: |
| | | | |
| at December 31, | 2019 |
| | 2018 |
| | 2017 |
|
| Cash and cash equivalents | $ | 2,117 |
| | $ | 1,333 |
| | $ | 1,253 |
|
Restricted cash included in other current assets (1) | — |
| | 57 |
| | 25 |
|
Restricted cash included in other assets (1) | 43 |
| | 43 |
| | 36 |
|
| Cash, cash equivalents and restricted cash | $ | 2,160 |
| | $ | 1,433 |
| | $ | 1,314 |
|
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 19. Contingencies.
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
| | | | Attributable to Altria Group, Inc. | | | | Attributable to Altria | | | |
| | Common Stock |
| | Additional Paid-in Capital |
| | Earnings Reinvested in the Business |
| | Accumulated Other Comprehensive Losses |
| | Cost of Repurchased Stock |
| | Non- controlling Interests |
| | Total Stockholders’ Equity |
| Common Stock |
| | Additional Paid-in Capital |
| | Earnings Reinvested in the Business |
| | Accumulated Other Comprehensive Losses |
| | Cost of Repurchased Stock |
| | Non- controlling Interests |
| | Total Stockholders’ Equity |
|
| Balances, December 31, 2014 | $ | 935 |
| | $ | 5,735 |
| | $ | 26,277 |
| | $ | (2,682 | ) | | $ | (27,251 | ) | | $ | (4 | ) | | $ | 3,010 |
| |
| Balances, December 31, 2016 | | $ | 935 |
| | $ | 5,893 |
| | $ | 36,906 |
| | $ | (2,052 | ) | | $ | (28,912 | ) | | $ | 3 |
| | $ | 12,773 |
|
Net earnings (losses) (1) | — |
| | — |
| | 5,241 |
| | — |
| | — |
| | (3 | ) | | 5,238 |
| — |
| | — |
| | 10,222 |
| | — |
| | — |
| | — |
| | 10,222 |
|
Other comprehensive losses, net of deferred income taxes | — |
| | — |
| | — |
| | (598 | ) | | — |
| | — |
| | (598 | ) | |
| Stock award activity | — |
| | 78 |
| | — |
| | — |
| | (40 | ) | | — |
| | 38 |
| |
| Cash dividends declared ($2.17 per share) | — |
| | — |
| | (4,261 | ) | | — |
| | — |
| | — |
| | (4,261 | ) | |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (554 | ) | | — |
| | (554 | ) | |
| Balances, December 31, 2015 | 935 |
| | 5,813 |
| | 27,257 |
| | (3,280 | ) | | (27,845 | ) | | (7 | ) | | 2,873 |
| |
Net earnings (1) | — |
| | — |
| | 14,239 |
| | — |
| | — |
| | — |
| | 14,239 |
| |
Other comprehensive earnings, net of deferred income taxes | — |
| | — |
| | — |
| | 1,228 |
| | — |
| | — |
| | 1,228 |
| |
| Stock award activity | — |
| | 90 |
| | — |
| | — |
| | (37 | ) | | — |
| | 53 |
| |
| Cash dividends declared ($2.35 per share) | — |
| | — |
| | (4,590 | ) | | — |
| | — |
| | — |
| | (4,590 | ) | |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (1,030 | ) | | — |
| | (1,030 | ) | |
| Other | — |
| | (10 | ) | | — |
| | — |
| | — |
| | 10 |
| | — |
| |
| Balances, December 31, 2016 | 935 |
| | 5,893 |
| | 36,906 |
| | (2,052 | ) | | (28,912 | ) | | 3 |
| | 12,773 |
| |
Net earnings (1) | — |
| | — |
| | 10,222 |
| | — |
| | — |
| | — |
| | 10,222 |
| |
Other comprehensive earnings, net of deferred income taxes | — |
| | — |
| | — |
| | 155 |
| | — |
| | — |
| | 155 |
| |
Other comprehensive earnings (losses), net of deferred income taxes | | — |
| | — |
| | — |
| | 155 |
| | — |
| | — |
| | 155 |
|
| Stock award activity | — |
| | 59 |
| | — |
| | — |
| | (35 | ) | | — |
| | 24 |
| — |
| | 59 |
| | — |
| | — |
| | (35 | ) | | — |
| | 24 |
|
| Cash dividends declared ($2.54 per share) | — |
| | — |
| | (4,877 | ) | | — |
| | — |
| | — |
| | (4,877 | ) | — |
| | — |
| | (4,877 | ) | | — |
| | — |
| | — |
| | (4,877 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (2,917 | ) | | — |
| | (2,917 | ) | — |
| | — |
| | — |
| | — |
| | (2,917 | ) | | — |
| | (2,917 | ) |
| Balances, December 31, 2017 | $ | 935 |
| | $ | 5,952 |
| | $ | 42,251 |
| | $ | (1,897 | ) | | $ | (31,864 | ) | | $ | 3 |
| | $ | 15,380 |
| 935 |
| | 5,952 |
| | 42,251 |
| | (1,897 | ) | | (31,864 | ) | | 3 |
| | 15,380 |
|
Reclassification due to adoption of ASU 2018-02 (2) | | — |
| | — |
| | 408 |
| | (408 | ) | | — |
| | — |
| | — |
|
Net earnings (losses) (1) | | — |
| | — |
| | 6,963 |
| | — |
| | — |
| | — |
| | 6,963 |
|
Other comprehensive earnings (losses), net of deferred income taxes | | — |
| | — |
| | — |
| | (242 | ) | | — |
| | — |
| | (242 | ) |
| Stock award activity | | — |
| | 9 |
| | — |
| | — |
| | 13 |
| | — |
| | 22 |
|
| Cash dividends declared ($3.00 per share) | | — |
| | — |
| | (5,660 | ) | | — |
| | — |
| | — |
| | (5,660 | ) |
| Repurchases of common stock | | — |
| | — |
| | — |
| | — |
| | (1,673 | ) | | — |
| | (1,673 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balances, December 31, 2018 | | 935 |
| | 5,961 |
| | 43,962 |
| | (2,547 | ) | | (33,524 | ) | | 2 |
| | 14,789 |
|
Net earnings (losses) (1) | | — |
| | — |
| | (1,293 | ) | | — |
| | — |
| | (7 | ) | | (1,300 | ) |
| Other comprehensive earnings (losses), net of deferred income taxes | | — |
| | — |
| | — |
| | (317 | ) | | — |
| | — |
| | (317 | ) |
| Stock award activity | | — |
| | 9 |
| | — |
| | — |
| | 11 |
| | — |
| | 20 |
|
| Cash dividends declared ($3.28 per share) | | — |
| | — |
| | (6,130 | ) | | — |
| | — |
| | — |
| | (6,130 | ) |
| Repurchases of common stock | | — |
| | — |
| | — |
| | — |
| | (845 | ) | | — |
| | (845 | ) |
| Issuance of noncontrolling interest in Helix | | — |
| | — |
| | — |
| | — |
| | — |
| | 88 |
| | 88 |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | 14 |
|
| Balances, December 31, 2019 | | $ | 935 |
| | $ | 5,970 |
| | $ | 36,539 |
| | $ | (2,864 | ) | | $ | (34,358 | ) | | $ | 97 |
| | $ | 6,319 |
|
(1) Amounts attributable to noncontrolling interests for each of the years ended December 31, 2017, 20162019, 2018 and 20152017 exclude net earnings of $2 million, $4 million and $5 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the consolidated balance sheets at December 31, 20172019, 2018 and 2017.
(2) In 2018, Altria adopted Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), 2016and 2015. See Note 18.reclassified the stranded income tax effects of the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) on items with accumulated other comprehensive losses to earnings reinvested in the business.
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 1. Background and Basis of Presentation
▪Background: At December 31, 2017,2019, Altria Group, Inc.’s (“Altria”) wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”), which are engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; and UST LLC (“UST”), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), a wholly-owned subsidiary that is engaged in the manufacture and sale of innovative tobacco products,wine; and Philip Morris Capital Corporation (“PMCC”), a wholly-owned subsidiary thatwhich maintains a portfolio of finance assets, substantially all of which are leveraged leases. In addition, Altria owns an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of on! oral nicotine pouches. In December 2018, Altria refocused its innovative product efforts, which included the discontinuation of production and distribution of alle-vapor products by Nu Mark LLC (“Nu Mark”). Prior to that time, Nu Mark was engaged in the manufacture and sale of innovative tobacco products. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria Group, Inc. and its subsidiaries. Altria Group, Inc.’sAltria’s 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. At December 31, 2017, Altria Group, Inc.’s principal2019, Altria’s significant wholly-owned subsidiaries 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.
At September 30, 2016,December 31, 2019, Altria Group, Inc. had an approximate 27%a 10.1% ownership of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounted for under the equity method of accounting. In October 2016,in Anheuser-Busch InBev SA/NV (“Legacy AB InBev”ABI”) completed its business combination with SABMiller, and Altria Group, Inc. received cash and shares representing a 9.6% ownership in the combined company (the “Transaction”). The newly formed Belgian company,, which retained the name Anheuser-Busch InBev SA/NV (“AB InBev”), became the holding company for the combined businesses. Subsequently, Altria Group, Inc. purchased approximately 12 million ordinary shares of AB InBev, increasing Altria Group, Inc.’s ownership to approximately 10.2% at December 31, 2016. At December 31, 2017, Altria Group, Inc. had an approximate 10.2% ownership of AB InBev, which Altria Group, Inc. accounts for under the equity method of accounting using a one-quarter lag. As a result of the one-quarter lag and the timing of the completion of the Transaction, no earnings from Altria Group, Inc.’s equity investment in AB InBev were recorded for the year
ended December 31, 2016. Altria Group, Inc. receives cash dividends on its interest in AB InBev ifABI and when AB InBevwill continue to do so as long as ABI pays such dividends.
During the third quarter of 2019, Helix acquired Burger Söhne Holding and its subsidiaries as well as certain affiliated companies (the “Burger Group”) that are engaged in the manufacture and sale of on! oral nicotine pouches. At closing, Altria indirectly owned an 80% interest in Helix, for which Altria paid $353 million in the third quarter of 2019. The financial results of Helix are included in Altria’s consolidated financial statements as part of its smokeless products segment, with the 20% minority ownership interest in Helix (held by the former shareholders of the Burger Group) included as a noncontrolling interest. The final purchase price allocation, which is subject to post-closing adjustments, will be completed by the third quarter of 2020.
In December 2018, Altria, through a wholly-owned subsidiary, purchased shares of non-voting convertible common stock of JUUL Labs, Inc. (“JUUL”), representing a 35% economic interest. JUUL is engaged in the manufacture and sale of e-vapor products globally and is the U.S. leader in e-vapor. At December 31, 2019, Altria had a 35% economic interest in JUUL, which Altria accounts for as an investment in an equity security.
In March 2019, Altria, through a subsidiary, completed its acquisition of a 45% economic and voting interest in Cronos Group Inc. (“Cronos”), a global cannabinoid company headquartered in Toronto, Canada. At December 31, 2019, Altria had a 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of accounting using a one-quarter lag.
For further discussion of Altria’s investments in equity securities, see Note 6. Investment7. Investments in AB InBev/SABMillerEquity Securities.
In January 2017, Altria Group, Inc. acquired Nat Sherman, which joined PM USA and Middleton as part of Altria Group, Inc.’s smokeable products segment.
▪Basis of Presentation: The consolidated financial statements include Altria, Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria Group, Inc. has the ability to exercise significant influence over the operating and financial policies of the investee are accounted for under the equity method of accounting. Equity investments in which Altria does not have the ability to exercise significant influence over the operating and financial policies of the investee are accounted for as an investment in an equity security. All intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, lives and valuation assumptions for goodwill and other intangible assets, impairment evaluations for equity investments, marketing programs, income taxes, and the allowance for losses and estimated residual values of finance leases. Actual results could differ from those estimates.
On January 1, 2019, Altria adopted ASU No. 2016-02, Leases (Topic 842) and all related ASU amendments (collectively “ASU No. 2016-02”), which requires entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Altria has elected to apply the guidance retrospectively at the beginning of the period of adoption. As a result, comparative periods prior to adoption will continue to be presented in accordance with prior lease guidance, including disclosures. The impact of the adoption was not material to Altria’s consolidated financial statements. As a result of the adoption, Altria and its subsidiaries,
as lessees, recorded right-of-use assets and lease liabilities of $179 million at January 1, 2019 for its leases, which were all operating leases. There was 0 cumulative effect adjustment to the opening balance of earnings reinvested in the business. Right-of-use assets and lease liabilities on Altria’s consolidated balance sheet at December 31, 2019 were not materially different than the amounts recorded upon adoption of ASU No. 2016-02.
Additionally, in accordance with ASU No. 2016-02, lessor accounting for leveraged leases that commenced before the January 1, 2019 adoption date of ASU No. 2016-02 is unchanged unless there is a change in the scope of, or the consideration for, such leases. As a result, adoption of ASU No. 2016-02 as it relates to PMCC’s leveraged leases had no impact on Altria’s consolidated financial statements at the adoption date. During 2019, PMCC had no new leases nor any changes in the scope of or the consideration for its existing leveraged leases.
During the fourth quarter of 2019, in conjunction with its annual impairment testing, Altria adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment. For further discussion, see Note 4. Goodwill and Other Intangible Assets, net.
On December 31, 2019, Altria adopted ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU No. 2018-14”), which amends certain defined benefit plan disclosures. The adoption of ASU No. 2018-14 had no impact on the amount of defined benefit plan assets, obligations or expenses recognized by Altria’s businesses. For further discussion, see Note 17. Benefit Plans.
Certain immaterial prior year amounts have been reclassifiedadjusted to conform with the current year’s presentation due primarily to Altria Group, Inc.’s 2017 adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU No. 2016-09”). For further discussion, see Note 11. Stock Plans.presentation.
Note 2. Summary of Significant Accounting Policies
▪Cash and Cash Equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.
▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Property, plant and equipment are stated at historical costs and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Altria
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If Altria determines that an impairment is determined to exist,exists, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
Altria Group, Inc. conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the implied fair value.value of a reporting unit, but is limited to the total amount of goodwill allocated to a reporting unit. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the intangible asset is considered impaired and is reduced to fair value.value in the period identified.
Altria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment 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. The factors used to make this determination include the duration and magnitude of the fair value decline, the financial condition and near-term prospects of the investee, and Altria’s intent and ability to hold its investment until recovery.
Altria reviews its equity investment in JUUL (which is accounted for as an equity security without a readily determinable fair value) for impairment by performing a qualitative assessment of impairment indicators. If a qualitative assessment indicates that Altria’s investment in JUUL is impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value in the period identified.
▪Derivative Financial Instruments: In November 2017, Altria Group, Inc. adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands hedge accounting for both financial and nonfinancial risk components to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the guidance includes certain targeted improvements to simplify the application of hedge accounting. At adoption, Altria Group, Inc. had no derivative or nonderivative financial instruments designated in hedging relationships. Adoption of the guidance had no impact on prior years.
Altria Group, Inc. enters into derivatives to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria Group, Inc. uses various types of derivative financial instruments, including forward contracts, options and swaps.
Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Derivative financial instruments that qualify for hedge accounting are designated as either fair value hedges, cash flow hedges or net investment hedges at the inception of the contracts. For fair value hedges, changes in the fair value of the derivative, as well as the offsetting changes in the
fair value of the hedged item, are recorded in the consolidated statements of earnings (losses) each period. For cash flow hedges, changes in the fair value of the derivative are recorded each period in accumulated other comprehensive earnings (losses) and are reclassified to the consolidated statements of earnings (losses) in the same periods in which operating results are affected by the respective hedged item. For net investment hedges, changes in the fair value of the derivative or foreign currency transaction gains or losses on a nonderivative hedging instrument are recorded in accumulated other comprehensive earnings (losses) to offset the change in the value
of the net investment being hedged. Such amounts remain in accumulated other comprehensive earnings (losses) until the complete or substantially complete liquidation of the underlying foreign operations occurs or, for investments in foreign entities accounted for under the equity method of accounting, Altria Group, Inc.’sAltria’s economic interest in the underlying foreign entity decreases. Cash flows from hedging instruments are classified in the same manner as the respective hedged item in the consolidated statements of cash flows.
To qualify for hedge accounting, the hedging relationship, both at inception of the hedge and on an ongoing basis, is expected to be highly effective at achieving the offsetting changes in the fair value of the hedged risk during the period that the hedge is designated. Altria Group, Inc. formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, the strategy for undertaking the hedge transaction and method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, if it becomes probable that a forecasted transaction will not occur, the hedge willwould no longer be considered effective and all of the derivative gains and losses would be recorded in the consolidated statement of earnings (losses) in the current period.
For financial instruments that are not designated as hedging instruments or do not qualify for hedge accounting, changes in fair value are recorded in the consolidated statements of earnings (losses) each period. Altria Group, Inc. does not enter into or hold derivative financial instruments for trading or speculative purposes.
▪Employee Benefit Plans: Altria Group, Inc. provides a range of benefits to itscertain employees and retired employees, including pension, postretirement health care and postemployment benefits. Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates.
Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. The gains or losses and prior service costs or credits recorded as components of other comprehensive earnings (losses) are subsequently amortized into net periodic benefit cost in future years.
▪Environmental Costs: Altria Group, Inc. is subject to laws and regulations relating to the protection of the environment. Altria Group, Inc. 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.
Compliance with environmental laws and regulations, including the payment of any remediation and compliance costs or damages and the making of related expenditures, has not had,
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
and is not expected to have, a material adverse effect on Altria Group, Inc.’sAltria’s consolidated results of operations, capital expenditures, financial position or cash flows (seeflows. See Note 18. 19. Contingencies - Environmental Regulation).
▪Fair Value Measurements: Altria Group, Inc. measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Altria Group, Inc. uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs used to measure fair value are:
| |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
▪Finance Leases: Income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment balances. Investments in leveraged leases are stated net of related nonrecourse debt obligations.
Finance leases include unguaranteed residual values that represent PMCC’s estimates at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed at least annually by PMCC’s management. This review includes analysis of a number of factors, including activity in the relevant industry. If necessary, revisions are recorded to reduce the residual values.
PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC stops recording income (“non-accrual status”) on rents receivable when contractual payments become 90 days past due or earlier if management believes there is significant uncertainty of collectability of rent payments, and resumes recording income when collectability of rent payments is reasonably certain. Payments received on rents receivable that are on non-accrual status are used to reduce the rents receivable balance. Write-offs to the allowance for losses are recorded when amounts are deemed to be uncollectible.
▪Guarantees: Altria Group, Inc. recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 1819. Contingencies for a further discussion of guarantees.
▪Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax positions.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Altria Group, Inc. records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes in its consolidated statements of earnings.earnings (losses).
▪Inventories: The last-in, first-out (“LIFO”) method is used to determine the cost of substantially all tobacco inventories. The cost of the remaining inventories is determined using the first-in, first-out (“FIFO”) and average cost methods. Inventories that are measured using the LIFO method are stated at the lower of cost or market. Inventories that are measured using the FIFO and average cost methods are stated at the lower of cost and net realizable value. It is a generally recognized industry practice to classify leaf tobacco and wine inventories as current assets although part of such inventory, because of the duration of the curing and aging process, ordinarily would not be used within one year.
▪Litigation Contingencies and Costs: Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs in the consolidated statements of earnings.earnings (losses). See Note 19. Contingencies.
▪Marketing Costs: Altria Group, Inc.’s Altria’s businesses promote their products with consumer incentives, trade promotions and consumer engagement programs,programs. These consumer incentivesincentive and trade promotions. Such programspromotion activities, which include discounts, coupons, rebates, in-store display incentives event marketing and volume-based incentives. Consumer engagement programsincentives, do not create a distinct deliverable and are, expensed as incurred. Consumer incentive and trade promotion activities aretherefore, recorded as a reduction of revenues. Consumer engagement program payments are made to third parties. Altria’s businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs in Altria’s consolidated statements of earnings (losses). For interim reporting purposes, Altria’s businesses charge consumer engagement programs and certain consumer incentive expenses to operations as a percentage of sales, based on estimated sales and related expenses for the full year.
▪Revenue Recognition: Altria’s businesses generate substantially all of their revenue from sales contracts with customers. While Altria’s businesses enter into separate sales contracts with each customer for each product type, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. All performance obligations are satisfied within one year; therefore, costs to obtain contracts are expensed as incurred and unsatisfied performance obligations are not disclosed. There is no financing component because Altria expects, at contract inception, that the period between when Altria’s businesses transfer product to the customer and when the customer pays for that product will be one year or less.
Altria’s businesses define net revenues as revenues, which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns (also referred to as returned goods) and sales incentives. Altria’s businesses exclude from the transaction price sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on cigarettes, cigars, smokeless tobacco or wine billed to customers).
Altria’s businesses recognize revenues from sales contracts with customers upon shipment of goods when control of such products is obtained by the customer. Altria’s businesses determine that a customer obtains control of the product upon shipment when title of such product and risk of loss transfers to the customer. Altria’s businesses account for shipping and handling costs as fulfillment costs and such amounts are classified as part of cost of sales in Altria’s consolidated statements of earnings (losses). Altria’s businesses record an allowance for returned goods, based principally on historical volume and return rates, which is included in other accrued liabilities on Altria’s consolidated balance sheets. Altria’s businesses record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction to revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period,period) based principally on historical volume, utilization and redemption rates. For interim reporting purposes, consumer engagement programs and certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated sales and related expensesExpected payments for the full year.
▪Revenue Recognition: Altria Group, Inc.’s businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to customers, upon shipment of goods when title and risk of loss pass to
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
customers. PaymentsPayment terms vary depending on product type. Altria’s businesses consider payments received in advance of product shipment as deferred revenue, recognition are deferred and recordedwhich is included in other accrued liabilities on Altria’s consolidated balance sheets until revenue is recognized. Altria Group, Inc.’s businesses also include excise taxes billed toPM USA receives payment in advance of a customer obtaining control of the product. USSTC receives substantially all payments within one business day of the customer obtaining control of the product. Ste. Michelle receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in net revenues. Shipping and handling costs are classified as partreceivables on Altria’s consolidated balance sheets.
▪Stock-Based Compensation: Altria Group, Inc. measures compensation cost for all stock-based awards at fair value on date of grant, net of estimated forfeitures, and recognizes compensation expense over the service periods for awards expected to vest.
▪New Accounting Standards: Guidance Not Yet Adopted: The following table provides a description of the recently issued accounting guidance applicable to, but not yet adopted by, Altria Group, Inc.:Altria:
|
| | | |
| Standards | Description | Effective Date for Public Entity | Effect on Financial Statements |
ASU Nos. 2014-09; 2015-14; 2016-08; 2016-10; 2016-12; 2016-20 Revenue from Contracts with Customers (Topic 606)
| The guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. | The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. | The adoption of this guidance will not have a material impact on the amount or timing of revenue recognized on Altria Group, Inc.’s consolidated financial statements based on current contracts with customers. The guidance will result in expanded footnote disclosures. Altria Group, Inc. will adopt this guidance in the first quarter of 2018, using the modified retrospective transition method. |
ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
| The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. | The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. | The adoption of this guidance will not have a material impact on Altria Group, Inc.’s consolidated financial statements. Altria Group, Inc. will adopt this guidance in the first quarter of 2018. |
ASU Nos. 2016-02; 2018-01
Leases (Topic 842)
| The guidance increases transparency and comparability among organizations by requiring entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. | The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. | Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures, including identifying and analyzing all contracts that contain a lease. As a lessor, PMCC maintains a portfolio of finance assets, substantially all of which are leveraged leases, the accounting of which will be unchanged under the new guidance and is not expected to change unless there is a contract modification to an existing lease. As a lessee, Altria Group, Inc.’s various leases under existing guidance are classified as operating leases that are not recorded on its consolidated balance sheets but are recorded in its consolidated statements of earnings as expense is incurred. Upon adoption of the new guidance, Altria Group, Inc. will record substantially all leases on its balance sheets as a right-of-use asset and a lease liability. The adoption of this guidance is not expected to have a material impact on Altria Group, Inc.’s consolidated financial statements. The guidance will result in expanded footnote disclosures. |
ASU No. 2016-132016-13; 2018-19; 2019-04; 2019-05; 2019-10; 2019-11 Measurement of Credit Losses on Financial Instruments(Topic 326)
| The guidance replaces the current incurred loss impairment methodology for recognizing credit losses for financial assets with a methodology that reflects the entity’s current estimate of all expected credit losses and requires consideration of a broader range of reasonable and supportable information for estimating credit losses. | The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early | Altria’s adoption of this guidance is permitted only as of annual reporting periodsnot expected to have a material impact on its consolidated financial statements. |
ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Subtopic 350-40) | The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). | The guidance is effective for fiscal years beginning after December 15, 2018, including2019 and interim periods within that reportingthose fiscal years. | Altria’s adoption of this guidance is not expected to have a material impact on its consolidated financial statements. |
ASU 2019-12 Simplifying the Accounting for Income Taxes (Topic 740) | The guidance removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes.
| 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 Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures. Altria Group, Inc.’s financial assets that are within the scope of the new guidance were approximately 2% of Altria Group, Inc.’s total assets at December 31, 2017.
|
ASU No. 2016-15 Classification of Certain Cash Receipts2020-01 Clarifying the Interactions between Topic 321, Topic 323, and Cash Payments (Topic 230)
| The guidance addresses how eight specific cash flow issues are to be presented and classified in the statement of cash flows.
| The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.
| The adoption of this guidance will not have a material impact on Altria Group, Inc.’s consolidated statements of cash flows. Altria Group, Inc. will adopt this guidance in the first quarter of 2018.
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
|
| | | |
Standards | Description | Effective Date for Public Entity | Effect on Financial Statements |
ASU No. 2016-18 Restricted Cash (Topic 230)
Topic 815
| The guidance requires that a statementprovides clarification of cash flows explain the change duringinteraction of rules for equity securities, the period in the totalequity method of cash, cash equivalentsaccounting, and amounts generally described as restricted cashforward contracts and restricted cash equivalents.purchase options on certain types of securities. | The guidance is effective for fiscal years, beginning after December 15, 2017 and interim periods within those fiscal years. | At December 31, 2017 and December 31, 2016, Altria Group, Inc. had restricted cash of $61 million and $82 million, respectively. Altria Group, Inc. will retrospectively adopt this guidance in the first quarter of 2018 and will comply with the required presentation of restricted cash in its consolidated statements of cash flows upon adoption.
|
ASU No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715)
| The guidance requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost are required to be presented in the statement of earnings separately from the service cost component and outside the subtotal of operating income. Additionally, only the service cost component is eligible for capitalization. | The guidance is effective for annual periodsyears, beginning after December 15, 2017 and2020. Early application is permitted, including adoption in any interim periods within that reporting period. The guidance
| Altria is required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statementprocess of earnings, and prospectively forevaluating the capitalization of the service cost component.
| Under the new guidance, the amount of non-service cost components of net periodic benefit cost (income) presented within operating income that would have been presented separately from operating income was $37 million, $(1) million and $151 million for the years ended December 31, 2017, 2016 and 2015, respectively. The prospective adoptionimpact of this guidance related to the capitalization of the service cost component will not have a material impact on Altria Group, Inc.’sits consolidated financial statements. Altria Group, Inc. will adopt this guidance in the first quarter of 2018.statements and related disclosures.
|
Note 3. Revenues from Contracts with Customers
Altria disaggregates net revenues based on product type. For further discussion, see Note 16. Segment Reporting.
Altria’s businesses offer cash discounts to customers for prompt payment and calculate cash discounts as a percentage of the list price based on historical experience and agreed-upon payment terms. Altria’s businesses record an allowance for cash discounts, which is included as a contra-asset against receivables on Altria’s consolidated balance sheets. There was 0 allowance for cash discounts at December 31, 2019 and 2018, and there were no differences between amounts recorded as an allowance for cash discounts and cash discounts subsequently given to customers.
Altria’s businesses that receive payments in advance of product shipment record such payments as deferred revenue. These payments are included in other accrued liabilities on Altria’s consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $362 million and $288 million at December 31, 2019 and 2018, respectively. When cash is received in advance of product shipment, Altria’s businesses satisfy their performance obligations within three days of receiving payment. At December 31, 2019 and 2018, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.
Receivables, which primarily reflect sales of wine produced and/or distributed by Ste. Michelle, were $152 million and $142 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, there were no expected differences between amounts recorded and subsequently received, and Altria’s businesses did not record an allowance for doubtful accounts against these receivables.
Altria’s businesses record an allowance for returned goods, which is included in other accrued liabilities on Altria’s consolidated balance sheets. While all of Altria’s tobacco operating companies sell tobacco products with dates relative to freshness as printed on product packaging, it is USSTC’s policy to accept authorized sales returns from its customers for products that have passed such dates due to the limited shelf life of USSTC’s smokeless tobacco products. Altria’s businesses record estimated sales returns, which are based principally on historical volume and return rates, as a reduction to revenues. Actual sales returns will differ from estimated sales returns to the extent actual results differ from estimated assumptions. Altria’s businesses reflect differences between actual and estimated sales returns in the period in which the actual amounts become known. These differences, if any, have not had a material impact on Altria’s consolidated financial statements. All returned goods are destroyed upon return and not included in inventory. Consequently, Altria’s businesses do not record an asset for their right to recover goods from customers upon return.
Sales incentives include variable payments related to goods sold by Altria’s businesses. Altria’s businesses include estimates of variable consideration as a reduction to revenues upon shipment of goods to customers. The sales incentives that require significant estimates and judgments are as follows:
| |
| ▪ | Price promotion payments- Altria’s businesses make price promotion payments, substantially all of which are made to their retail partners to incent the promotion of certain product offerings in select geographic areas. |
| |
| ▪ | Wholesale and retail participation payments- Altria’s businesses make payments to their wholesale and retail partners to incent merchandising and sharing of sales data in accordance with each business’s trade agreements. |
These estimates primarily include estimated wholesale to retail sales volume and historical acceptance rates. Actual payments will differ from estimated payments to the extent actual results differ from estimated assumptions. Differences between actual and estimated payments are reflected in the period such information becomes available. These differences, if any, have not had a material impact on Altria’s consolidated financial statements.
Note 3.4. Goodwill and Other Intangible Assets, net
Goodwill and other intangible assets, net, by segment were as follows: | | | | Goodwill | | Other Intangible Assets, net | Goodwill | | Other Intangible Assets, net |
| (in millions) | December 31, 2017 |
| | December 31, 2016 |
| | December 31, 2017 |
| | December 31, 2016 |
| December 31, 2019 |
| | December 31, 2018 |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Smokeable products | $ | 99 |
| | $ | 77 |
| | $ | 3,054 |
| | $ | 2,901 |
| $ | 99 |
| | $ | 99 |
| | $ | 3,071 |
| | $ | 3,037 |
|
| Smokeless products | 5,023 |
| | 5,023 |
| | 8,827 |
| | 8,829 |
| 5,078 |
| | 5,023 |
| | 9,196 |
| | 8,825 |
|
| Wine | 74 |
| | 74 |
| | 294 |
| | 295 |
| — |
| | 74 |
| | 238 |
| | 239 |
|
| Other | 111 |
| | 111 |
| | 225 |
| | 11 |
| — |
| | — |
| | 182 |
| | 178 |
|
| Total | $ | 5,307 |
| | $ | 5,285 |
| | $ | 12,400 |
| | $ | 12,036 |
| $ | 5,177 |
| | $ | 5,196 |
| | $ | 12,687 |
| | $ | 12,279 |
|
Goodwill relatesAt December 31, 2019 and 2018, the accumulated impairment losses related to the 2017 acquisition of Nat Sherman, 2014 acquisition of Green Smoke, 2009 acquisition of USTgoodwill were $185 million and 2007 acquisition of Middleton.$111 million, respectively.
Other intangible assets consisted of the following:
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| (in millions) | Gross Carrying Amount |
| | Accumulated Amortization |
| | Gross Carrying Amount |
| | Accumulated Amortization |
|
| Indefinite-lived intangible assets | $ | 11,676 |
| | $ | — |
| | $ | 11,846 |
| | $ | — |
|
| Definite-lived intangible assets | 1,275 |
| | 264 |
| | 654 |
| | 221 |
|
| Total other intangible assets | $ | 12,951 |
| | $ | 264 |
| | $ | 12,500 |
| | $ | 221 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| (in millions) | Gross Carrying Amount |
| | Accumulated Amortization |
| | Gross Carrying Amount |
| | Accumulated Amortization |
|
| Indefinite-lived intangible assets | $ | 12,125 |
| | $ | — |
| | $ | 11,740 |
| | $ | — |
|
| Definite-lived intangible assets | 465 |
| | 190 |
| | 465 |
| | 169 |
|
| Total other intangible assets | $ | 12,590 |
| | $ | 190 |
| | $ | 12,205 |
| | $ | 169 |
|
Indefinite-livedAt December 31, 2019, indefinite-lived intangible assets consist substantially of trademarks from Altria Group, Inc.’sAltria’s 2009 acquisition of UST ($9.19.0 billion) and 2007 acquisition of Middleton ($2.6 billion). Definite-lived intangible assets, which consist primarily of intellectual property, customer relationships and certain cigarette trademarks, are amortized over periods up to 25a weighted-average period of 20 years. Pre-tax amortization expense for definite-lived intangible assets during each of the years ended December 31, 2019, 2018 and 2017, 2016was $44 million, $38 million and 2015,$21 million, respectively. In the fourth quarter of 2019, due to a change in estimated useful life, $170 million for an indefinite-lived intangible asset in the smokeable products segment was $21 million.reclassified to a definite-lived intangible asset, due to an anticipated change in the way the asset will be utilized in the future. Annual amortization expense for each of the next five years is estimated to be approximately $20$70 million, assuming no
additional transactions occur that require the amortization of intangible assets.
The changes in goodwill and net carrying amount of intangible assets were as follows:
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| (in millions) | Goodwill | | Other Intangible Assets, net | | Goodwill | | Other Intangible Assets, net |
| Balance at January 1 | $ | 5,196 |
| | $ | 12,279 |
| | $ | 5,307 |
| | $ | 12,400 |
|
| Changes due to: | | | | | | | |
Acquisitions (1) | 55 |
| | 451 |
| | — |
| | 15 |
|
| Asset impairment | (74 | ) | | — |
| | (111 | ) | | (98 | ) |
| Amortization | — |
| | (43 | ) | | — |
| | (38 | ) |
| Balance at December 31 | $ | 5,177 |
| | $ | 12,687 |
| | $ | 5,196 |
| | $ | 12,279 |
|
(1) Substantially all of the 2019 changes reflect Helix’s acquisition of the Burger Group, which held assets consisting primarily of intellectual property. For further discussion, see Note 1. Background and Basis of Presentation.
During the fourth quarter of 2019, in conjunction with its annual impairment testing, Altria adopted ASU 2017-04, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU
2017-04, an impairment charge is recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit.
During 2019, upon completion of Altria’s annual impairment testing of goodwill and other indefinite-lived intangible assets, Altria concluded that goodwill of $74 million in the wine segment was fully impaired as the wine reporting unit was impacted by a slowing growth rate in the premium wine category and higher inventories.
During 2018, Altria recorded goodwill and other intangible asset impairment charges of $111 million and $44 million, respectively, related to Altria’s decision in the fourth quarter of 2018 to refocus its innovative product efforts, which included Nu Mark’s discontinuation of production and distribution of alle-vapor products.
In addition, during 2018, upon completion of Altria’s annual impairment testing, Altria concluded that the $54 millioncarrying value of the Columbia Crest trademark in the wine segment was fully impaired as Columbia Crest has been negatively impacted by an accelerated decline in the $7 to $10 premium wine segment, increased competition and reduction in trade support.
During 2017, 2016 and 2015, Altria Group, Inc. completed itsAltria’s quantitative annual impairment test of goodwill and indefinite-lived intangible assets and noresulted in 0 impairment charges resulted.charges.
For the years ended December 31, 2017, 2016 and 2015, there have been no changes in goodwill and the gross carrying amount of other intangible assets except for the purchase of certain intellectual property in 2017 primarily related to innovative tobacco products, the 2017 acquisition of Nat Sherman and Ste. Michelle’s 2016 purchase of substantially all of the assets
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
of Patz & Hall Wine Company, Inc. In addition, there were no accumulated impairment losses related to goodwill and other intangible assets, net at December 31, 2017 and 2016.
Note 4.5. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs consisted of the following:
| | | For the Year Ended December 31, 2017 | |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs (1) |
| | Total |
| Asset Impairment and Exit Costs | | Implementation Costs | | Total |
| For the year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
| | 2019 (1) |
| | 2018 (2) |
| | 2017 (2) |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Smokeable products | $ | 5 |
| | $ | 17 |
| | $ | 22 |
| $ | 59 |
| | $ | 79 |
| | $ | 4 |
| | $ | 33 |
| | $ | 1 |
| | $ | 17 |
| | $ | 92 |
| | $ | 80 |
| | $ | 21 |
|
| Smokeless products | 28 |
| | 28 |
| | 56 |
| 9 |
| | 20 |
| | 28 |
| | 5 |
| | 3 |
| | 28 |
| | 14 |
| | 23 |
| | 56 |
|
Wine (3) | | 76 |
| | 54 |
| | — |
| | — |
| | — |
| | — |
| | 76 |
| | 54 |
| | — |
|
| All other | | 14 |
| | 227 |
| | — |
| | (10 | ) | | 63 |
| | — |
| | 4 |
| | 290 |
| | — |
|
| General corporate | | 1 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 3 |
| | — |
|
| Total | $ | 33 |
| | $ | 45 |
| | $ | 78 |
| 159 |
| | 383 |
| | 32 |
| | 28 |
| | 67 |
| | 45 |
| | 187 |
| | 450 |
| | 77 |
|
Plus amounts included in net periodic benefit (income) cost, excluding service cost(4) | | 29 |
| | 3 |
| | 1 |
| | — |
| | — |
| | — |
| | 29 |
| | 3 |
| | 1 |
|
| Total | | $ | 188 |
| | $ | 386 |
| | $ | 33 |
| | $ | 28 |
| | $ | 67 |
| | $ | 45 |
| | $ | 216 |
| | $ | 453 |
| | $ | 78 |
|
(1) The pre-tax implementation Included in cost of sales ($2 million) and marketing, administration and research costs were included($26 million) in Altria’s consolidated statement of earnings (losses).
(2) Included in cost of sales in Altria Group, Inc.’sAltria’s consolidated statementstatements of earnings.earnings (losses).
(3) Includes impairment of goodwill for the wine reporting unit in 2019 and impairment of the Columbia Crest trademark in 2018. See Note 4. Goodwill and Other Intangible Assets, net. |
| | | | | | | | | | | |
| For the Year Ended December 31, 2016 |
| (in millions) | Asset Impairment and Exit Costs (1) |
| | Implementation Costs |
| | Total |
|
| Smokeable products | $ | 125 |
| | $ | 9 |
| | $ | 134 |
|
| Smokeless products | 42 |
| | 15 |
| | 57 |
|
| All other | 7 |
| | — |
| | 7 |
|
| General corporate | 5 |
| | — |
| | 5 |
|
| Total | $ | 179 |
| | $ | 24 |
| | $ | 203 |
|
(1)(4) Includes termination, Represents settlement and curtailment costs of $27 million.costs. See Note 16. 17. Benefit Plans.
The 2019 pre-tax asset impairment, exit and implementation costs were related to the cost reduction program and the refocus of innovative product efforts discussed below, and the goodwill impairment for the wine reporting unit.
Substantially all of the 2018 pre-tax asset impairment, exit and implementation costs were related to the refocus of innovative product efforts and the cost reduction program discussed below, and the impairment of the Columbia Crest trademark.
The pre-tax asset impairment, exit and implementation costs for 2017 arewere related to the facilities consolidation discussed below, and the pre-tax asset impairment, exit and implementation costs for 2016 are related to both the facilities consolidation and the productivity initiative discussed below.
The movement in the restructuring liabilities, (excluding termination, settlement and curtailment costs), substantially all of which arewere severance liabilities, for the years ended December 31, 20172019 and 20162018 was as follows:
|
| | | |
| (in millions) | |
| Balances at December 31, 2017 | $ | 33 |
|
| Charges | 154 |
|
| Cash spent | (32 | ) |
| Balances at December 31, 2018 | 155 |
|
| Charges | 59 |
|
| Cash spent | (147 | ) |
| Balances at December 31, 2019 | $ | 67 |
|
|
| | | |
| (in millions) | |
| Balances at December 31, 2015 | $ | — |
|
| Charges | 152 |
|
| Cash spent | (73 | ) |
| Balances at December 31, 2016 | 79 |
|
| Charges | 25 |
|
| Cash spent | (71 | ) |
| Balances at December 31, 2017 | $ | 33 |
|
▪Cost Reduction Program: In December 2018, Altria announced a cost reduction program that includes workforce reductions and third-party spending reductions across the businesses. As a result of the cost reduction program, Altria recorded total pre-tax restructuring charges of $254 million, which included employee benefit-related curtailment and settlement costs. Of this amount, Altria incurred pre-tax charges of $133 million in 2019 and $121 million in 2018. The total charges, the majority of which will result in cash expenditures, related primarily to employee separation costs of $202 million and other costs of $52 million. The pre-tax charges related to this cost reduction program have been substantially completed. Cash payments related to this cost reduction program of $136 million were made during the year ended December 31, 2019. There were 0 cash payments related to this program in 2018.
▪Facilities Consolidation: In October 2016, Altria Group, Inc. announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. In the first quarter of 2018, Middleton is incompleted the processtransfer of transferring its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”)., and USSTC is incompleted the processtransfer of transferring its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. Separation benefits are being paidAt December 31, 2018, pre-tax charges related to non-relocating employees. Thethe consolidation is expected to be substantially completed by the end of the first quarter of 2018.were completed.
As a result of the consolidation, Altria Group, Inc. expects to recordrecorded total pre-tax charges of approximately $150 million, or $0.05 per share. Of this amount, during$155 million. During 2018 and 2017, Altria Group, Inc. incurredrecorded pre-tax charges of $6 million and $78 million, and recorded $71 million in 2016.respectively. The total estimated charges relaterelated primarily to accelerated depreciation and asset impairment ($5055 million), employee separation costs ($4540 million) and other exit and implementation costs ($5560 million). Approximately $95 million of the total pre-tax charges are expected to result in cash expenditures.
For the year ended December 31, 2016, total pre-tax asset impairment and exit costs for the consolidation of $54 million were recorded in the smokeable products segment ($25 million) and smokeless products segment ($29 million). In addition, for the year ended December 31, 2016, pre-tax implementation costs of $17 million were recorded in the smokeable products segment ($3 million) and smokeless products segment ($14 million). The pre-tax implementation costs were included in cost of sales in Altria Group, Inc.’s consolidated statement of earnings.
Cash payments related to the consolidation of $58$3 million were made during the year ended December 31, 2017,2019, for total cash payments of $63$100 million since inception.
▪Productivity Initiative: In January 2016,Altria Group, Inc. announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness through reduced spending on certain selling, general and administrative infrastructure and a leaner organizational structure. As a result of the initiative, during 2016, Altria Group, Inc. incurred total pre-
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
tax restructuring charges of $132 million, or $0.04 per share, substantially all of which result in cash expenditures. The charges consisted of employee separation costs of $117 million and other associated costs of $15 million. Total pre-tax charges related to the initiative have been completed.
For the year ended At December 31, 2016, total pre-tax asset impairment and exit costs for the initiative of $125 million were recorded in the smokeable products segment ($100 million), smokeless products segment ($13 million), all other ($7 million) and general corporate ($5 million). In addition, for the year ended December 31, 2016, pre-tax implementation costs of $7 million were recorded in the smokeable products segment ($6 million) and smokeless products segment ($1 million). The pre-tax implementation costs were included in marketing, administration and research costs in Altria Group, Inc.’s consolidated statement of earnings.
Cash2019, cash payments related to the initiative of $32 millionconsolidation were made during the year ended December 31, 2017, for total cash payments of $106 million since inception.completed.
Note 5.6. Inventories
On January 1, 2017, Altria Group, Inc. adopted ASU No. 2015-11, Inventory(Topic 330): Simplifying the Measurement of Inventory, which requires inventory that is measured using the FIFO or average cost methods to be measured at the lower of cost and net realizable value. Previous guidance required inventory that was measured using the FIFO or average cost methods to be measured at the lower of cost or market. The adoption of this guidance did not have a material impact on Altria Group, Inc.’s consolidated financial statements.
The cost of approximately 59%56% and 62%58% of inventories at December 31, 20172019 and 2016,2018, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.6 billion and $0.7 billion lower than the current cost of inventories at December 31, 20172019 and 2016.2018, respectively.
Note 6. Investment in AB InBev/SABMiller
At December 31, 2017, Altria Group, Inc. had an approximate 10.2% ownership
Altria Group, Inc. reports its share of AB InBev’s results using a one-quarter lag because AB InBev’s results are not available in time for Altria Group, Inc. to record them in the concurrent period.
Pre-tax earnings from Altria Group, Inc.’s equity investment in AB InBev were $532 million for the year ended December 31, 2017. As a result of the one-quarter lag and the timing of theContents
completion of the Transaction, no earnings from Altria Group, Inc.’s equity investmentNote 7. Investments in AB InBev were recorded for the year ended December 31, 2016.Equity Securities
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). Consistent with the one-quarter lag for recording AB InBev’s results, in the first quarter of 2018 Altria Group, Inc. will record its share of AB InBev’s recorded fourth quarter 2017 estimated effect of the Tax Reform Act.
Summary financial data of AB InBev is as follows: |
| | | |
| (in millions) | For Altria Group, Inc.’s Year Ended December 31, 2017 (1) |
| Net revenues | $ | 56,004 |
|
| Gross profit | $ | 34,376 |
|
| Earnings from continuing operations | $ | 6,769 |
|
| Net earnings | $ | 6,845 |
|
| Net earnings attributable to AB InBev | $ | 5,473 |
|
|
| | | | | | | |
| (in millions) | At September 30, 2017 (1) | | At October 10, 2016 (1) |
| Current assets | $ | 30,920 |
| | $ | 40,086 |
|
| Long-term assets | $ | 213,696 |
| | $ | 223,701 |
|
| Current liabilities | $ | 37,765 |
| | $ | 44,272 |
|
| Long-term liabilities | $ | 134,236 |
| | $ | 139,112 |
|
| Noncontrolling interests | $ | 10,639 |
| | $ | 9,177 |
|
(1) Reflecting the one-quarter lag: (i) summary financial data of AB InBev’s results for Altria Group, Inc.’s year ended December 31, 2017 include AB InBev’s results for the last three months of 2016 and the first nine months of 2017, and (ii) summary financial data of AB InBev’s financial position is disclosed at September 30, 2017 and October 10, 2016.
At December 31, 2017, Altria Group, Inc.’s carrying amount of its equity investment in AB InBev exceeded its share of AB InBev’s net assets attributable to equity holders of AB InBev by approximately $11.7 billion. Substantially all of this difference is comprised of goodwill and other indefinite-lived intangible assets (consisting primarily of trademarks).
The fair value of Altria Group, Inc.’s equity investment in AB InBev is based on: (i) unadjusted quoted prices in active markets for AB InBev’s ordinary shares and 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 Group, Inc. 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 forecloses on the Restricted Shares, the relevant 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 Group, Inc.’s equity investment in AB InBevAltria’s investments at December 31, 20172019 and 2016 was $22.1 billion and $20.9 billion, respectively, compared
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
with its carrying value of $18.0 billion and $17.9 billion, respectively.
Prior to the completion2018 consisted of the Transaction on October 10, 2016, Altria Group, Inc. held an approximate 27% ownership of SABMiller that wasfollowing:
|
| | | | | | | | |
| | | Carrying Amount |
| (in millions) | | December 31, 2019 | | December 31, 2018 |
| ABI | | $ | 18,071 |
| | $ | 17,696 |
|
| JUUL | | 4,205 |
| | 12,800 |
|
Cronos (1) | | 1,305 |
| | — |
|
| Total | | $ | 23,581 |
| | $ | 30,496 |
|
Earnings from equity investments accounted for under the equity method of accounting.
Pre-tax earnings from Altria Group, Inc.’s equity investment in SABMiller were $795 million and $757 millionaccounting for the years ended December 31, 20162019, 2018 and 2015, respectively. Altria Group, Inc.’s earnings from its equity investment in SABMiller for2017 consisted of the year ended December 31, 2016 included a pre-tax non-cash gain of $309 million, reflecting Altria Group, Inc.’sfollowing:
|
| | | | | | | | | | | | |
| (in millions) | | 2019 | | 2018 | | 2017 |
| ABI | | $ | 1,229 |
| | $ | 890 |
| | $ | 532 |
|
Cronos (1) | | 496 |
| | — |
| | — |
|
| Total | | $ | 1,725 |
| | $ | 890 |
| | $ | 532 |
|
(1) Represents Altria’s share of SABMiller’s increaseCronos’s earnings, substantially all of which relate to shareholders’ equity, resulting from the completionchange in fair value of the SABMiller, The Coca-Cola Company and Gutsche Family Investments transaction, combining bottling operations in Africa. As a result of the timing of the completion of the Transaction, Altria Group, Inc.’s pre-tax earnings from its equity investment in SABMiller for the year ended December 31, 2016 included its share of approximately nine months of SABMiller’s earnings.
Summary financial data of SABMiller is as follows: |
| | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2016 (1) |
| | 2015 |
|
| Net revenues | $ | 14,543 |
| | $ | 20,188 |
|
| Operating profit | $ | 2,099 |
| | $ | 3,690 |
|
| Net earnings attributable to SABMiller | $ | 1,803 |
| | $ | 2,838 |
|
(1) As a result of the timing of the completion of the Transaction, summary financial data of SABMiller for the year ended December 31, 2016 included approximately nine months of SABMiller’s results.
▪AB InBev and SABMiller Business Combination: On October 10, 2016, Legacy AB InBev completed the Transaction, and AB InBev became the holding company for the combined SABMiller and Legacy AB InBev businesses. Under the terms of the Transaction, SABMiller shareholders received 45 British pounds (“GBP”) in cash for each SABMiller share held, with a partial share alternative (“PSA”), which was subject to proration, available for approximately 41% of the SABMiller shares. Altria Group, Inc. elected the PSA.
Upon completion of the Transaction and taking into account proration, Altria Group, Inc. received, in respect of its 430,000,000 SABMiller shares, (i) an interest that was converted into the Restricted Shares, representing a 9.6% ownership of AB InBev based on AB InBev’s shares outstanding at October 10, 2016, and (ii) approximately $4.8 billion in pre-tax cash as the cash component of the PSA. Additionally, Altria Group, Inc. received pre-tax cash proceeds of approximately $0.5 billion from exercising theCronos’s derivative financial instruments discussed below, which, togetherassociated with the pre-tax cash from the Transaction, totaled approximately $5.3 billionissuance of additional shares.
Investment in pre-tax cash. Subsequently,ABI
At December 31, 2019, Altria Group, Inc. purchased approximatelyhad a 10.1% economic and voting interest in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria Group, Inc.’s ownership of AB InBev to approximately 10.2% at December 31, 2016.
ABI. The Restricted Shares:
| |
| ▪ | are unlisted and not admitted to trading on any stock exchange; |
| |
| ▪ | are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021; |
| |
| ▪ | are convertible into ordinary shares of AB InBevABI on a one-for-one basis after the end of this five-year lock-up period; |
| |
| ▪ | rank equally with ordinary shares of AB InBevABI with regards to dividends and voting rights; and |
| |
| ▪ | have director nomination rights with respect to AB InBev.ABI. |
AsAltria accounts for its investment in ABI under the equity method of accounting because Altria has the ability to exercise significant influence over the operating and financial policies of ABI, including having active representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board committees. Through this representation, Altria participates in ABI policy making processes.
Altria reports its share of ABI’s results using a resultone-quarter lag because ABI’s results are not available in time for Altria to record them in the concurrent period.
Summary financial data of ABI is as follows:
|
| | | | | | | | | | | |
| | For Altria’s Year Ended December 31, |
| (in millions) | 2019 (1) | | 2018 (1) | | 2017 (1) |
| Net revenues | $ | 54,187 |
| | $ | 55,500 |
| | $ | 56,004 |
|
| Gross profit | $ | 33,735 |
| | $ | 34,986 |
| | $ | 34,376 |
|
| Earnings from continuing operations | $ | 10,530 |
| | $ | 9,020 |
| | $ | 6,769 |
|
| Net earnings | $ | 10,530 |
| | $ | 9,020 |
| | $ | 6,845 |
|
| Net earnings attributable to ABI | $ | 9,189 |
| | $ | 7,641 |
| | $ | 5,473 |
|
|
| | | | | | | |
| | At September 30, |
| (in millions) | 2019 (1) | | 2018 (1) |
| Current assets | $ | 27,353 |
| | $ | 20,289 |
|
| Long-term assets | $ | 199,591 |
| | $ | 207,921 |
|
| Current liabilities | $ | 36,819 |
| | $ | 32,019 |
|
| Long-term liabilities | $ | 119,025 |
| | $ | 130,812 |
|
| Noncontrolling interests | $ | 8,765 |
| | $ | 7,251 |
|
(1) Reflects the one-quarter lag.
At December 31, 2019, Altria’s carrying value of its equity investment in ABI exceeded its share of ABI’s net assets attributable to equity holders of ABI by approximately $11.8 billion. Substantially all of this difference is comprised of goodwill and other indefinite-lived intangible assets (consisting primarily of trademarks).
The fair value of Altria’s equity investment in ABI is based on: (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and was classified in Level 1 of the Transaction,fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets, for the yearRestricted 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 December 31, 2019 and 2018 was $16.1 billion (carrying value of $18.1 billion) and $13.1 billion (carrying value of $17.7 billion), respectively, which was less than its carrying value by 11% and 26%, respectively, at December 31, 2019 and 2018. During 2019, the fair value increased and at September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value by 4%. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value. Based on Altria’s evaluation of the duration and magnitude of the fair value decline, Altria’s evaluation of ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery, Altria concluded that the decline in fair value of its investment in ABI below its carrying value is temporary and, therefore, no impairment was recorded.
In the fourth quarter of 2019, Altria recorded a net pre-tax gain of $284 million in earnings from equity investments in Altria’s consolidated statement of earnings (losses), related to the completion in September 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited.
At September 30, 2019, ABI had derivative financial instruments used to hedge its share price related to 92.4 million of its share commitments. ABI’s share price in Euros at December 31, 2019 and September 30, 2019 was €72.71 and €87.42, respectively. Consistent with the one-quarter lag for reporting ABI’s results in Altria’s financial results, Altria will record its share of ABI’s fourth quarter 2019 mark-to-market losses associated with these derivative financial instruments in the first quarter of 2020.
At September 30, 2016, Altria had an approximate 27% ownership of SABMiller plc (“SABMiller”), which Altria accounted for under the equity method of accounting. In October 2016, Anheuser-Busch InBev SA/NV completed its business combination with SABMiller, and Altria received cash and shares representing a 9.6% ownership in the combined company. For the years ended December 31, 2016,2018 and 2017, Altria Group, Inc. recorded pre-tax losses of $33 million and gains of $445 million, respectively, related to the planned completion of the remaining ABI divestitures in (gain) loss on ABI/SABMiller business combination in Altria’s consolidated statements of earnings (losses).
Investment in JUUL
In December 2018, Altria, through a pre-tax gainwholly-owned subsidiary, purchased shares of approximately $13.9JUUL’s non-voting Class C-1 Common Stock for an aggregate price of $12.8 billion, which will convert automatically to shares of voting Class C Common Stock upon antitrust clearance (“Share Conversion”), and for no additional payment, a security convertible into additional shares of Class C-1 Common Stock or $9.0 billion after-tax,Class C Common Stock, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). At December 31, 2019 and 2018, Altria owned 35% of the issued and outstanding capital stock of JUUL.
Altria received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Altria is subject to a standstill restriction under which was basedit may not acquire additional JUUL shares above its 35% interest. Furthermore, Altria agreed not to sell or transfer any of its JUUL shares until December 20, 2024.
As part of the JUUL Transaction, Altria and JUUL entered into a services agreement pursuant to which Altria agreed to provide JUUL with certain commercial services, as requested by JUUL, for an initial term of six years. Altria also agreed to grant JUUL a non-exclusive, royalty-free perpetual, irrevocable, sublicensable license to Altria’s non-trademark licensable intellectual property rights in the e-vapor field, subject to the terms and conditions set forth in an intellectual property license agreement between the parties.
Additionally, Altria agreed to non-competition obligations generally requiring that it participate in the e-vapor business only through JUUL as long as Altria is supplying JUUL services, which Altria is committed to doing until at least December 20, 2024.
As previously disclosed, in April 2019 in connection with antitrust review, Altria and JUUL received a request for additional information (commonly referred to as a “second request”) from the U.S. Federal Trade Commission (the “FTC”). In October 2019, Altria and JUUL certified substantial compliance with the second request. Based on the following:timing agreement among Altria, JUUL and the FTC staff, Share Conversion will not occur before the end of the 70th calendar day following certification of substantial compliance by Altria and JUUL unless the FTC completes its review prior to that day. This agreement has been subject to extensions for the convenience of the parties; however, Altria believes the FTC will complete its review in the first half of 2020.
On January 28, 2020, Altria and JUUL amended certain JUUL Transaction agreements and entered into a new cooperation agreement, which include the following provisions:
| |
| ▪ | the Legacy AB InBev share price as of October 10, 2016;Effective January 28, 2020: |
| |
| ▪ | Altria will continue to provide regulatory affairs support for JUUL’s pursuit of its pre-market tobacco applications (PMTA) and/or its modified risk tobacco products authorization (MRTP) and will discontinue all other services by the book valueend of Altria Group, Inc.’s investment in SABMiller, including Altria Group, Inc.’s accumulated other comprehensive losses directly attributable to SABMiller, at October 10, 2016;the first quarter of 2020; |
| |
| ▪ | Altria has the gains onoption to be released from its non-compete obligation (i) in the derivative financial instruments discussed below;event JUUL is prohibited by federal law from selling e-vapor products in the U.S. for a continuous period of at least 12 months (subject to tolling of this period in certain circumstances) or (ii) if the carrying value of Altria’s investment in JUUL is not more than 10% of its initial carrying value of $12.8 billion; |
| |
| ▪ | Altria and JUUL agreed that for a period of one year they will not pursue any litigation against each other in connection with any conduct that occurred prior to the date of such agreement, with statutes of limitation being tolled during the one-year period; and |
| |
| ▪ | with respect to certain litigation in which Altria and JUUL are both defendants against third-party plaintiffs, Altria will not pursue any claims against JUUL for indemnification or reimbursement except for any non-contractual claims for contribution or indemnity where a judgment has been entered against Altria and JUUL. |
| |
| ▪ | Upon Share Conversion, JUUL will: |
| |
| ▪ | restructure JUUL’s current 7-member Board of Directors to a 9-member board to include independent board members. The new structure will include: (i) 3 independent directors (1 of whom will be designated by Altria and 2 of whom will be designated by JUUL stockholders other than Altria) unanimously certified as independent by a nominating committee, which will include at least 1 Altria designee, (ii) 2 directors designated by Altria, (iii) 3 directors designated by JUUL stockholders other than Altria, and (iv) the impactJUUL Chief Executive Officer; and |
| |
| ▪ | create a Litigation Oversight Committee, which will include 2 Altria designated directors (1 of AB InBev’s divestitureswhom will chair the Litigation Oversight Committee) that will have oversight authority and review of litigation management for matters in which JUUL and Altria are co-defendants and have or reasonably could have a written joint defense agreement in effect between them. Subject to certain SABMiller assetslimitations, the Litigation Oversight Committee will recommend to JUUL changes to outside counsel and businesses in connectionlitigation strategy by majority vote, with Legacy AB InBev obtaining necessary regulatory clearances for the Transaction (“AB InBev divestitures”) that occurreddisagreements by December 31, 2016.JUUL’s management being resolved by majority vote of JUUL’s Board of Directors. |
ForAlso, upon Share Conversion, Altria expects to account for its equity investment in JUUL under the fair value option. Under this option, Altria’s consolidated statement of earnings (losses) will include any cash dividends received from its investment in JUUL as well as any changes in the fair value of the investment, which will be calculated quarterly.
At December 31, 2019, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares do not have a readily determinable fair value, Altria has elected to measure its investment in JUUL at its cost minus any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There have been 0 upward or downward adjustments to the carrying value of Altria’s investment in JUUL resulting from observable price changes in orderly transactions since the JUUL Transaction through December 31, 2019.
Altria reviews its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicates that Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value.
As part of the preparation of its financial statements for the periods ended September 30, 2019 and December 31, 2019, Altria performed its respective qualitative assessments of impairment indicators for its investment in JUUL and determined that indicators of impairment existed.
At September 30, 2019, these indicators included recent significant adverse changes in both the e-vapor regulatory environment and the industry in which JUUL operates. While there was no single determinative event or factor, Altria considered in totality the following indicators of impairment: the increased likelihood of a United States Food and Drug Administration compliance policy prohibiting the sale of certain flavored e-vapor products in the U.S. market without a pre-market authorization; various e-vapor bans put in place by certain states and cities in the U.S. and in certain international markets, coupled with the increased potential for additional bans in the future; and the impact of heightened adverse publicity, including news reports and public health advisories concerning vaping-related lung injuries and deaths.
At December 31, 2019, Altria determined that a significant increase in the number of legal cases pending against JUUL in the fourth quarter of 2019 resulted in an additional indicator of impairment. There were approximately 340 cases (an increase of over 80% since the filing
of Altria’s 2019 Third Quarter Form 10-Q at October 31, 2019) outstanding against JUUL at December 31, 2019, including a variety of class action lawsuits and personal injury claims, as well as cases brought by state attorneys general and local governments. Following completion of Altria’s valuation of JUUL as of September 30, 2019, these incremental outstanding legal cases against JUUL, as well as the expectation that the number of legal cases against JUUL will continue to increase, have increased the risk that JUUL will not achieve Altria’s projection of JUUL’s future cash flows. While Altria has not made any assumptions, or drawn any conclusions, regarding the merits or likelihood of success of any of these cases, litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. This uncertainty has increased the risk that JUUL may not be able to obtain financing and/or fund working capital requirements, financial obligations and international expansion plans.
Given the existence of these impairment indicators, Altria performed quantitative valuations of its investment in JUUL as of September 30, 2019 and December 31, 2019 and recorded total pre-tax charges of $8.6 billion for the year ended December 31, 2017,2019, reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). Of this amount, Altria Group, Inc. recorded pre-tax gainscharges of $445$4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019. The third-quarter impairment charge was due primarily to lower e-vapor sales volume assumptions in the U.S. and international markets and a delay in achieving operating margin performance, as compared to the assumptions at the time of the JUUL Transaction. The fourth-quarter impairment charge results substantially from increased discount rates applied to future cash flow projections, due to the significant risk created by the increase in number of legal cases pending against JUUL.
Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows. Future cash flows in the U.S. were based on a range of scenarios that consider various potential regulatory and market outcomes.
In determining the fair value of its investment in JUUL, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. Additionally, Altria made significant assumptions regarding the likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy.
As disclosed in Note 9. Short-term Borrowings and Borrowing Arrangements, Altria financed the JUUL Transaction through a senior unsecured term loan agreement (the “Term Loan Agreement”). Costs incurred to effect the investment in JUUL were recognized as expenses in Altria’s consolidated statements of earnings (losses). For the years ended December 31, 2019 and 2018, Altria incurred $8 million and $85 million, respectively, of pre-tax acquisition-related costs, consisting primarily of advisory fees, substantially all of which were recorded in marketing, administration and research costs.
Investment in Cronos
In March 2019, Altria, through a subsidiary, completed its acquisition of:
| |
| ▪ | 149.8 million newly issued common shares of Cronos (“Acquired Common Shares”), which represented a 45% economic and voting interest; |
| |
| ▪ | anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of Canadian dollar (“CAD”) $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of December 31, 2019, Altria estimates the Fixed-price Preemptive Rights will allow Altria to purchase up to an additional approximately 37 million common shares of Cronos; and |
| |
| ▪ | a warrant providing Altria the ability to purchase up to an additional 10% of common shares of Cronos (approximately 78 million common shares at December 31, 2019) at a per share exercise price of CAD $19.00, which expires on March 8, 2023. |
If exercised in full, the exercise prices for the warrant and Fixed-price Preemptive Rights are approximately CAD $1.5 billion and CAD $0.6 billion (approximately USD $1.1 billion and $0.5 billion, respectively, based on the CAD to USD exchange rate on January 27, 2020).
The total purchase price for the Acquired Common Shares, Fixed-price Preemptive Rights and warrant (collectively, “Investment in Cronos”) was CAD $2.4 billion (U.S. dollar (“USD”) $1.8 billion). Upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own a maximum of 55% of the outstanding common shares of Cronos.
In accounting for the acquisition of these assets as of the date of closing, the Fixed-price Preemptive Rights and warrant were recorded at each of their fair values using Black-Scholes option-pricing models, based on the assumptions described in Note 8. Financial Instruments. In addition, a deferred tax liability related to the planned completionFixed-price Preemptive Rights and warrant was recorded. The residual of the remaining AB InBev divestiturespurchase price was allocated to the Acquired Common Shares. Accordingly, the CAD $2.4 billion (USD $1.8 billion) purchase price was recorded in gain on AB InBev/SABMiller business combinationUSD as follows:
| |
| ▪ | $1.2 billion to the warrant; |
| |
| ▪ | $0.5 billion to the Fixed-price Preemptive Rights; |
| |
| ▪ | $0.4 billion to the Acquired Common Shares; and |
| |
| ▪ | $0.3 billion to a deferred tax liability. |
For a discussion of derivatives related to Altria’s investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 8. Financial Instruments.
At December 31, 2019, Altria Group, Inc.’s consolidated statementhad a 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of earnings.accounting. Altria reports its share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for Altria to record them in the concurrent period.
Altria Group, Inc.’s gainnominated 4 directors, including 1 director who is independent from Altria, who serve on Cronos’s 7-member Board of Directors.
Summary financial data of Cronos is as follows:
|
| | | |
| | For Altria’s Year Ended December 31, |
| (in millions) | 2019 (1) |
| Net revenues | $ | 21 |
|
| Gross profit | $ | 10 |
|
Net earnings (2) | $ | 1,117 |
|
|
| | | |
| (in millions) | At September 30, 2019 (1) |
| Current assets | $ | 1,575 |
|
| Long-term assets | $ | 511 |
|
| Current liabilities | $ | 457 |
|
| Long-term liabilities | $ | 7 |
|
| Noncontrolling interests | $ | — |
|
(1) Reflecting the Transactionone-quarter lag: (i) summary financial data of Cronos’s results for Altria’s year ended December 31, 2019 include Cronos’s results for the period March 8, 2019 through September 30, 2019, and (ii) summary financial data of Cronos’s financial position is disclosed at September 30, 2019.
(2) Substantially all of Cronos’s net earnings related to changes in fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.
At December 31, 2019, Altria’s carrying amount of its Acquired Common Shares in Cronos exceeded its share of Cronos’s net assets attributable to equity holders of Cronos by approximately $0.2 billion. Substantially all of this difference is comprised of definite-lived intangible assets (consisting of licenses, distribution agreements and developed technology).
The fair value of Altria’s Acquired Common Shares in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was deferred for United States corporate income tax purposes, except to the extentclassified in Level 1 of the cash consideration received.fair value hierarchy. The fair value of Altria’s Acquired Common Shares in Cronos at December 31, 2019 was $1.2 billion compared with its carrying value of $1.0 billion.
▪ Derivative
Note 8. Financial Instruments: In November 2015 and August 2016, Instruments
Altria Group, Inc. enteredenters into a derivative financial instrument, eachinstruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes.
Altria’s investment in ABI, whose functional currency is the form of a put option (together the “options”) to hedgeEuro, exposes Altria Group, Inc.’s exposure to foreign currency exchange rate movementsrisk on the carrying value of its investment. To manage this risk, Altria designates certain foreign exchange contracts, including cross-currency swap contracts and forward contracts (collectively, “foreign currency contracts”), and Euro denominated unsecured long-term notes (“foreign currency denominated debt”) as net investment hedges of Altria’s investment in the GBP to the United States dollar, in relation to the pre-tax cash consideration thatABI.
At December 31, 2019 and December 31, 2018, Altria Group, Inc. expected to receive under the PSA pursuant to the revised and final offer announced by Legacy AB InBev on July 26, 2016. Thehad foreign currency contracts with aggregate notional amounts of $2,246 million and $1,226 million, respectively. At December 31, 2019, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $5,057 million and $4,741 million, respectively. At December 31, 2018, Altria had 0 foreign currency denominated debt.
Altria’s estimates of the November 2015fair values of its foreign currency contracts are determined using valuation models with significant inputs that are readily available in public markets, or can be derived from observable market transactions, and August 2016 optionstherefore are classified in Level 2 of the fair value hierarchy. An adjustment for credit risk and nonperformance risk is included in the fair values of foreign currency contracts.
Altria’s estimate of the fair value of its debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria’s total long-term debt at December 31, 2019 and 2018, was $30.7 billion and $12.5 billion, respectively, as compared with its carrying value of $28.0 billion and $13.0 billion, respectively.
Altria’s Fixed-price Preemptive Rights and warrant related to its investment in Cronos, which is further discussed in Note 7. Investments in Equity Securities, are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and warrant are estimated using Black-Scholes option-pricing models, adjusted for unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:
|
| | | | | | | | |
| | | December 31, 2019 | | March 8, 2019 | | December 31, 2019 | | March 8, 2019 |
| | | Fixed-price Preemptive Rights | | Warrant |
Expected life (1) | | 1.67 years | | 2.32 years | | 3.18 years | | 4 years |
Expected volatility (2) | | 81.61% | | 93.02% | | 81.61% | | 93.02% |
Risk-free interest rate (3)(4) | | 1.71% | | 1.61% | | 1.69% | | 1.67% |
Expected dividend yield (5) | | —% | | —% | | —% | | —% |
(1) Based on the weighted-average expected life of the Fixed-price Preemptive Rights (with a range from approximately 0.25 years to 7 years at December 31, 2019 and March 8, 2019) and the March 8, 2023 expiration date of the warrant.
(2) Based on a blend of historical volatility levels of the underlying equity security and peer companies.
(3) Based on the implied yield currently available on Canadian Treasury zero coupon issues weighted for the remaining expected life of the Fixed-price Preemptive Rights.
(4) Based on the implied yield currently available on Canadian Treasury zero coupon issues and the expected life of the warrant.
(5) Based on Cronos’s expected dividend payments.
The following table provides a reconciliation of the beginning and ending balance of the Fixed-price Preemptive Rights and warrant, which are classified in Level 3 of the fair value hierarchy:
|
| | | | |
| | | (in millions) |
| Balance at December 31, 2018 | | $ | — |
|
| Initial investment in Fixed-price Preemptive Rights and warrant | | 1,736 |
|
| Exercise of Fixed-price Preemptive Rights | | (22 | ) |
| Pre-tax earnings (losses) recognized in net earnings | | (1,411 | ) |
| Balance at December 31, 2019 | | $ | 303 |
|
Altria elects to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on its consolidated balance sheets. The fair values of Altria’s derivative financial instruments on a gross basis included on the consolidated balance sheets were $2,467 million (1,625 million GBP) and $480 million (378 million GBP), respectively. The options did not qualify for hedge accounting; therefore,as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Fair Value of Assets | | Fair Value of Liabilities |
| (in millions) | Balance Sheet Classification | | December 31, 2019 | | December 31, 2018 | | Balance Sheet Classification | December 31, 2019 | | December 31, 2018 |
| Derivatives designated as hedging instruments: | |
| Foreign currency contracts | Other current assets | | $ | 46 |
| | $ | 37 |
| | Other accrued liabilities | $ | 7 |
| | $ | — |
|
| Foreign currency contracts | Other assets | | — |
| | 4 |
| | Other liabilities | 21 |
| | 4 |
|
| Total | | $ | 46 |
| | $ | 41 |
| | | $ | 28 |
| | $ | 4 |
|
| | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Cronos warrant | Investments in equity securities | | $ | 234 |
| | $ | — |
| | | | | |
| Fixed-price Preemptive Rights | Investments in equity securities | | 69 |
| | — |
| | | | | |
| Total | | | $ | 303 |
| | $ | — |
| | | | | |
| | | | | | | | | | | |
| Total derivatives | | | $ | 349 |
| | $ | 41 |
| | | $ | 28 |
| | $ | 4 |
|
Altria records in its consolidated statements of earnings (losses) any changes in the fair values of the options were recordedFixed-price Preemptive Rights and warrant as gains or losses in Altria Group, Inc.’s consolidated statements of earningson Cronos-related financial instruments in the periods in which the changes occurred.occur. For the year ended December 31, 2016,2019, Altria Group, Inc. recordedrecognized pre-tax gains associated with the November 2015 and August
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
2016 options$1,411 million, consisting of $330$434 million and $19$977 million, respectively, forrepresenting the changes in the fair values of the optionsFixed-price Preemptive Rights and warrant, respectively.
In January and February 2019, Altria entered into derivative financial instruments in gainthe form of forward contracts, which were settled on AB InBev/SABMiller business combinationMarch 7, 2019, to hedge Altria’s exposure to CAD to USD foreign currency exchange rate movements, in Altria Group, Inc.’srelation to the CAD $2.4 billion purchase price for the Cronos transaction. The aggregate notional amounts of the forward contracts were USD $1.8 billion (CAD $2.4 billion). The forward contracts did not qualify for hedge accounting; therefore, in the first quarter of 2019, pre-tax losses of USD $31 million representing changes in the fair values of the forward contracts were recorded in loss on Cronos-related financial instruments in Altria’s consolidated statement of earnings. Forearnings (losses).
Counterparties to Altria’s foreign currency contracts are domestic and international financial institutions. Altria is exposed to potential losses due to non-performance by these counterparties. Altria manages its credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure Altria has with each counterparty and monitoring the financial condition of each counterparty. The counterparty agreements also contain provisions that require Altria to maintain an investment grade credit rating. In the event Altria’s credit rating falls below investment grade, counterparties to Altria’s foreign currency contracts can require Altria to post collateral. No collateral was received or posted related to derivative assets and liabilities at December 31, 2019 and December 31, 2018.
▪Net Investment Hedging: The pre-tax effects of Altria’s net investment hedges on accumulated other comprehensive losses and the consolidated statements of earnings (losses) were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Gain (Loss) Recognized in Accumulated Other Comprehensive Losses (1) | | Gain (Loss) Recognized in Net Earnings (Losses)(1) (2) |
| | | For the Years Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
| Foreign currency contracts | | $ | 23 |
| | $ | 69 |
| | $ | 36 |
| | $ | 35 |
|
| Foreign currency denominated debt | | 35 |
| | — |
| | — |
| | — |
|
| Total | | $ | 58 |
| | $ | 69 |
| | $ | 36 |
| | $ | 35 |
|
(1) Net investment hedging activity was not material to Altria for the year ended December 31, 2015, Altria Group, Inc. recorded a pre-tax gain of $20 million for the change2017.
(2) Related to amounts excluded from effectiveness testing.
The changes in the fair value of the November 2015 option. Exercisingforeign currency contracts and in the options in October 2016 resulted in approximately $0.5 billion in pre-tax cash proceeds.
The fair valuescarrying value of the optionsforeign currency denominated debt due to changes in the Euro to USD exchange rate were determined using binomial option pricing models, which reflectrecognized in accumulated other comprehensive losses related to ABI. Gains on the contractual terms of the optionsforeign currency contracts arising from components excluded from effectiveness testing were recognized in interest and other observable market-based inputs, and were classifieddebt expense, net in Level 2 of the fair value hierarchy.
Note 7. Finance Assets, net
In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold.
At December 31, 2017, finance assets, net, of $899 million were comprised of investments in finance leases of $922 million, reduced by the allowance for losses of $23 million. At December 31, 2016, finance assets, net, of $1,028 million were comprised of investments in finance leases of $1,060 million, reduced by the allowance for losses of $32 million.
A summary of the net investments in finance leases, substantially all of which were leveraged leases, at December 31, 2017 and 2016, before allowance for losses was as follows: |
| | | | | | | | |
| (in millions) | | 2017 |
| | 2016 |
|
| Rents receivable, net | | $ | 696 |
| | $ | 805 |
|
| Unguaranteed residual values | | 427 |
| | 495 |
|
| Unearned income | | (201 | ) | | (240 | ) |
| Investments in finance leases | | 922 |
| | 1,060 |
|
| Deferred income taxes | | (407 | ) | | (717 | ) |
| Net investments in finance leases | | $ | 515 |
| | $ | 343 |
|
Rents receivable, net, represent unpaid rents, net of principal and interest payments on third-party nonrecourse debt. PMCC’s rights to rents receivable are subordinate to the third-party nonrecourse debtholders and the leased equipment is pledged as collateral to the debtholders. The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt of $0.6 billion and $0.8 billion at December 31, 2017 and 2016, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in 2017 and 2016.
In 2017, 2016 and 2015 PMCC’s review of estimated residual values resulted in a decrease of $8 million, $28 million and $65 million, respectively, to unguaranteed residual values. These decreases in unguaranteed residual values resulted in a
reduction to PMCC’s net revenues of $5 million, $18 million and $41 million in 2017, 2016 and 2015, respectively.
At December 31, 2017, PMCC’s investments in finance leases were principally comprised of the following investment categories: aircraft (40%), electric power (27%), railcar (13%), real estate (10%) and manufacturing (10%). There were no investments located outside the United States at December 31, 2017 and 2016.
Rents receivable in excess of debt service requirements on third-party nonrecourse debt at December 31, 2017 were as follows:
|
| | | |
| (in millions) | |
| 2018 | $ | 96 |
|
| 2019 | 173 |
|
| 2020 | 116 |
|
| 2021 | 96 |
|
| 2022 | 142 |
|
| Thereafter | 73 |
|
| Total | $ | 696 |
|
PMCC maintains an allowance for losses that provides for estimated credit losses on its investments in finance leases. PMCC’s portfolio consists substantially of leveraged leases to a diverse base of lessees participating in a variety of industries. Losses on such leases are recorded when probable and estimable. PMCC regularly performs a systematic assessment of each individual lease in its portfolio to determine potential credit or collection issues that might indicate impairment. Impairment takes into consideration both the probability of default and the likelihood of recovery if default were to occur. PMCC considers both quantitative and qualitative factors of each investment when performing its assessment of the allowance for losses.
Quantitative factors that indicate potential default are tied most directly to public debt ratings. PMCC monitors publicly available information on its obligors, including financial statements and credit rating agency reports. Qualitative factors that indicate the likelihood of recovery if default were to occur include underlying collateral value, other forms of credit support, and legal/structural considerations impacting each lease. Using available information, PMCC calculates potential losses for each lease in its portfolio based on its default and recovery rating assumptions for each lease. The aggregate of these potential losses forms a range of potential losses which is used as a guideline to determine the adequacy of PMCC’s allowance for losses.
PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. During 2017 and 2016, PMCC determined that its allowance for losses exceeded the amount required based on management’s assessment of the credit quality and size of PMCC’s leasing portfolio. As a result, PMCC reduced its allowance for losses by $9 million and $10 million for the years ended December 31, 2017 and 2016, respectively. There was no such adjustment for the year ended December 31, 2015. These
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
decreases to the allowance for losses were recorded as a reduction to marketing, administration and research costs in Altria Group, Inc.’s consolidated statements of earnings. PMCC believes that, as of December 31, 2017, the allowance for losses of $23 million was adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may increase or decrease its allowance for losses if such conditions change in the future.earnings (losses) based on an amortization approach.
The activity in the allowance for losses on finance assets for the years ended December 31, 2017, 2016 and 2015 was as follows:
|
| | | | | | | | | | | |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Balance at beginning of year | $ | 32 |
| | $ | 42 |
| | $ | 42 |
|
| Decrease to allowance | (9 | ) | | (10 | ) | | — |
|
| Balance at end of year | $ | 23 |
| | $ | 32 |
| | $ | 42 |
|
All PMCC lessees were current on their lease payment obligations as of December 31, 2017.
The credit quality of PMCC’s investments in finance leases as assigned by Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at December 31, 2017 and 2016 was as follows:
|
| | | | | | | |
| (in millions) | 2017 |
| | 2016 |
|
| Credit Rating by Standard & Poor’s/Moody’s: | | | |
| “AAA/Aaa” to “A-/A3” | $ | 220 |
| | $ | 218 |
|
| “BBB+/Baa1” to “BBB-/Baa3” | 550 |
| | 559 |
|
| “BB+/Ba1” and Lower | 152 |
| | 283 |
|
| Total | $ | 922 |
| | $ | 1,060 |
|
Note 8.9. Short-Term Borrowings and Borrowing Arrangements
At December 31, 2017 and2019, Altria had 0 short-term borrowings. At December 31, 2016,2018, Altria Group, Inc. had no$12.7 billion of short-term borrowings.borrowings, which was net of approximately $95 million of debt issuance costs, under the term loan agreement discussed below.
In December 2018, Altria entered into a senior unsecured term loan agreement in connection with its investments in JUUL and Cronos (the “Term Loan Agreement”). At December 31, 2018, Altria had aggregate short-term borrowings under the Term Loan Agreement of $12.8 billion at an average interest rate of approximately 3.5%. Borrowings under the Term Loan Agreement were set to mature on December 19, 2019. In February 2019, Altria repaid all of the outstanding $12.8 billion of short-term borrowings under the Term Loan Agreement with net proceeds from the issuance of long-term senior unsecured notes. See Note 10. Long-Term Debt. Upon repayment, the Term Loan Agreement terminated in accordance with its terms. In 2019, Altria recorded approximately $95 million of pre-tax acquisition-related costs for the write-off of the debt issuance costs related to the Term Loan Agreement, which were recorded in interest and other debt expense, net in Altria’s consolidated statement of earnings (losses).
Altria’s estimate of the fair value of its short-term borrowings is derived from discounted future cash flows based on the contractual terms of the Term Loan Agreement and observable interest rates and is classified in Level 2 of the fair value hierarchy. The credit line available to Altria Group, Inc.fair value of Altria’s short-term borrowings at December 31, 2017 under the Credit Agreement (as defined below) was $3.0 billion.2018 approximated its carrying value.
At December 31, 2017,2018, accrued interest on short-term borrowings of $15 million was included in other accrued liabilities on Altria’s consolidated balance sheet.
At December 31, 2019, Altria Group, Inc. had in place a senior unsecured 5-year revolving credit agreement (the “Credit Agreement”). The Credit Agreement, which is used for general corporate purposes, provides for borrowings up to an aggregate principal amount of $3.0 billion andbillion. The Credit Agreement expires on August 19, 2020.1, 2023 and includes an option, subject to certain conditions, for Altria to extend the Credit Agreement for
2 additional one-year periods. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria Group, Inc.’sAltria’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”), or a mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria Group, Inc.’sAltria’s long-term senior unsecured debt from Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s.Poor’s Ratings Services (“Standard & Poor’s”). The applicable percentage based on Altria Group, Inc.’sAltria’s long-term senior unsecured debt ratings at December 31, 20172019 for borrowings under the Credit Agreement was 1.125%1.0%. The Credit Agreement does not include any other rating triggers, nor does it containor any provisions that could require the posting of collateral. At December 31, 2019 and 2018, Altria had 0 borrowings under the Credit Agreement. The credit line available to Altria at December 31, 2019 under the Credit Agreement was $3.0 billion.
The Credit Agreement is used for general corporate purposes andincludes various covenants, one of which requires Altria to support Altria Group, Inc.’s commercial paper issuances.
The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expenseConsolidated Interest Expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, 2017,2019, the ratiosratio of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense,Consolidated Interest Expense, calculated in accordance with the Credit Agreement, were 1.3was 8.2 to 1.0 and 14.8 to 1.0, respectively.1.0. At December 31, 2019, Altria Group, Inc. expects to continue to meetwas in compliance with its covenants associated within the Credit Agreement. The terms “consolidated EBITDA,“Consolidated EBITDA” and “Consolidated Interest Expense,” “debt” and “consolidated interest expense,”each as defined in the Credit Agreement, include certain adjustments.
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 19. 20. Condensed Consolidating Financial Information.
Note 9.10. Long-Term Debt
At December 31, 20172019 and 2016, Altria Group, Inc.’s2018, Altria’s long-term debt consisted of the following:
|
| | | | | | | |
| (in millions) | 2019 |
| | 2018 |
|
USD notes, 2.625% to 10.20%, interest payable semi-annually, due through 2059 (1) | $ | 23,259 |
| | $ | 13,000 |
|
| USD Debenture, 7.75%, interest payable semi-annually, due 2027 | 42 |
| | 42 |
|
Euro notes, 1.000% to 3.125%, interest payable annually, due through 2031(2) | 4,741 |
| | — |
|
| | 28,042 |
| | 13,042 |
|
| Less current portion of long-term debt | 1,000 |
| | 1,144 |
|
| | $ | 27,042 |
| | $ | 11,898 |
|
|
| | | | | | | |
| (in millions) | 2017 |
| | 2016 |
|
Notes, 2.625% to 10.20%, interest payable semi-annually, due through 2046 (1) | $ | 13,852 |
| | $ | 13,839 |
|
| Debenture, 7.75%, interest payable semi-annually, due 2027 | 42 |
| | 42 |
|
| | 13,894 |
| | 13,881 |
|
| Less current portion of long-term debt | 864 |
| | — |
|
| | $ | 13,030 |
| | $ | 13,881 |
|
(1) Weighted-average coupon interest rate of 4.9%4.6% at December 31, 20172019 and 2016.2018.
(2) Weighted-average coupon interest rate of 2.0% at December 31, 2019.
At December 31, 2017,2019, aggregate maturities of Altria Group, Inc.’sAltria’s long-term debt were as follows:
|
| | | | |
| (in millions) | |
| 2020 | | $ | 1,000 |
|
| 2021 | | 1,500 |
|
| 2022 | | 2,900 |
|
| 2023 | | 1,752 |
|
| 2024 | | 2,400 |
|
| Thereafter | 18,723 |
|
| | | 28,275 |
|
| Less: | debt issuance costs | 154 |
|
| | debt discounts | 79 |
|
| | | $ | 28,042 |
|
|
| | | | |
| (in millions) | | |
| 2018 | $ | 864 |
| |
| 2019 | 1,144 |
| |
| 2020 | 1,000 |
| |
| 2021 | 1,500 |
| |
| 2022 | 1,900 |
| |
| Thereafter | 7,609 |
| |
| | 14,017 |
| |
| Less: debt issuance costs | 68 |
| |
| debt discounts | 55 |
| |
| | $ | 13,894 |
| |
Altria Group, Inc.’s estimate of the fair value of its debt is basedAt December 31, 2019 and 2018, accrued interest on observable market information derived from a third party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria Group, Inc.’s total long-term debt at December 31, 2017of $470 million and 2016,$207 million, respectively, was $15.3 billion and $15.1 billion, respectively, as compared with its carrying value of $13.9 billion for each period.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪Altria Group, Inc. Senior Notes: In February 2019, Altria issued USD denominated and Euro denominated long-term senior unsecured notes in the aggregate principal amounts of $11.5 billion and €4.25 billion, respectively. Altria immediately converted the proceeds of the Euro denominated notes into USD of $4.8 billion. The net proceeds from the Euro notes and a portion of the net proceeds from the USD notes were used to repay in full the $12.8 billion of short-term borrowings under the Term Loan Agreement, which were incurred to fund Altria’s investment in JUUL. The remaining net proceeds from the USD notes were used to fund Altria’s investment in Cronos in the first quarter of 2019 and for other general corporate purposes. The notes contain the following terms:
USD denominated notes
| |
| ▪ | $1.0 billion at 3.490%, due 2022, interest payable semiannually beginning August 14, 2019; |
| |
| ▪ | $1.0 billion at 3.800%, due 2024, interest payable semiannually beginning August 14, 2019; |
| |
| ▪ | $1.5 billion at 4.400%, due 2026, interest payable semiannually beginning August 14, 2019; |
| |
| ▪ | $3.0 billion at 4.800%, due 2029, interest payable semiannually beginning August 14, 2019; |
| |
| ▪ | $2.0 billion at 5.800%, due 2039, interest payable semiannually beginning August 14, 2019; |
| |
| ▪ | $2.5 billion at 5.950%, due 2049, interest payable semiannually beginning August 14, 2019; and |
| |
| ▪ | $0.5 billion at 6.200%, due 2059, interest payable semiannually beginning August 14, 2019. |
Euro denominated notes
| |
| ▪ | €1.25 billion at1.000%, due 2023, interest payable annually beginning February 15, 2020; |
| |
| ▪ | €0.75 billion at 1.700%, due 2025, interest payable annually beginning June 15, 2020; |
| |
| ▪ | €1.0 billion at 2.200%, due 2027, interest payable annually beginning June 15, 2020; and |
| |
| ▪ | €1.25 billion at 3.125%, due 2031, interest payable annually beginning June 15, 2020. |
All of Altria Group, Inc.Altria’s outstanding notes are senior unsecured obligations and rank equally in right of payment with all of Altria Group, Inc.’sAltria’s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of suchthe notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.
During 2019, Altria repaid in full at maturity notes in the aggregate principal amount of $1,144 million.
Altria designated its Euro denominated notes as a net investment hedge of its investment in ABI. For further discussion, see Note 8. Financial Instruments.
For discussion of the fair value of Altria’s long-term debt, see Note 8. Financial Instruments.
The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA as further discussed in Note 19. 20. Condensed Consolidating Financial Information.
▪Debt Tender Offers: During 2016 and 2015, Altria Group, Inc. completed debt tender offers to purchase for cash certain of its senior unsecured notes in aggregate principal amounts of $0.9 billion and $0.8 billion, respectively.
Details of these debt tender offers and the associated pre-tax losses on early extinguishment of debt recorded by Altria Group, Inc. were as follows:
|
| | | | | | | |
| (in millions) | 2016 |
| | 2015 |
|
| Notes Purchased | | | |
| 9.95% Notes due 2038 | $ | 441 |
| | $ | — |
|
| 10.20% Notes due 2039 | 492 |
| | — |
|
| 9.70% Notes due 2018 | — |
| | 793 |
|
| Total | $ | 933 |
| | $ | 793 |
|
|
| | | | | | | |
| Pre-tax Loss on Early Extinguishment of Debt |
| Premiums and fees | $ | 809 |
| | $ | 226 |
|
| Write-off of unamortized debt discounts and debt issuance costs | 14 |
| | 2 |
|
| Total | $ | 823 |
| | $ | 228 |
|
Note 10.11. Capital Stock
At December 31, 2017,2019, Altria Group, Inc. had 12 billion shares of authorized common stock; issued, repurchased and outstanding shares of common stock were as follows:
|
| | | | | | | | |
| | Shares Issued |
| | Shares Repurchased |
| | Shares Outstanding |
|
| Balances, December 31, 2016 | 2,805,961,317 |
| | (862,689,093 | ) | | 1,943,272,224 |
|
| Stock award activity | — |
| | (408,891 | ) | | (408,891 | ) |
| Repurchases of common stock | — |
| | (41,604,141 | ) | | (41,604,141 | ) |
| Balances, December 31, 2017 | 2,805,961,317 |
| | (904,702,125 | ) | | 1,901,259,192 |
|
| Stock award activity | — |
| | 676,727 |
| | 676,727 |
|
| Repurchases of common stock | — |
| | (27,878,324 | ) | | (27,878,324 | ) |
| Balances, December 31, 2018 | 2,805,961,317 |
| | (931,903,722 | ) | | 1,874,057,595 |
|
| Stock award activity | — |
| | 427,276 |
| | 427,276 |
|
| Repurchases of common stock | — |
| | (16,503,317 | ) | | (16,503,317 | ) |
| Balances, December 31, 2019 | 2,805,961,317 |
| | (947,979,763 | ) | | 1,857,981,554 |
|
|
| | | | | | | | |
| | Shares Issued |
| | Shares Repurchased |
| | Shares Outstanding |
|
| Balances, December 31, 2014 | 2,805,961,317 |
| | (834,486,794 | ) | | 1,971,474,523 |
|
| Stock award activity | — |
| | (732,623 | ) | | (732,623 | ) |
Repurchases of common stock | — |
| | (10,682,419 | ) | | (10,682,419 | ) |
| Balances, December 31, 2015 | 2,805,961,317 |
| | (845,901,836 | ) | | 1,960,059,481 |
|
| Stock award activity | — |
| | (566,256 | ) | | (566,256 | ) |
Repurchases of common stock | — |
| | (16,221,001 | ) | | (16,221,001 | ) |
| Balances, December 31, 2016 | 2,805,961,317 |
| | (862,689,093 | ) | | 1,943,272,224 |
|
| Stock award activity | — |
| | (408,891 | ) | | (408,891 | ) |
Repurchases of common stock | — |
| | (41,604,141 | ) | | (41,604,141 | ) |
| Balances, December 31, 2017 | 2,805,961,317 |
| | (904,702,125 | ) | | 1,901,259,192 |
|
At December 31, 2017, 41,688,6662019, Altria had 39,288,323 shares of common stock were reserved for stock-based awards under Altria Group, Inc.’sAltria’s stock plans, andplans.
At December 31, 2019, 10 million shares of serial preferred stock, $1.00 par value, were authorized. Noauthorized; 0 shares of serial preferred stock have been issued.
▪Dividends: During the third quarter of 2017, Altria Group, Inc.’s2019, Altria’s Board of Directors (the “Board of Directors”) approved an 8.2%a 5% increase in the quarterly dividend rate to $0.66$0.84 per share of Altria Group, Inc. common stock versus the previous rate of $0.61$0.80 per share. The current annualized dividend rate is $2.64$3.36 per share. Future dividend payments remain subject to the discretion of the Board of Directors.
▪Share Repurchases: In July 2014, the Board of Directors authorized a $1.0 billion share repurchase program (the “July 2014 share repurchase program”). During the third quarter of 2015, Altria Group, Inc. completed the July 2014 share repurchase program, under which Altria Group, Inc. repurchased a total of 20.4 million shares of its common stock at an average price of $48.90 per share.
In July 2015, the Board of Directors authorized a $1.0 billion share repurchase program that it expanded to $3.0 billion in October 2016 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”). During 2017, 2016 and 2015, Altria Group, Inc. repurchased 41.6 million shares, 16.2 million shares, and 0.6 million shares, respectively, of its common stock (at an aggregate cost
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
of approximately $2,917 million, $1,030 million and $35 million, respectively, and at an average price of $70.10 per share, $63.48 per share and $57.66 per share, respectively) under the July 2015 share repurchase program. At December 31, 2017, Altria Group, Inc. had approximately $18 million remaining in the July 2015 share repurchase program. In January 2018, Altria Group, Inc. completed the July 2015 share repurchase program, under which it purchased a total of 58.7 million shares of its common stock at an average price of $68.15 per share.
In January 2018,Following the completion of the July 2015 share repurchase program, the Board of Directors authorized a new $1.0 billion share repurchase program in January 2018 that it expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”). In June 2019, Altria completed the January 2018 share repurchase program, under which it purchased a total of 34.0 million shares of its common stock at an average price of $58.86 per share.
In July 2019, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2019 share repurchase program”). At December 31, 2019, Altria had $500 million remaining in the July 2019 share repurchase program. 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 of Directors.
For the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, Altria Group, Inc.’sAltria’s total share repurchase activity was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | July 2019 Share Repurchase Program | | January 2018 Share Repurchase Program | | July 2015 Share Repurchase Program | | Total |
| (in millions, except per share data) | | 2019 | | 2019 | | 2018 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Total number of shares repurchased | 10.1 |
| | 6.4 |
| | 27.6 |
| | 0.3 |
| | 41.6 |
| | 16.5 |
| | 27.9 |
| | 41.6 |
|
| Aggregate cost of shares repurchased | $ | 500 |
| | $ | 345 |
| | $ | 1,655 |
| | $ | 18 |
| | $ | 2,917 |
| | $ | 845 |
| | $ | 1,673 |
| | $ | 2,917 |
|
| Average price per share of shares repurchased | $ | 49.29 |
| | $ | 54.36 |
| | $ | 59.89 |
| | $ | 71.68 |
| | $ | 70.10 |
| | $ | 51.24 |
| | $ | 60.00 |
| | $ | 70.10 |
|
|
| | | | | | | | | | |
| | | 2017 |
| 2016 |
| 2015 |
|
| | | (in millions, except per share data) |
Total number of shares repurchased | 41.6 |
| 16.2 |
| 10.7 |
|
Aggregate cost of shares repurchased | $ | 2,917 |
| $ | 1,030 |
| $ | 554 |
|
| Average price per share of shares repurchased | $ | 70.10 |
| $ | 63.48 |
| $ | 51.83 |
|
Note 11.12. Stock Plans
Under the Altria Group, Inc. 2015 Performance Incentive Plan (the “2015 Plan”), Altria Group, Inc. may grant stock options, stock appreciation rights, restricted stock, restricted andstock units (“RSUs”), deferred stock units and other stock-based awards, as well as cash-based annual and long-term incentive awards to employees of Altria Group, Inc. or any of its subsidiaries or affiliates. Any awards granted pursuant to the 2015 Plan may be in the form of performance-based awards, including performance stock units (“PSUs”), which are subject to the achievement or satisfaction of performance goals and performance cycles. Up to 40 million shares of common stock may be issued under the 2015 Plan. In addition, under the 2015 Stock Compensation Plan for Non-Employee Directors (the “Directors Plan”), Altria Group, Inc. may grant up to one million1000000 shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc.Altria.
Shares available to be granted under the 2015 Plan and the Directors Plan at December 31, 2017,2019, were 38,161,24236,078,232 and 920,942,831,560, respectively.
On January 1, 2017, Altria Group, Inc. adopted ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of ASU No. 2016-09 did not have a material impact on Altria Group, Inc.’s consolidated financial statements. The portions of the guidance that have an impact on Altria Group, Inc.’s consolidated financial statements have been adopted prospectively, with the exception of the classification of employee
taxes paid by Altria Group, Inc. on the consolidated statements of cash flows related to shares withheld by Altria Group, Inc. for tax withholding purposes, which has been applied retrospectively. Altria Group, Inc. has made an accounting policy election to continue to estimate the number of share-based awards that are expected to vest, which includes estimating forfeitures.
▪Restricted Stock and Restricted Stock Units: Altria Group, Inc. may grant shares of restricted stock and restricted stock units to employees of Altria Group, Inc. or any of its subsidiaries or affiliates. RSUs: During the vesting period, these shares include nonforfeitable rights to dividends or dividend equivalents and may not be sold, assigned, pledged or otherwise encumbered. Such shares are subject to forfeiture if certain employment conditions are not met. Altria Group, Inc. estimates the number of awards expected to be forfeited and adjusts this estimate when subsequent information indicates that the actual number of forfeitures is likely to differ from previous estimates. Shares of restricted stock and restricted stock unitsRSUs generally vest three years after the grant date.
The fair value of the shares of restricted stock and restricted stock unitsRSUs at the date of grant, net of estimated forfeitures, is amortized to expense ratably over the restriction period, which is generally three years. Altria Group, Inc. recorded pre-tax compensation expense related to restricted stock and restricted stock units granted to employeesRSUs for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 of $49$28 million, $44$39 million and $51$49 million, respectively. The deferred tax benefit recorded related to this compensation expense was $18$7 million, $17$9 million and $20$18 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and restricted stock unitsRSUs was $54$50 million at December 31, 20172019 and is expected to be recognized over a weighted-average period of approximately two years.
Altria Group, Inc.’shas not granted any restricted stock since 2014 and had 0 restricted stock unitsoutstanding at December 31, 2017.
RSU activity was as follows for the year ended December 31,
2017:2019: | | | | Number of Shares |
| | Weighted-Average Grant Date Fair Value Per Share |
| Number of Shares |
| | Weighted-Average Grant Date Fair Value Per Share |
|
| Balance at December 31, 2016 | 3,245,534 |
| | $ | 48.45 |
| |
| Balance at December 31, 2018 | | 2,129,626 |
| | $ | 64.94 |
|
| Granted | 641,263 |
| | $ | 71.05 |
| 719,677 |
| | $ | 52.03 |
|
| Vested | (1,321,620 | ) | | $ | 36.40 |
| (611,657 | ) | | $ | 59.78 |
|
| Forfeited | (180,676 | ) | | $ | 59.11 |
| (328,004 | ) | | $ | 66.52 |
|
| Balance at December 31, 2017 | 2,384,501 |
| | $ | 60.40 |
| |
| Balance at December 31, 2019 | | 1,909,642 |
| | $ | 61.46 |
|
The weighted-average grant date fair value of Altria Group, Inc. restricted stock and restricted stock unitsRSUs granted during the years ended December 31, 2019, 2018 and 2017 2016 and 2015 was $46$37 million, $56$60 million and $65$46 million, respectively, or $52.03, $67.17 and $71.05 $59.38 and $54.54 per restricted stock or restricted stock unit,RSU, respectively. The total fair value of Altria Group, Inc. restricted stock and restricted stock unitsRSUs that vested during the years ended December 31, 2019, 2018 and 2017 2016was $30 million, $65 million and 2015 was $95 million, $78 million and $85 million, respectively.
▪PSUs: Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪Performance Stock Units: In January 2017, Altria Group, Inc. granted an aggregate of 181,409, 177,338 and 187,886 performance stock units to eligible employees.of PSUs during 2019, 2018 and 2017, respectively. The payout of the performance stock unitsPSUs requires the achievement of certain performance measures, which were predetermined at the time of grant, over a three-year performance cycle. These performance measures consist of Altria Group, Inc.’sAltria’s adjusted diluted earnings per share (“EPS”) compounded annual growth rate and Altria Group, Inc.’sAltria’s total shareholder return relative to a predetermined peer group. The performance stock unitsPSUs are also subject to forfeiture if certain employment conditions are not met. At December 31, 2017,2019, Altria Group, Inc. had 170,755 performance stock units remaining,360,685 PSUs outstanding, with a weighted-average grant date fair value of $70.39$58.41 per performance stock unit.PSU. The fair value of the performance stock unitsPSUs at the date of grant, net of estimated forfeitures, is amortized to expense over the performance period. Altria Group, Inc. recorded pre-tax compensation expense related to performance stock unitsPSUs for the yearyears ended December 31, 2019, 2018 and 2017 of $4 million, $7 million and $6 million.million, respectively. The unamortized compensation expense related to Altria Group, Inc.’s performance stock unitsPSUs was $7$10 million at both December 31, 2017. Altria Group, Inc. did not grant any performance stock units during 20162019 and 2015.
2018.
Note 12.13. Earnings (Losses) per Share
Basic and diluted EPSearnings (losses) per share (“EPS”) were calculated using the following:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Net earnings (losses) attributable to Altria | $ | (1,293 | ) | | $ | 6,963 |
| | $ | 10,222 |
|
| Less: Distributed and undistributed earnings attributable to share-based awards | (7 | ) | | (8 | ) | | (14 | ) |
| Earnings (losses) for basic and diluted EPS | $ | (1,300 | ) | | $ | 6,955 |
| | $ | 10,208 |
|
| Weighted-average shares for basic EPS | 1,869 |
| | 1,887 |
| | 1,921 |
|
| Plus: contingently issuable PSUs | — |
| | 1 |
| | — |
|
| Weighted-average shares for diluted EPS | 1,869 |
| | 1,888 |
| | 1,921 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Net earnings attributable to Altria Group, Inc. | $ | 10,222 |
| | $ | 14,239 |
| | $ | 5,241 |
|
| Less: Distributed and undistributed earnings attributable to share-based awards | (14 | ) | | (24 | ) | | (10 | ) |
| Earnings for basic and diluted EPS | $ | 10,208 |
| | $ | 14,215 |
| | $ | 5,231 |
|
| Weighted-average shares for basic and diluted EPS | 1,921 |
| | 1,952 |
| | 1,961 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 13.14. Other Comprehensive Earnings/Losses
The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:Altria:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Benefit Plans |
| | ABI |
| | Currency Translation Adjustments and Other |
| | Accumulated Other Comprehensive Losses |
|
| Balances, December 31, 2016 | | $ | (2,048 | ) | | $ | — |
| | $ | (4 | ) | | $ | (2,052 | ) |
| Other comprehensive earnings (losses) before reclassifications | | 52 |
| | (91 | ) | | — |
| | (39 | ) |
| Deferred income taxes | | (21 | ) | | 32 |
| | — |
| | 11 |
|
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | 31 |
| | (59 | ) | | — |
| | (28 | ) |
| | | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 291 |
| | 8 |
| | — |
| | 299 |
|
| Deferred income taxes | | (113 | ) | | (3 | ) | | — |
| | (116 | ) |
Amounts reclassified to net earnings (losses), net of deferred income taxes | | 178 |
| | 5 |
| | — |
| | 183 |
|
| | | | | | | | | |
| Other comprehensive earnings (losses), net of deferred income taxes | | 209 |
| | (54 | ) | (1) | — |
| | 155 |
|
| Balances, December 31, 2017 | | (1,839 | ) | | (54 | ) | | (4 | ) | | (1,897 | ) |
Adoption of ASU No. 2018-02 (2) | | (397 | ) | | (11 | ) | | — |
| | (408 | ) |
| | | | | | | | | |
| Other comprehensive earnings (losses) before reclassifications | | (151 | ) | | (323 | ) | | (1 | ) | | (475 | ) |
| Deferred income taxes | | 39 |
| | 64 |
| | — |
| | 103 |
|
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | (112 | ) | | (259 | ) | | (1 | ) | | (372 | ) |
| | | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 241 |
| | (64 | ) | | — |
| | 177 |
|
| Deferred income taxes | | (61 | ) | | 14 |
| | — |
| | (47 | ) |
Amounts reclassified to net earnings (losses), net of deferred income taxes | | 180 |
| | (50 | ) | | — |
| | 130 |
|
| | | | | | | | | |
| Other comprehensive earnings (losses), net of deferred income taxes | | 68 |
| | (309 | ) | (1) | (1 | ) | | (242 | ) |
| Balances, December 31, 2018 | | (2,168 | ) | | (374 | ) | | (5 | ) | | (2,547 | ) |
| Other comprehensive earnings (losses) before reclassifications | | (204 | ) | | (367 | ) | | 26 |
| | (545 | ) |
| Deferred income taxes | | 51 |
| | 75 |
| | — |
| | 126 |
|
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | (153 | ) | | (292 | ) |
| 26 |
|
| (419 | ) |
| | | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 173 |
| | (34 | ) | | — |
| | 139 |
|
| Deferred income taxes | | (44 | ) | | 7 |
| | — |
| | (37 | ) |
Amounts reclassified to net earnings (losses), net of deferred income taxes | | 129 |
|
| (27 | ) |
| — |
|
| 102 |
|
| | | | | | | | | |
| Other comprehensive earnings (losses), net of deferred income taxes | | (24 | ) | | (319 | ) | (1) | 26 |
| | (317 | ) |
| Balances, December 31, 2019 | | $ | (2,192 | ) | | $ | (693 | ) | | $ | 21 |
| | $ | (2,864 | ) |
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Benefit Plans |
| | AB InBev/SABMiller |
| | Currency Translation Adjustments and Other |
| | Accumulated Other Comprehensive Losses |
|
| Balances, December 31, 2014 | | $ | (2,040 | ) | | $ | (640 | ) | | $ | (2 | ) | | $ | (2,682 | ) |
| Other comprehensive losses before reclassifications | | (223 | ) | | (983 | ) | | (4 | ) | | (1,210 | ) |
| Deferred income taxes | | 86 |
| | 344 |
| | 1 |
| | 431 |
|
| Other comprehensive losses before reclassifications, net of deferred income taxes | | (137 | ) | | (639 | ) | | (3 | ) | | (779 | ) |
| | | | | | | | | |
| Amounts reclassified to net earnings | | 272 |
| | 21 |
| | — |
| | 293 |
|
| Deferred income taxes | | (105 | ) | | (7 | ) | | — |
| | (112 | ) |
Amounts reclassified to net earnings, net of deferred income taxes | | 167 |
| | 14 |
| | — |
| | 181 |
|
| | | | | | | | | |
| Other comprehensive earnings (losses), net of deferred income taxes | | 30 |
| | (625 | ) | (1) | (3 | ) | | (598 | ) |
| Balances, December 31, 2015 | | (2,010 | ) | | (1,265 | ) | | (5 | ) | | (3,280 | ) |
| Other comprehensive (losses) earnings before reclassifications | | (247 | ) | | 787 |
| | 1 |
| | 541 |
|
| Deferred income taxes | | 96 |
| | (276 | ) | | — |
| | (180 | ) |
| Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes | | (151 | ) | | 511 |
| (2) | 1 |
| | 361 |
|
| | | | | | | | | |
| Amounts reclassified to net earnings | | 178 |
| | 1,160 |
| | — |
| | 1,338 |
|
| Deferred income taxes | | (65 | ) | | (406 | ) | | — |
| | (471 | ) |
Amounts reclassified to net earnings, net of deferred income taxes | | 113 |
| | 754 |
| (3) | — |
| | 867 |
|
| | | | | | | | | |
| Other comprehensive (losses) earnings, net of deferred income taxes | | (38 | ) | | 1,265 |
| | 1 |
| | 1,228 |
|
| Balances, December 31, 2016 | | (2,048 | ) | | — |
| | (4 | ) | | (2,052 | ) |
| Other comprehensive earnings (losses) before reclassifications | | 52 |
| | (91 | ) | | — |
| | (39 | ) |
| Deferred income taxes | | (21 | ) | | 32 |
| | — |
| | 11 |
|
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | 31 |
| | (59 | ) | | — |
| | (28 | ) |
| | | | | | | | | |
| Amounts reclassified to net earnings | | 291 |
| | 8 |
| | — |
| | 299 |
|
| Deferred income taxes | | (113 | ) | | (3 | ) | | — |
| | (116 | ) |
Amounts reclassified to net earnings, net of deferred income taxes | | 178 |
| | 5 |
| | — |
| | 183 |
|
| | | | | | | | | |
| Other comprehensive earnings (losses), net of deferred income taxes | | 209 |
| | (54 | ) | (1) | — |
| | 155 |
|
| Balances, December 31, 2017 | | $ | (1,839 | ) | | $ | (54 | ) | | $ | (4 | ) | | $ | (1,897 | ) |
(1) Altria Group, Inc.’s proportionate share of AB InBev’s and SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments for the years ended December 31, 2017 and 2015, respectively.
(2) As a result of the Transaction, Altria Group, Inc. reversed to investment in SABMiller $414 million of its accumulated other comprehensive losses directly attributable to SABMiller; the remaining $97 million consisted primarily ofPrimarily reflects currency translation adjustments.
(3) (2)As a result Reflects the reclassification of the Transaction, Altria Group, Inc. recognized $737 millionstranded income tax effects of its accumulated other comprehensive losses directly attributable to SABMiller.the Tax Reform Act.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:earnings (losses):
| | | | | For the Years Ended December 31, | | For the Years Ended December 31, |
| (in millions) | | 2017 |
| | 2016 |
| | 2015 |
| | 2019 |
| | 2018 |
| | 2017 |
|
Benefit Plans: (1) | | | | | | | | | | | | |
| Net loss | | $ | 325 |
| | $ | 223 |
| | $ | 304 |
| | $ | 200 |
| | $ | 276 |
| | $ | 325 |
|
| Prior service cost/credit | | (34 | ) | | (45 | ) | | (32 | ) | | (27 | ) | | (35 | ) | | (34 | ) |
| | | 291 |
| | 178 |
| | 272 |
| | 173 |
| | 241 |
| | 291 |
|
AB InBev/SABMiller (2) | | 8 |
| | 1,160 |
| | 21 |
| |
| Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings | | $ | 299 |
| | $ | 1,338 |
| | $ | 293 |
| |
ABI (2) | | | (34 | ) | | (64 | ) | | 8 |
|
| Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings (losses) | | | $ | 139 |
| | $ | 177 |
| | $ | 299 |
|
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 16. 17. Benefit Plans.
(2) For the years ended December 31, 2017 and 2015, amounts Amounts are primarily included in earnings from equity investment in AB InBev/SABMiller. Substantially all of the amount for the year ended December 31, 2016 is included in gain on AB InBev/SABMiller business combination.investments. For further information, see Note 6. Investment7. Investments in AB InBev/SABMiller.Equity Securities.
Note 14.15. Income Taxes
In December 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Reform Act. As a result of the Tax Reform Act, Altria Group, Inc. recorded net tax benefits of approximately $3.4 billion in the fourth quarter of 2017 as discussed below. The main provisions of the Tax Reform Act that impactimpacted Altria Group, Inc. include:included: (i) a reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system.
The transition to a modified territorial tax system requiresrequired Altria Group, Inc. to record a deemed repatriation tax and an associated tax basis benefit in 2017. Substantially all of the deemed repatriation tax iswas related to Altria Group, Inc.’sAltria’s share of AB InBev’sABI’s accumulated earnings. As a result ofDividends received from ABI beginning in 2017, to the extent that such dividends represent previously taxed income attributable to the deemed repatriation tax, noresult in an associated tax was due onbasis expense, which reverses the dividends Altria Group, Inc. received from AB InBevtax basis benefit recorded in 2017.
Earnings before income taxes and provision (benefit) provision for income taxes consisted of the following for the years ended December 31, 2017, 20162019, 2018 and 2015:2017:
|
| | | | | | | | | | | |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Earnings (losses) before income taxes: | | | | | |
| United States | $ | 266 |
| | $ | 9,441 |
| | $ | 9,809 |
|
| Outside United States | 500 |
| | (100 | ) | | 19 |
|
| Total | $ | 766 |
| | $ | 9,341 |
| | $ | 9,828 |
|
| Provision (benefit) for income taxes: | | | | | |
| Current: | | | | | |
| Federal | $ | 1,686 |
| | $ | 1,911 |
| | $ | 2,346 |
|
| State and local | 470 |
| | 519 |
| | 366 |
|
| Outside United States | 3 |
| | 1 |
| | 15 |
|
| | 2,159 |
| | 2,431 |
| | 2,727 |
|
| Deferred: | | | | | |
| Federal | (78 | ) | | (18 | ) | | (3,213 | ) |
| State and local | (19 | ) | | (42 | ) | | 86 |
|
| Outside United States | 2 |
| | 3 |
| | 1 |
|
| | (95 | ) | | (57 | ) | | (3,126 | ) |
| Total provision (benefit) for income taxes | $ | 2,064 |
| | $ | 2,374 |
| | $ | (399 | ) |
|
| | | | | | | | | | | |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Earnings before income taxes: | | | | | |
| United States | $ | 9,809 |
| | $ | 21,867 |
| | $ | 8,078 |
|
| Outside United States | 19 |
| | (15 | ) | | — |
|
| Total | $ | 9,828 |
| | $ | 21,852 |
| | $ | 8,078 |
|
Provision (benefit) for income taxes: | | | | | |
| Current: | | | | | |
| Federal | $ | 2,346 |
| | $ | 4,093 |
| | $ | 2,516 |
|
| State and local | 366 |
| | 390 |
| | 451 |
|
| Outside United States | 15 |
| | 6 |
| | — |
|
| | 2,727 |
| | 4,489 |
| | 2,967 |
|
| Deferred: | | | | | |
| Federal | (3,213 | ) | | 3,102 |
| | (140 | ) |
| State and local | 86 |
| | 20 |
| | 8 |
|
| Outside United States | 1 |
| | (3 | ) | | — |
|
| | (3,126 | ) | | 3,119 |
| | (132 | ) |
Total (benefit) provision for income taxes | $ | (399 | ) | | $ | 7,608 |
| | $ | 2,835 |
|
Altria Group, Inc.’sAltria’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal income tax statute of limitations remains open for the year 20102016 and forward, with years 2014 and 20152016 through 2018 currently under examination by the Internal Revenue Service (“IRS”) as part of an audit conducted in the ordinary course of business. With the exception of corresponding federal audit adjustments, state statutes of limitations generally remain open for the year 20132015 and forward. Certain of Altria Group, Inc.’sAltria’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 20162019, 2018 and 20152017 was as follows:
|
| | | | | | | | | | | |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Balance at beginning of year | $ | 85 |
| | $ | 66 |
| | $ | 169 |
|
| Additions based on tax positions related to the current year | — |
| | — |
| | — |
|
| Additions for tax positions of prior years | 32 |
| | 22 |
| | 129 |
|
| Reductions for tax positions due to lapse of statutes of limitations | — |
| | — |
| | (4 | ) |
| Reductions for tax positions of prior years | (16 | ) | | (1 | ) | | (208 | ) |
| Tax settlements | (37 | ) | | (2 | ) | | (20 | ) |
| Balance at end of year | $ | 64 |
| | $ | 85 |
| | $ | 66 |
|
|
| | | | | | | | | | | |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Balance at beginning of year | $ | 169 |
| | $ | 158 |
| | $ | 258 |
|
Additions based on tax positions related to the current year | — |
| | 15 |
| | 15 |
|
Additions for tax positions of prior years | 129 |
| | 29 |
| | 57 |
|
Reductions for tax positions due to lapse of statutes of limitations | (4 | ) | | (4 | ) | | (4 | ) |
Reductions for tax positions of prior years | (208 | ) | | (28 | ) | | (86 | ) |
| Settlements | (20 | ) | | (1 | ) | | (82 | ) |
| Balance at end of year | $ | 66 |
| | $ | 169 |
| | $ | 158 |
|
Unrecognized tax benefits and Altria Group, Inc.’sAltria’s consolidated liability for tax contingencies at December 31, 20172019 and 20162018 were as follows: | | | (in millions) | 2017 |
| | 2016 |
| 2019 |
| | 2018 |
|
| Unrecognized tax benefits | $ | 66 |
| | $ | 169 |
| $ | 64 |
| | $ | 85 |
|
| Accrued interest and penalties | 9 |
| | 23 |
| 11 |
| | 13 |
|
| Tax credits and other indirect benefits | (1 | ) | | (6 | ) | (1 | ) | | (1 | ) |
| Liability for tax contingencies | $ | 74 |
| | $ | 186 |
| $ | 74 |
| | $ | 97 |
|
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 20172019 was $43$40 million, along with $23$24 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 20162018 was $67$59 million, along with $102$26 million affecting deferred taxes.
Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision.
For the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, Altria Group, Inc. recognized in its consolidated statements of earnings $(13)(losses) $6 million, $9$5 million and $(36)$(13) million, respectively, of gross interest expense (income) expense associated with uncertain tax positions.
Altria Group, Inc. is subject to income taxation in many jurisdictions. UncertainUnrecognized tax positionsbenefits reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within the control of Altria Group, Inc.Altria. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $5$28 million.
The effectiveA reconciliation between actual income tax rate on pre-tax earnings differed fromtaxes and amounts computed by applying the U.S. federal statutory rate for the following reasonsto earnings (losses) before income taxes for the years ended December 31, 2019, 2018 and 2017 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| (dollars in millions) | | $ | | % | | $ | | % | | $ | | % |
| U.S. federal statutory rate | | $ | 161 |
| | 21.0 | % | | $ | 1,962 |
| | 21.0 | % | | $ | 3,440 |
| | 35.0 | % |
| Increase (decrease) resulting from: | | | | | | | | | | | | |
| State and local income taxes, net of federal tax benefit | | 356 |
| | 46.5 |
| | 377 |
| | 4.0 |
| | 345 |
| | 3.5 |
|
| Re-measurement of net deferred tax liabilities | | — |
| | — |
| | — |
| | — |
| | (3,063 | ) | | (31.2 | ) |
| Tax basis in foreign investments | | 84 |
| | 11.0 |
| | 140 |
| | 1.5 |
| | (763 | ) | | (7.8 | ) |
| Deemed repatriation tax | | — |
| | — |
| | 14 |
| | 0.1 |
| | 413 |
| | 4.2 |
|
| Uncertain tax positions | | (40 | ) | | (5.2 | ) | | 8 |
| | 0.1 |
| | (89 | ) | | (0.9 | ) |
| Investment in ABI | | (210 | ) | | (27.4 | ) | | (104 | ) | | (1.1 | ) | | (580 | ) | | (5.9 | ) |
| Investment in JUUL | | 1,808 |
| | 236.0 |
| | 15 |
| | 0.2 |
| | — |
| | — |
|
| Investment in Cronos | | (66 | ) | | (8.6 | ) | | — |
| | — |
| | — |
| | — |
|
| Domestic manufacturing deduction | | — |
| | — |
| | — |
| | — |
| | (181 | ) | | (1.8 | ) |
Other (1) | | (29 | ) | | (3.8 | ) | | (38 | ) | | (0.4 | ) | | 79 |
| | 0.8 |
|
| Effective tax rate | | $ | 2,064 |
| | 269.5 | % | | $ | 2,374 |
| | 25.4 | % | | $ | (399 | ) | | (4.1 | )% |
(1) Other in 2019 is primarily deferred profit sharing dividends tax benefit of $21 million and miscellaneous immaterial items.
The tax provision in 2019 included tax expense of $2,024 million for a valuation allowance on a deferred tax asset related to Altria’s impairment of its investment in JUUL equity securities, tax expense of $84 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017 and tax expense of $38 million for a valuation allowance against foreign tax
credits not realizable. These amounts were partially offset by a tax benefit of $105 million for amended tax returns and audit adjustments relating to a prior year, a tax benefit of $100 million for accruals no longer required and a net tax benefit of $79 million related to Altria’s equity investment in Cronos, including a valuation allowance release on a deferred tax asset.
The tax provision in 2018 included tax expense of $188 million related to the Tax Reform Act as follows: (i) tax expense of $140 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017; (ii) tax expense of $34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017; and (iii) tax expense of $14 million for an adjustment to the provisional estimates for the repatriation tax recorded in 2017.
Substantially all of the 2018 amounts related to the tax basis adjustment, valuation allowance on foreign tax credits and repatriation tax relate to Altria’s share of ABI’s accumulated earnings and associated taxes. The adjustments recorded in 2018 to the provisional estimates recorded in 2017 were based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information received from ABI, including information regarding ABI’s accumulated earnings and associated taxes for the 2016 and 2015:
|
| | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| U.S. federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Increase (decrease) resulting from: | | | | | |
State and local income taxes, net of federal tax benefit | 3.5 |
| | 1.2 |
| | 3.7 |
|
| Re-measurement of net deferred tax liabilities | (31.2 | ) | | — |
| | — |
|
| Tax basis in foreign investments | (7.8 | ) | | — |
| | — |
|
| Deemed repatriation tax | 4.2 |
| | — |
| | — |
|
| Uncertain tax positions | (0.9 | ) | | — |
| | (0.8 | ) |
AB InBev/SABMiller dividend benefit | (5.9 | ) | | (0.6 | ) | | (0.5 | ) |
| Domestic manufacturing deduction | (1.8 | ) | | (0.8 | ) | | (2.0 | ) |
| Other | 0.8 |
| | — |
| | (0.3 | ) |
| Effective tax rate | (4.1 | )% | | 34.8 | % | | 35.1 | % |
The tax benefit in 2017 included net tax benefits of $3,367 million related to the Tax Reform Act recorded in the fourth quarter of 2017 as follows: (i) a tax benefit of $3,017 million to re-measure Altria Group, Inc. and its consolidated subsidiaries’ net deferred tax liabilities based on the new U.S. federal statutory rate;rate and (ii) a net tax benefit of $763 million for a tax basis adjustment associated with the deemed repatriation tax, partially offset by tax expense of $413 million for the deemed repatriation tax.
The 2017 amounts above related to the tax basis adjustment and the deemed repatriation tax were based on provisional estimates, as of January 18, 2018, substantially all of which arewere related to Altria Group, Inc.’sAltria’s share of AB InBev’sABI’s accumulated earnings and associated taxes. Altria Group, Inc. may be required to adjust these provisional estimates based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information to be received from AB InBev, including information regarding AB InBev’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. This additional guidance and information could result in increases or decreases to the provisional estimates, which may be significant in relation to these estimates. Altria Group, Inc. will record any such adjustments in 2018.
The tax benefit in 2017 also included tax benefits of $232 million for the release of a valuation allowance in the third quarter of 2017 related to deferred income tax assets for foreign tax credit carryforwards, which is included in AB InBev/SABMiller dividend benefitinvestment in ABI in the table above; and tax benefits of $152 million related primarily to the effective settlement in the second quarter of 2017 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2010-2013 tax years, partially offset by tax expense of $114 million in the third quarter of 2017 for tax reserves related to the calculation of certain foreign tax credits.
The tax provision in 2016 included increased tax benefits associated with the cumulative SABMiller and AB InBev dividends and tax expense of $4.9 billion (approximately 35%) for the gain on the Transaction.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The tax provision in 2015 included net tax benefits of (i) $59 million from the reversal of tax reserves and associated interest due primarily to the closure in the third quarter of 2015 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”); and (ii) $41 million for Philip Morris International Inc. (“PMI”) tax matters discussed below, partially offset by the reversal of foreign tax credits primarily associated with SABMiller dividends that were recorded during the third quarter of 2015 ($41 million) and the fourth quarter of 2015 ($24 million). The tax provision in 2015 also included decreased recognition of foreign tax credits associated with SABMiller dividends.
Under tax sharing agreements between Altria Group, Inc. and its former subsidiary PMI, entered into in connection with the 2008 spin-off, PMI is responsible for its pre-spin-off tax obligations. Altria Group, Inc., however, remained severally liable for PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns, and continued to include the pre-spin-off federal income tax reserves of PMI in its liability for uncertain tax positions. As of December 31, 2015, there were no remaining pre-spin-off tax reserves for PMI.
During 2015, Altria Group, Inc. recorded tax benefits of $41 million for PMI tax matters, primarily relating to the IRS 2007-2009 Audit. These net tax benefits were offset by a reduction of a PMI tax-related receivable, which was recorded as a decrease to operating income in Altria Group, Inc.’s consolidated statement of earnings. Due to the offset, the PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the year ended December 31, 2015.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 20172019 and 2016:2018:
| | | (in millions) | 2017 |
| | 2016 |
| 2019 |
| | 2018 |
|
| Deferred income tax assets: | | | | | | |
| Accrued postretirement and postemployment benefits | $ | 539 |
| | $ | 952 |
| $ | 491 |
| | $ | 500 |
|
| Settlement charges | 614 |
| | 1,446 |
| 833 |
| | 864 |
|
| Accrued pension costs | 136 |
| | 330 |
| 131 |
| | 155 |
|
| Investment in JUUL | | 2,047 |
| | — |
|
| Investment in Cronos | | 197 |
| | — |
|
| Net operating losses and tax credit carryforwards | 18 |
| | 288 |
| 92 |
| | 57 |
|
| Total deferred income tax assets | 1,307 |
| | 3,016 |
| 3,791 |
| | 1,576 |
|
| Deferred income tax liabilities: | | | | | | |
| Property, plant and equipment | (261 | ) | | (429 | ) | (255 | ) | | (251 | ) |
| Intangible assets | (2,674 | ) | | (4,032 | ) | (2,758 | ) | | (2,689 | ) |
| Investment in AB InBev | (2,859 | ) | | (5,546 | ) | |
| Investment in ABI | | (3,115 | ) | | (3,038 | ) |
| Finance assets, net | (404 | ) | | (708 | ) | (204 | ) | | (313 | ) |
| Other | (121 | ) | | (125 | ) | (158 | ) | | (115 | ) |
| Total deferred income tax liabilities | (6,319 | ) | | (10,840 | ) | (6,490 | ) | | (6,406 | ) |
| Valuation allowances | — |
| | (240 | ) | (2,324 | ) | | (71 | ) |
| Net deferred income tax liabilities | $ | (5,012 | ) | | $ | (8,064 | ) | $ | (5,023 | ) | | $ | (4,901 | ) |
At December 31, 2017,2019, Altria Group, Inc. had estimated gross state tax net operating losses of $569$655 million that, if unused, will expire in 2020 through 2038.
A reconciliation of the beginning and ending valuation allowances for the years ended December 31, 2019, 2018 through 2037.and 2017 was as follows:
|
| | | | | | | | | | | | |
| (in millions) | | 2019 |
| | 2018 |
| | 2017 |
|
| Balance at beginning of year | | $ | 71 |
| | $ | — |
| | $ | 240 |
|
| Additions to valuation allowance related to Altria’s initial investment in Cronos | | 352 |
| | — |
| | — |
|
| Additions to valuation allowance charged to income tax expense | | 2,063 |
| | 71 |
| | — |
|
| Reductions to valuation allowance credited to income tax benefit | | (159 | ) | | — |
| | (240 | ) |
| Foreign currency translation | | (3 | ) | | — |
| | — |
|
| Balance at end of year | | $ | 2,324 |
| | $ | 71 |
| | $ | — |
|
The 2019 valuation allowance was primarily attributable to the deferred tax asset recorded in connection with the impairment of Altria’s investment in JUUL equity securities. Altria determined, based on the weight of available evidence, that it is more-likely-than-not that the deferred tax asset related to the impairment of its investment in JUUL equity securities will not be realized; therefore, Altria recorded a full valuation allowance of $2,024 million against this deferred tax asset. In reaching this determination, Altria considered all available positive and negative evidence, including the character of the loss, carryback and carryforward considerations, future reversals of temporary differences and available tax planning strategies. For a discussion regarding the impairment of Altria’s investment in JUUL equity securities, see Note 7. Investments in EquitySecurities.
The 2018 valuation allowance was primarily related to foreign tax credit and state net operating loss carryforwards that more-likely-than-not will not be realized.
Note 15.16. Segment Reporting
The products of Altria Group, Inc.’sAltria’s subsidiaries include smokeable tobacco products, consisting of combustible cigarettes manufactured and sold by PM USA and Nat Sherman, machine-made large cigars and pipe tobacco manufactured and sold by Middleton and premium cigars sold by Nat Sherman; smokeless tobacco products, consisting of moist smokeless tobacco and snus products manufactured and sold by USSTC;USSTC, and oral nicotine pouches sold by Helix; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria Group, Inc.’sAltria’s reportable segments of smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in all other.
Altria Group, Inc.’sAltria’s chief operating decision maker (the “CODM”) reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Interest and other debt expense, net, net periodic benefit income/cost, excluding service cost, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the CODM. Information about total assets by segment is not disclosed because such information is not reported to or used by the CODM. Substantially all of Altria’s long-lived assets are located in the United States. Segment goodwill and other intangible assets, net, are disclosed in Note 3. 4. Goodwill and Other Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Segment data were as follows:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Net revenues: | | | | | |
| Smokeable products | $ | 21,996 |
| | $ | 22,297 |
| | $ | 22,636 |
|
| Smokeless products | 2,367 |
| | 2,262 |
| | 2,155 |
|
| Wine | 689 |
| | 691 |
| | 698 |
|
| All other | 58 |
| | 114 |
| | 87 |
|
| Net revenues | $ | 25,110 |
| | $ | 25,364 |
| | $ | 25,576 |
|
| Earnings (losses) before income taxes: | | | | | |
| Operating companies income (loss): | | | | | |
| Smokeable products | $ | 9,009 |
| | $ | 8,408 |
| | $ | 8,426 |
|
| Smokeless products | 1,580 |
| | 1,431 |
| | 1,306 |
|
| Wine | (3 | ) | | 50 |
| | 146 |
|
| All other | (16 | ) | | (421 | ) | | (51 | ) |
| Amortization of intangibles | (44 | ) | | (38 | ) | | (21 | ) |
| General corporate expenses | (199 | ) | | (315 | ) | | (213 | ) |
| Corporate asset impairment and exit costs | (1 | ) | | — |
| | — |
|
| Operating income | 10,326 |
| | 9,115 |
| | 9,593 |
|
| Interest and other debt expense, net | (1,280 | ) | | (665 | ) | | (705 | ) |
| Net periodic benefit income (cost), excluding service cost | 37 |
| | 34 |
| | (37 | ) |
| Earnings from equity investments | 1,725 |
| | 890 |
| | 532 |
|
| Impairment of JUUL equity securities | (8,600 | ) | | — |
| | — |
|
| Loss on Cronos-related financial instruments | (1,442 | ) | | — |
| | — |
|
| Gain (loss) on ABI/SABMiller business combination | — |
| | (33 | ) | | 445 |
|
| Earnings (losses) before income taxes | $ | 766 |
| | $ | 9,341 |
| | $ | 9,828 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Net revenues: | | | | | |
| Smokeable products | $ | 22,636 |
| | $ | 22,851 |
| | $ | 22,792 |
|
| Smokeless products | 2,155 |
| | 2,051 |
| | 1,879 |
|
| Wine | 698 |
| | 746 |
| | 692 |
|
| All other | 87 |
| | 96 |
| | 71 |
|
| Net revenues | $ | 25,576 |
| | $ | 25,744 |
| | $ | 25,434 |
|
| Earnings before income taxes: | | | | | |
Operating companies income (loss): | | | | | |
| Smokeable products | $ | 8,408 |
| | $ | 7,768 |
| | $ | 7,569 |
|
| Smokeless products | 1,300 |
| | 1,177 |
| | 1,108 |
|
| Wine | 147 |
| | 164 |
| | 152 |
|
| All other | (51 | ) | | (99 | ) | | (169 | ) |
| Amortization of intangibles | (21 | ) | | (21 | ) | | (21 | ) |
| General corporate expenses | (227 | ) | | (222 | ) | | (237 | ) |
| Reduction of PMI tax-related receivable | — |
| | — |
| | (41 | ) |
| Corporate asset impairment and exit costs | — |
| | (5 | ) | | — |
|
| Operating income | 9,556 |
| | 8,762 |
| | 8,361 |
|
| Interest and other debt expense, net | (705 | ) | | (747 | ) | | (817 | ) |
| Loss on early extinguishment of debt | — |
| | (823 | ) | | (228 | ) |
| Earnings from equity investment in AB InBev/SABMiller | 532 |
| | 795 |
| | 757 |
|
| Gain on AB InBev/SABMiller business combination | 445 |
| | 13,865 |
| | 5 |
|
| Earnings before income taxes | $ | 9,828 |
| | $ | 21,852 |
| | $ | 8,078 |
|
The smokeable products segment included net revenues of $21,900$21,158 million, $22,199$21,506 million and $22,193$21,900 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, related to cigarettes and net revenues of $736$838 million, $652$791 million and $599$736 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, related to cigars.
Substantially all of Altria’s net revenues are from sales generated in the United States for the years ended December 31, 2019, 2018 and 2017. PM USA, USSTC, Helix, Middleton and Nat Sherman’s largest customer, McLane Company, Inc., accounted for approximately 26%25%, 25%27% and 26% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. In addition, Core-Mark Holding Company, Inc. accounted for approximately 14%15%, 14% and 10%14% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Substantially all of these net revenues were reported in the smokeable products and smokeless products segments. Sales to threetwo distributors accounted for approximately 67%, 69% and 66%64% of net revenues for the wine segment for the years ended December 31, 2017, 20162019 and 2015,2018, respectively. Sales to three distributors accounted for approximately 67% of net revenues for the wine segment for the year ended December 31, 2017.
Details of Altria Group, Inc.’sAltria’s depreciation expense and capital expenditures were as follows:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Depreciation expense: | | | | | | | | | | |
| Smokeable products | $ | 93 |
| | $ | 93 |
| | $ | 117 |
| $ | 88 |
| | $ | 90 |
| | $ | 93 |
|
| Smokeless products | 29 |
| | 26 |
| | 27 |
| 27 |
| | 28 |
| | 29 |
|
| Wine | 40 |
| | 36 |
| | 32 |
| 41 |
| | 40 |
| | 40 |
|
| General corporate and other | 26 |
| | 28 |
| | 28 |
| 26 |
| | 31 |
| | 26 |
|
| Total depreciation expense | $ | 188 |
| | $ | 183 |
| | $ | 204 |
| $ | 182 |
| | $ | 189 |
| | $ | 188 |
|
| Capital expenditures: | | | | | | | | | | |
| Smokeable products | $ | 39 |
| | $ | 55 |
| | $ | 56 |
| $ | 61 |
| | $ | 81 |
| | $ | 39 |
|
| Smokeless products | 61 |
| | 52 |
| | 113 |
| 44 |
| | 73 |
| | 61 |
|
| Wine | 53 |
| | 59 |
| | 42 |
| 63 |
| | 40 |
| | 53 |
|
| General corporate and other | 46 |
| | 23 |
| | 18 |
| 78 |
| | 44 |
| | 46 |
|
| Total capital expenditures | $ | 199 |
| | $ | 189 |
| | $ | 229 |
| $ | 246 |
| | $ | 238 |
| | $ | 199 |
|
The comparability of operating companies income for the reportable segments was affected by the following:
▪Non-Participating Manufacturer (“NPM”) Adjustment Items: For the years ended December 31, 2018 and 2017, 2016 and 2015, pre-tax (income) expense (income) for NPM adjustment items was recorded in Altria Group, Inc.’sAltria’s consolidated statements of earnings (losses) as follows:
|
| | | | | | | | | |
| (in millions) | | | 2018 |
| | 2017 |
|
| Smokeable products segment | |
| $ | (145 | ) |
| $ | (5 | ) |
| Interest and other debt expense, net | |
| — |
|
| 9 |
|
| Total | | | $ | (145 | ) | | $ | 4 |
|
|
| | | | | | | | | | | | |
| (in millions) | | 2017 |
| | 2016 |
| | 2015 |
|
| Smokeable products segment | | $ | (5 | ) |
| $ | 12 |
|
| $ | (97 | ) |
| Interest and other debt expense, net | | 9 |
|
| 6 |
|
| 13 |
|
| Total | | $ | 4 |
| | $ | 18 |
| | $ | (84 | ) |
NPM adjustment items result from the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (such dispute resolutions are referred to collectively as “NPM Adjustment Items”). For the year ended December 31, 2015, the NPM Adjustment Items primarily relate to the resolution of the dispute with New York. For further discussion, see and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18. Contingencies. 19. Contingencies). The amounts shown in the table above for the smokeable products segment were recorded by PM USA as increases (reductions)reductions to cost of sales, which decreased (increased)increased operating companies income in the smokeable products segment.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪Tobacco and Health Litigation Items: For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, pre-tax charges related to certain tobacco and health litigation items were recorded in Altria Group, Inc.’sAltria’s consolidated statements of earnings (losses) as follows:
|
| | | | | | | | | | | | |
| (in millions) | | 2019 |
| | 2018 |
| | 2017 |
|
| Smokeable products segment | | $ | 72 |
| | $ | 103 |
| | $ | 72 |
|
| Smokeless products segment | | — |
| | 10 |
| | — |
|
| Interest and other debt expense, net | | 5 |
| | 18 |
| | 8 |
|
| Total | | $ | 77 |
| | $ | 131 |
| | $ | 80 |
|
|
| | | | | | | | | | | | |
| (in millions) | | 2017 |
| | 2016 |
| | 2015 |
|
| Smokeable products segment | | $ | 72 |
| | $ | 88 |
| | $ | 127 |
|
| Interest and other debt expense, net | | 8 |
| | 17 |
| | 23 |
|
| Total | | $ | 80 |
| | $ | 105 |
| | $ | 150 |
|
During 2017, PM USA recorded pre-tax charges of$72 million in marketing, administration and research costs and $8 million in interest costs, substantially all of which related to 11 Engle progeny cases. For further discussion, see Note 18. Contingencies.
During 2016, PM USA recorded pre-tax charges of $88 million in marketing, administration and research costs, primarily related to settlementsThe amounts shown in the Minertable above for the smokeable and Aspinall cases totaling approximately $67 million, and $16 million related to a judgment in the Merino case. In addition, during 2016, PM USAsmokeless products segments were recorded $17 million in interest costs primarily related to Aspinall. For further discussion, see Note 18. Contingencies.
During 2015, PM USA recorded pre-tax charges in marketing, administration and research costs in seven state Engle progeny cases and Schwarz of $59 million and $25 million, respectively, as well as $14 million and $9 million, respectively, in interest costs related to these cases. Additionally in 2015, PM USA and certain other cigarette manufacturers reached an agreement to resolve approximately 415 pending federal Engle progeny cases. As a result of the agreement, PM USA recorded a pre-tax provision of approximately $43 million in marketing, administration and research costs. For further discussion, see Note 18. 19. Contingencies.
▪Settlement for Lump Sum Pension Payments: In the third quarter of 2017, Altria Group, Inc. made a voluntary, limited-time offer to former employees with vested benefits in the Altria Retirement Plan who had not commenced receiving benefit payments and who met certain other conditions. Eligible participants were offered the opportunity to make a one-time election to receive their pension benefit as a single lump sum payment or as a monthly annuity. As a result of the 2017 lump sum distributions, a one-time pre-tax settlement charge of $81 million was recorded in 2017 in Altria Group, Inc.’s consolidated statement of earnings as follows:
|
| | | | | | | | | | | |
| For the Year Ended December 31, 2017 |
| (in millions) | Cost of Sales |
| | Marketing, Administration and Research Costs |
| | Total |
|
| Smokeable products | $ | 39 |
| | $ | 18 |
| | $ | 57 |
|
| Smokeless products | — |
| | 16 |
| | 16 |
|
| General corporate and other | — |
| | 8 |
| | 8 |
|
| Total | $ | 39 |
| | $ | 42 |
| | $ | 81 |
|
For further discussion, see Note 16. Benefit Plans.
▪Smokeless Products Recall: During 2017, USSTC voluntarily recalled certain smokeless tobacco products manufactured at its Franklin Park, Illinois facility due to a product tampering incident (the “Recall”). USSTC estimatesestimated that the Recall reduced smokeless products segment operating companies income by approximately $60 million in 2017.
▪Asset Impairment, Exit and Implementation Costs: See Note 4. 5. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.
Note 16.17. Benefit Plans
Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of allcertain employees of Altria Group, Inc. and its subsidiaries. However, employeesEmployees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST’s subsidiaries and
Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide postretirement health care and other benefits to the majority ofcertain retired employees.
The plan assets and benefit obligations of Altria Group, Inc.’sAltria’s pension plans and postretirement plans are measured at December 31 of each year. In December 2017, Altria Group, Inc. made a contribution of $270 million to a trust to fund certain
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
postretirement benefits. Prior to this contribution, Altria Group, Inc.’s postretirement plans were not funded.
The discount rates for Altria Group, Inc.’sAltria’s plans were based on a yield curve developed from a model portfolio of high-quality
corporate bonds with durations that match the expected future cash flows of the pension and postretirement benefit obligations.
| |
▪ | Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and postretirement plans at December 31, 2017 and 2016 were as follows:
|
On December 31, 2019, Altria adopted ASU No. 2018-14, which amends certain defined benefit plan disclosures. Altria elected early adoption of this update, which is permitted for all entities and applied on a retrospective basis to all periods presented. The adoption of ASU No. 2018-14 had no impact on the amount of defined benefit plan assets, obligations or expenses recognized by Altria’s businesses. |
| | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| (in millions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at beginning of year | $ | 8,312 |
| | $ | 8,011 |
| | $ | 2,364 |
| | $ | 2,392 |
|
| Service cost | 75 |
| | 76 |
| | 16 |
| | 17 |
|
| Interest cost | 288 |
| | 281 |
| | 76 |
| | 77 |
|
| Benefits paid | (703 | ) | | (440 | ) | | (139 | ) | | (135 | ) |
| Actuarial losses | 589 |
| | 367 |
| | 56 |
| | 24 |
|
| Termination, settlement and curtailment | (51 | ) | | 13 |
| | — |
| | 5 |
|
| Other | — |
| | 4 |
| | (38 | ) | | (16 | ) |
| Benefit obligation at end of year | 8,510 |
| | 8,312 |
| | 2,335 |
| | 2,364 |
|
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of year | 7,475 |
| | 6,706 |
| | — |
| | — |
|
| Actual return on plan assets | 1,219 |
| | 678 |
| | — |
| | — |
|
| Employer contributions | 24 |
| | 531 |
| | 270 |
| | — |
|
| Benefits paid | (703 | ) | | (440 | ) | | — |
| | — |
|
| Fair value of plan assets at end of year | 8,015 |
| | 7,475 |
| | 270 |
| | — |
|
| Funded status at December 31 | $ | (495 | ) | | $ | (837 | ) | | $ | (2,065 | ) | | $ | (2,364 | ) |
| Amounts recognized on Altria Group, Inc.’s consolidated balance sheets were as follows: | | | | | | | |
| Other accrued liabilities | $ | (51 | ) | | $ | (32 | ) | | $ | (78 | ) | | $ | (147 | ) |
| Accrued pension costs | (445 | ) | | (805 | ) | | — |
| | — |
|
| Other assets | 1 |
| | — |
| | — |
| | — |
|
| Accrued postretirement health care costs | — |
| | — |
| | (1,987 | ) | | (2,217 | ) |
| | $ | (495 | ) | | $ | (837 | ) | | $ | (2,065 | ) | | $ | (2,364 | ) |
|
| | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| (in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at beginning of year | $ | 7,726 |
| | $ | 8,510 |
| | $ | 2,040 |
| | $ | 2,335 |
|
| Service cost | 70 |
| | 81 |
| | 16 |
| | 18 |
|
| Interest cost | 306 |
| | 276 |
| | 76 |
| | 70 |
|
| Benefits paid | (493 | ) | | (488 | ) | | (126 | ) | | (130 | ) |
| Actuarial (gains) losses | 1,025 |
| | (660 | ) | | 78 |
| | (298 | ) |
| Settlement and curtailment | 25 |
| | (18 | ) | | 7 |
| | — |
|
| Other | — |
| | 25 |
| | — |
| | 45 |
|
| Benefit obligation at end of year | 8,659 |
| | 7,726 |
| | 2,091 |
| | 2,040 |
|
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of year | 7,138 |
| | 8,015 |
| | 211 |
| | 270 |
|
| Actual return on plan assets | 1,466 |
| | (430 | ) | | 45 |
| | (14 | ) |
| Employer contributions | 56 |
| | 41 |
| | — |
| | — |
|
| Benefits paid | (493 | ) | | (488 | ) | | (43 | ) | | (45 | ) |
| Fair value of plan assets at end of year | 8,167 |
| | 7,138 |
| | 213 |
| | 211 |
|
| Funded status at December 31 | $ | (492 | ) | | $ | (588 | ) | | $ | (1,878 | ) | | $ | (1,829 | ) |
| Amounts recognized on Altria’s consolidated balance sheets were as follows: | | | | | | | |
| Other accrued liabilities | $ | (26 | ) | | $ | (44 | ) | | $ | (81 | ) | | $ | (80 | ) |
| Accrued pension costs | (473 | ) | | (544 | ) | | — |
| | — |
|
| Other assets | 7 |
| | — |
| | — |
| | — |
|
| Accrued postretirement health care costs | — |
| | — |
| | (1,797 | ) | | (1,749 | ) |
| | $ | (492 | ) | | $ | (588 | ) | | $ | (1,878 | ) | | $ | (1,829 | ) |
The table above presents the projected benefit obligation for Altria Group, Inc.’sAltria’s pension plans. The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8.2$8.4 billion and $8.0$7.4 billion at December 31, 20172019 and 2016,2018, respectively.
Actuarial (gains) losses for the years ended December 31, 2019 and 2018 for the pension and postretirement plans were due primarily to changes in the discount rate assumptions.
For pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2017,2019, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $413 million, $364$357 million and $124$134 million, respectively. For pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2018, the accumulated benefit obligation and fair value of plan assets were $7,239 million and $7,012 million, respectively.
For pension plans with projected benefit obligations in excess of plan assets at December 31, 2019, the projected benefit obligation and fair value of plan assets were $8,522 million and $8,023 million, respectively. At December 31, 2016,2018, the accumulatedprojected benefit obligations were in excess of plan assets for all pension plans.
At December 31, 2019 and 2018, the accumulated postretirement benefit obligations were in excess of plan assets for all postretirement plans.
The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, mandatesmandated health care reforms, with staggered effective dates from 2010 to 2022, including the imposition of an excise tax on high cost health care plans effective in 2022.plans. The excise tax provision was
repealed on December 20, 2019; therefore, the additional accumulated postretirement liability resulting from the PPACA, which iswas not material to Altria, Group, Inc., has been included in Altria Group, Inc.’sexcluded from Altria’s accumulated postretirement benefit obligation at December 31, 2017 and 2016. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria Group, Inc.’s accumulated postretirement benefit obligation may be necessary.2019.
The following assumptions were used to determine Altria Group, Inc.’sAltria’s pension and postretirement benefit obligations at December 31:
| | | | | | | | Pension | | Postretirement |
| | 2017 |
| | 2016 |
| 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
| Discount rate | 3.7 | % | | 4.1 | % | 3.4 | % | | 4.4 | % | | 3.4 | % | | 4.4 | % |
| Rate of compensation increase | 4.0 |
| | 4.0 |
| 4.0 |
| | 4.0 |
| | — |
| | — |
|
| Health care cost trend rate assumed for next year | | — |
| | — |
| | 6.5 |
|
| 6.5 |
|
| Ultimate trend rate | | — |
| | — |
| | 5.0 |
|
| 5.0 |
|
| Year that the rate reaches the ultimate trend rate | | — |
| | — |
| | 2025 |
|
| 2025 |
|
▪Components of Net Periodic Benefit Cost (Income): Net periodic benefit cost (income) consisted of the following for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Service cost | $ | 70 |
| | $ | 81 |
| | $ | 75 |
| | $ | 16 |
| | $ | 18 |
| | $ | 16 |
|
| Interest cost | 306 |
| | 276 |
| | 288 |
| | 76 |
| | 70 |
| | 76 |
|
| Expected return on plan assets | (576 | ) | | (585 | ) | | (601 | ) | | (15 | ) | | (19 | ) | | — |
|
| Amortization: | | | | | | | | | | | |
| Net loss | 159 |
| | 225 |
| | 197 |
| | 5 |
| | 21 |
| | 25 |
|
| Prior service cost (credit) | 6 |
| | 4 |
| | 4 |
| | (30 | ) | | (42 | ) | | (38 | ) |
| Settlement and curtailment | 27 |
| | 16 |
| | 86 |
| | 5 |
| | — |
| | — |
|
| Net periodic benefit cost (income) | $ | (8 | ) | | $ | 17 |
| | $ | 49 |
| | $ | 57 |
| | $ | 48 |
| | $ | 79 |
|
64
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following assumptions were used to determine Altria Group, Inc.’s postretirement benefit obligations at December 31: |
| | | | | |
| | 2017 |
| | 2016 |
|
| Discount rate | 3.7 | % | | 4.1 | % |
| Health care cost trend rate assumed for next year | 7.0 |
|
| 7.0 |
|
| Ultimate trend rate | 5.0 |
|
| 5.0 |
|
| Year that the rate reaches the ultimate trend rate | 2022 |
|
| 2022 |
|
| |
▪ | Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31, 2017, 2016 and 2015:
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Service cost | $ | 75 |
| | $ | 76 |
| | $ | 86 |
| | $ | 16 |
| | $ | 17 |
| | $ | 18 |
|
| Interest cost | 288 |
| | 281 |
| | 337 |
| | 76 |
| | 77 |
| | 100 |
|
| Expected return on plan assets | (601 | ) | | (553 | ) | | (539 | ) | | — |
| | — |
| | — |
|
| Amortization: | | | | | | | | | | | |
| Net loss | 197 |
| | 171 |
| | 234 |
| | 25 |
| | 25 |
| | 43 |
|
| Prior service cost (credit) | 4 |
| | 5 |
| | 7 |
| | (38 | ) | | (39 | ) | | (39 | ) |
| Termination, settlement and curtailment | 86 |
| | 34 |
| | 8 |
| | — |
| | (2 | ) | | — |
|
| Net periodic benefit cost | $ | 49 |
| | $ | 14 |
| | $ | 133 |
| | $ | 79 |
| | $ | 78 |
| | $ | 122 |
|
Termination, settlementSettlement and curtailment shown in the table above primarily relate to the settlement charge discussed below, and the productivity initiative and facilities consolidationcost reduction program discussed in Note 4. 5. Asset Impairment, Exit and Implementation Costs.
In the third quarter of 2017, Altria Group, Inc. made a voluntary, limited-time offer to former employees with vested benefits in the Altria Retirement Plan who had not commenced receiving benefit payments and who met certain other conditions. Eligible participants were offered the opportunity to make a one-time election to receive their pension benefit as a single lump sum payment or as a monthly annuity. Distributions to former employees who elected to receive lump sum payments totaled approximately $277 million, substantially all of which were made in December 2017 from the Altria Retirement Plan’s assets. Payments began on January 1, 2018 to former employees who elected a monthly annuity. As a result of the lump sum distributions, Altria Group, Inc. recorded a one-time settlement charge of $81 million in 2017.
The amounts included in termination, settlement and curtailment in the table above were comprised of the following changes:
| | | | Pension | | Post- retirement |
| Pension | | Postretirement |
| (in millions) | 2017 |
| 2016 |
| 2015 |
| | 2016 |
| 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
|
| Benefit obligation | $ | — |
| $ | 23 |
| $ | — |
| | $ | 11 |
| $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 10 |
|
| Other comprehensive earnings/losses: | |
| | | | | | |
| | |
| Net loss | 86 |
| 9 |
| 8 |
| | — |
| 20 |
| | 13 |
| | 86 |
| | — |
|
| Prior service cost (credit) | — |
| 2 |
| — |
| | (13 | ) | 1 |
| | 3 |
| | — |
| | (5 | ) |
| | $ | 86 |
| $ | 34 |
| $ | 8 |
| | $ | (2 | ) | $ | 27 |
| | $ | 16 |
| | $ | 86 |
| | $ | 5 |
|
Beginning in 2016, Altria Group, Inc. began using a spot rate approach to estimate the service and interest cost components of net periodic benefit costs by applying the specific spot rates along the yield curve to the relevant projected cash flows, as Altria Group, Inc. believes that this approach is a more precise estimate of service and interest cost. This change resulted in a decrease of approximately $70 million and $20 million to its 2016 pre-tax pension and postretirement net periodic benefit cost, respectively. Prior to 2016, Altria Group, Inc. estimated the service and interest cost components of net periodic benefit cost using a single weighted-average discount rate derived from the yield curve used to measure the pension and postretirement plans benefit obligations.
The estimated net loss and prior service cost (credit) that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2018 is as follows: |
| | | | | | | |
| (in millions) | Pension |
| | Postretirement |
|
| Net loss | $ | 228 |
| | $ | 35 |
|
| Prior service cost (credit) | 4 |
| | (42 | ) |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following assumptions were used to determine Altria Group, Inc.’sAltria’s net periodic benefit cost for the years ended December 31:
|
| | | | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| | 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Discount rates: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Service cost | 4.6 | % | | 3.8 | % | | 4.3 | % | | 4.5 | % | | 3.8 | % | | 4.3 | % |
| Interest cost | 4.0 |
| | 3.3 |
| | 3.5 |
| | 4.0 |
| | 3.3 |
| | 3.5 |
|
| Expected rate of return on plan assets | 7.8 |
| | 7.8 |
| | 8.0 |
| | 7.8 |
| | 7.8 |
| | — |
|
| Rate of compensation increase | 4.0 |
| | 4.0 |
| | 4.0 |
| | — |
| | — |
| | — |
|
| Health care cost trend rate | — |
| | — |
| | — |
| | 6.5 |
| | 7.0 |
| | 7.0 |
|
|
| | | | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Discount rates: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Service cost | 4.3 | % | | 4.7 | % | | 4.1 | % | | 4.3 | % | | 4.5 | % | | 4.0 | % |
| Interest cost | 3.5 |
| | 3.6 |
| | 4.1 |
| | 3.5 |
| | 3.4 |
| | 4.0 |
|
| Expected rate of return on plan assets | 8.0 |
| | 8.0 |
| | 8.0 |
| | — |
| | — |
| | — |
|
| Rate of compensation increase | 4.0 |
| | 4.0 |
| | 4.0 |
| | — |
| | — |
| | — |
|
| Health care cost trend rate | — |
| | — |
| | — |
| | 7.0 |
| | 6.5 |
| | 7.0 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects as of December 31, 2017: |
| | | | | |
| | One-Percentage-Point Increase |
| | One-Percentage-Point Decrease |
|
| Effect on total of postretirement service and interest cost | 7.8 | % | | (6.9 | )% |
| Effect on postretirement benefit obligation | 6.6 | % | | (5.5 | )% |
▪Defined Contribution Plans: Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $78 million, $85 million and $83 million $93 millionin 2019, 2018 and $85 million in 2017, 2016respectively.
▪Pension and 2015, respectively.
▪PensionPostretirement Plan Assets: Altria Group, Inc.’sAltria’s investment strategy for its pension and postretirement plan assets is based on an expectation that equity securities will outperform debt securities over the long term.term and reflects the maturity structure of the benefit obligation. Altria Group, Inc. believes that it implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflectssecurities. In the impactfourth quarter of the demographic mix of plan participants on the benefit obligation using a2019, Altria changed its target asset allocation between equity securities and for the majority of its pension plan assets from an equity/fixed income investmentsmix of 55%/45% to a 30%/70% mix. The objective of this change is to reduce the overall exposure to equity volatility and more closely align the values of plan assets with the liabilities. The equity/fixed income target allocation for postretirement plan assets remains at 55%/45%.
The actual composition of Altria Group, Inc.’sAltria’s plan assets at December 31, 20172019 was broadly characterized with the following allocation:
|
| | | | | |
| | Pension | | Postretirement |
| Equity securities | 35 | % | | 56 | % |
| Corporate bonds | 52 | % | | 34 | % |
| U.S. Treasury and foreign government securities | 13 | % | | 10 | % |
Altria’s pension and postretirement plan asset performance is monitored on an ongoing basis to adjust the mix as an allocation between equity securities (59%), corporate bonds (30%) and U.S. Treasury and foreign government securities (11%). Virtuallynecessary.
Substantially all pension and all postretirement assets can be used to make monthly benefit payments.
Altria Group, Inc.’sAltria’s investment objective for its pension and postretirement plan assets is accomplished by investing in long-duration fixed income securities that primarily include U.S. corporate bonds of companies from diversified industries and U.S. Treasury securities that mirror Altria’s pension obligation benchmark, the Bloomberg Barclays Capital U.S. Long Credit Index, as well as U.S. and international equity index strategies that are intended to mirror indices, such asincluding, the Standard & Poor’s 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index (“RAFI”) Low Volatility U.S. Index and Morgan Stanley Capital International (“MSCI”) Europe, Australasia, and the Far East (“EAFE”) Index. Altria Group, Inc.’sAltria’s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include corporate bonds of companies from diversified industries. Themarkets. For pension plan assets, the allocation to below investment grade securities represented 16%8% of the fixed income holdings or 7%5% of the total plan assets at December 31, 2019. The allocation to emerging markets represented 1% of equity holdings or less than 1% of total plan assets at December 31, 2017. The2019. For postretirement plan assets, the allocation to emerging marketsbelow investment grade securities represented 8% of the fixed income holdings or 4% of the equity holdings or 3% of total plan assets at December 31, 2017.2019. There were 0 postretirement plan assets invested in emerging markets at December 31, 2019.
Altria Group, Inc.’sAltria’s risk management practices for its pension and postretirement plans include ongoing monitoring of asset allocation, investment performance and investment managers’ compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.
Altria Group, Inc.’sAltria’s expected rate of return on pension and postretirement plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term historical averages exhibited by returns on equity and fixed income securities. As a result of the pension plan asset re-allocation described above, Altria Group, Inc. has reduced thisits expected rate of return assumption from 8.0%7.8% in 2019 to 7.8%6.6% in 2020 for determining its pension net periodic benefit cost. For determining its postretirement net periodic benefit cost, for 2018.Altria has reduced the expected rate of return assumption from 7.8% in 2019 to 7.7% in 2020.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The fair values of Altria Group, Inc.’sthe pension plan assets by asset category at December 31, 20172019 and 20162018 were as follows:
| | | | 2017 | | 2016 | 2019 | | 2018 |
| (in millions) | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
| Level 1 | Level 2 | | Total | | Level 1 | Level 2 | | Total |
U.S. and foreign government securities or their agencies: | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | — |
| | $ | 588 |
| | $ | — |
| | $ | 588 |
| | $ | — |
| | $ | 444 |
| | $ | — |
| | $ | 444 |
| $ | — |
| $ | 811 |
| | $ | 811 |
| | $ | — |
| $ | 868 |
| | $ | 868 |
|
| U.S. municipal bonds | — |
| | 81 |
| | — |
| | 81 |
| | — |
| | 102 |
| | — |
| | 102 |
| — |
| 57 |
| | 57 |
| | — |
| 73 |
| | 73 |
|
| Foreign government and agencies | — |
| | 150 |
| | — |
| | 150 |
| | — |
| | 185 |
| | — |
| | 185 |
| — |
| 98 |
| | 98 |
| | — |
| 115 |
| | 115 |
|
| Corporate debt instruments: | | | | | | | | | | | | | | | | | | | | | | |
| Above investment grade | — |
| | 1,789 |
| | — |
| | 1,789 |
| | — |
| | 1,735 |
| | — |
| | 1,735 |
| — |
| 3,523 |
| | 3,523 |
| | — |
| 1,726 |
| | 1,726 |
|
| Below investment grade and no rating | — |
| | 511 |
| | — |
| | 511 |
| | — |
| | 602 |
| | — |
| | 602 |
| — |
| 521 |
| | 521 |
| | — |
| 478 |
| | 478 |
|
| Common stock: | | | | | | | | | | | | | | | | | | | | | | |
| International equities | 1,396 |
| | — |
| | — |
| | 1,396 |
| | 1,076 |
| | — |
| | — |
| | 1,076 |
| 296 |
| — |
| | 296 |
| | 237 |
| — |
| | 237 |
|
| U.S. equities | 831 |
| | — |
| | — |
| | 831 |
| | 760 |
| | — |
| | — |
| | 760 |
| 1,263 |
| — |
| | 1,263 |
| | 1,082 |
| — |
| | 1,082 |
|
| Other, net | 120 |
| | 74 |
| | — |
| | 194 |
| | 142 |
| | 33 |
| | 13 |
| | 188 |
| (4 | ) | 479 |
| | 475 |
| | 36 |
| 339 |
| | 375 |
|
| | $ | 2,347 |
| | $ | 3,193 |
| | $ | — |
| | $ | 5,540 |
| | $ | 1,978 |
| | $ | 3,101 |
| | $ | 13 |
| | $ | 5,092 |
| $ | 1,555 |
| $ | 5,489 |
| | $ | 7,044 |
| | $ | 1,355 |
| $ | 3,599 |
| | $ | 4,954 |
|
| Investments measured at NAV as a practical expedient for fair value: | | | | | | | | | | | | | | | | | | | | | | |
| Common/collective trusts: | | | | | | | | | | | | | | | | |
| Collective investment funds | | | | | | | | |
| U.S. large cap | | | | | | | 2,014 |
| | | | | | | | 1,940 |
| | | $ | 825 |
| | | | $ | 1,722 |
|
| U.S. small cap | | | | | | | 361 |
| | | | | | | | 363 |
| | | 386 |
| | | | 328 |
|
| International developed markets | | | | | | | 100 |
| | | | | | | | 80 |
| | | 106 |
| | | | 86 |
|
| Total investments measured at NAV | | | | $ | 1,317 |
| | | | $ | 2,136 |
|
| | | | | | | | | |
| Other | | | | (194 | ) | | | | 48 |
|
| Fair value of plan assets, net | | | | | | | $ | 8,015 |
| | | | | | | | $ | 7,475 |
| | | $ | 8,167 |
| | | | $ | 7,138 |
|
Level 3 holdings and transactions were immaterial to total plan assets at December 31, 20172019 and 2016.2018.
The fair value of the postretirement plan assets at December 31, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| (in millions) | Level 1 | Level 2 | | Total | | Level 1 | Level 2 | | Total |
| U.S. and foreign government securities or their agencies: | | | | | | | | | |
| U.S. government and agencies | $ | — |
| $ | 11 |
| | $ | 11 |
| | $ | — |
| $ | 13 |
| | $ | 13 |
|
| Foreign government and agencies | — |
| 5 |
| | 5 |
| | — |
| 3 |
| | 3 |
|
| Corporate debt instruments: | | | |
| | | | | |
| Above investment grade | — |
| 63 |
| | 63 |
| | — |
| 71 |
| | 71 |
|
| Below investment grade and no rating | — |
| 9 |
| | 9 |
| | — |
| 8 |
| | 8 |
|
| Other, net | — |
| 7 |
| | 7 |
| | 2 |
| 2 |
| | 4 |
|
| | $ | — |
| $ | 95 |
| | $ | 95 |
| | $ | 2 |
| $ | 97 |
| | $ | 99 |
|
| Investments measured at NAV as a practical expedient for fair value: | | | | | | | | | |
| Collective investment funds: | | | | | | | | | |
| U.S. large cap | | | | $ | 97 |
| | | | | $ | 77 |
|
| International developed markets | | | | 24 |
| | | | | 26 |
|
| Total investments measured at NAV | | | | $ | 121 |
| | | | | $ | 103 |
|
| | | | | | | | | | |
| Other | | | | (3 | ) | | | | | 9 |
|
| Fair value of plan assets, net | | | | $ | 213 |
| | | | | $ | 211 |
|
There were 0 Level 3 postretirement plan holdings or transactions during 2019 and 2018.
For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.
Following is a description of the valuation methodologies used for investments measured at fair value.
| |
| ▪ | U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities and municipal securities. Government securities are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available. |
| |
| ▪ | Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available. |
| |
| ▪ | Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date. |
| |
| ▪ | Common/Collective TrustsInvestment Funds: Common/collective trustsCollective investment funds consist of funds that are intended to mirror indices such as Standard & Poor’s 500 Index Russell Small Cap Completeness Index and MSCI EAFE Index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective collective investment funds. The underlying assets are valued based on the net asset value (“NAV”), which is provided by the investment account manager as a practical expedient to estimate fair value. These investments are not classified by level but are disclosed to permit reconciliation to the fair value of plan assets.
|
valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value (“NAV”), which is provided by the investment account manager as a practical expedient to estimate fair value. These investments are not classified by level but are disclosed to permit reconciliation to the fair value of plan assets.
▪Postretirement Plan Assets: Altria Group, Inc. has established a long-term investment strategy for its postretirement plan assets using a target asset allocation between equity securities and fixed income investments of 55%/45%. The expected rate of return on plan assets is 7.8% for determining Altria Group, Inc.’s postretirement net periodic benefit cost for 2018. At December 31, 2017, postretirement plan assets totaled $270 million. Approximately $150 million was invested in domestic and international common/collective trusts. The underlying assets of each of the respective common/collective trusts are valued based on the NAV, which is provided by the investment account manager as a practical expedient to estimate fair value. Additionally, approximately $120 million was held in an interest bearing cash account, which is classified in Level 1 of the fair value hierarchy, pending full implementation of the investment strategy in early January 2018.
▪Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of up to approximately $60$30 million in 20182020 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension plan assets, or
changes in interest rates. In December 2017, Altria Group, Inc. made a contribution of $270 million to its postretirement plans. Currently, Altria Group, Inc. anticipates making employer contributions to its postretirement plans of up to approximately $70$60 million in 2018.2020. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on postretirement plan assets.
Estimated future benefit payments at December 31, 20172019 were as follows: | | | (in millions) | Pension |
| | Postretirement |
| Pension |
| | Postretirement |
|
| 2018 | $ | 480 |
| | $ | 142 |
| |
| 2019 | 451 |
| | 140 |
| |
| 2020 | 456 |
| | 138 |
| $ | 472 |
| | $ | 126 |
|
| 2021 | 459 |
| | 136 |
| 477 |
| | 124 |
|
| 2022 | 463 |
| | 133 |
| 479 |
| | 121 |
|
| 2023-2027 | 2,372 |
| | 620 |
| |
| 2023 | | 483 |
| | 117 |
|
| 2024 | | 481 |
| | 115 |
|
| 2025-2029 | | 2,430 |
| | 555 |
|
Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2017 consisted of the following: |
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net loss | $ | (2,493 | ) | | $ | (612 | ) | | $ | (93 | ) | | $ | (3,198 | ) |
| Prior service (cost) credit | (15 | ) | | 195 |
| | — |
| | 180 |
|
| Deferred income taxes | 979 |
| | 166 |
| | 34 |
| | 1,179 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,529 | ) | | $ | (251 | ) | | $ | (59 | ) | | $ | (1,839 | ) |
The amounts recorded in accumulated other comprehensive losses at December 31, 20162019 consisted of the following:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net loss | $ | (2,565 | ) | | $ | (389 | ) | | $ | (45 | ) | | $ | (2,999 | ) |
| Prior service (cost) credit | (27 | ) | | 72 |
| | (5 | ) | | 40 |
|
| Deferred income taxes | 670 |
| | 86 |
| | 11 |
| | 767 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,922 | ) | | $ | (231 | ) | | $ | (39 | ) | | $ | (2,192 | ) |
The amounts recorded in accumulated other comprehensive losses at December 31, 2018 consisted of the following:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net loss | $ | (2,591 | ) | | $ | (327 | ) | | $ | (78 | ) | | $ | (2,996 | ) |
| Prior service (cost) credit | (34 | ) | | 108 |
| | (6 | ) | | 68 |
|
| Deferred income taxes | 679 |
| | 61 |
| | 20 |
| | 760 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,946 | ) | | $ | (158 | ) | | $ | (64 | ) | | $ | (2,168 | ) |
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net loss | $ | (2,857 | ) | | $ | (581 | ) | | $ | (99 | ) | | $ | (3,537 | ) |
| Prior service (cost) credit | (19 | ) | | 195 |
| | — |
| | 176 |
|
| Deferred income taxes | 1,124 |
| | 153 |
| | 36 |
| | 1,313 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,752 | ) | | $ | (233 | ) | | $ | (63 | ) | | $ | (2,048 | ) |
The movements in other comprehensive earnings/losses during the year ended December 31, 2019 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 159 |
| | $ | 5 |
| | $ | 20 |
| | $ | 184 |
|
| Prior service cost/credit | 6 |
| | (30 | ) | | 1 |
| | (23 | ) |
| Other expense (income): | | | | | | | |
| Net loss | 20 |
| | — |
| | (4 | ) | | 16 |
|
| Prior service cost/credit | 1 |
| | (5 | ) | | — |
| | (4 | ) |
| Deferred income taxes | (47 | ) | | 7 |
| | (4 | ) | | (44 | ) |
| | $ | 139 |
| | $ | (23 | ) | | $ | 13 |
| | $ | 129 |
|
| Other movements during the year: | | | | | | | |
| Net loss | $ | (153 | ) | | $ | (67 | ) | | $ | 17 |
| | $ | (203 | ) |
| Prior service cost/credit | — |
| | (1 | ) | | — |
| | (1 | ) |
| Deferred income taxes | 38 |
| | 18 |
| | (5 | ) | | 51 |
|
| | $ | (115 | ) | | $ | (50 | ) | | $ | 12 |
| | $ | (153 | ) |
| Total movements in other comprehensive earnings/losses | $ | 24 |
| | $ | (73 | ) | | $ | 25 |
| | $ | (24 | ) |
The movements in other comprehensive earnings/losses during the year ended December 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post-retirement |
| | Post-employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 225 |
| | $ | 21 |
| | $ | 17 |
| | $ | 263 |
|
| Prior service cost/credit | 4 |
| | (42 | ) | | — |
| | (38 | ) |
| Other expense (income): | | | | | | | |
| Net loss | 13 |
| | — |
| | — |
| | 13 |
|
| Prior service cost/credit | 3 |
| | — |
| | — |
| | 3 |
|
| Deferred income taxes | (61 | ) | | 4 |
| | (4 | ) | | (61 | ) |
| | $ | 184 |
| | $ | (17 | ) | | $ | 13 |
| | $ | 180 |
|
| Other movements during the year: | | | | | | | |
Adoption of ASU 2018-02 (1) | $ | (330 | ) | | $ | (55 | ) | | $ | (12 | ) | | $ | (397 | ) |
| Net loss | (336 | ) | | 264 |
| | (2 | ) | | (74 | ) |
| Prior service cost/credit | (26 | ) | | (45 | ) | | (6 | ) | | (77 | ) |
| Deferred income taxes | 91 |
| | (54 | ) | | 2 |
| | 39 |
|
| | $ | (601 | ) | | $ | 110 |
| | $ | (18 | ) | | $ | (509 | ) |
| Total movements in other comprehensive earnings/losses | $ | (417 | ) | | $ | 93 |
| | $ | (5 | ) | | $ | (329 | ) |
(1) Reflects the reclassification of the stranded income tax effects of the Tax Reform Act.
The movements in other comprehensive earnings/losses during the year ended December 31, 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 197 |
| | $ | 25 |
| | $ | 17 |
| | $ | 239 |
|
| Prior service cost/credit | 4 |
| | (38 | ) | | — |
| | (34 | ) |
| Other expense: | | | | | | | |
| Net loss | 86 |
| | — |
| | — |
| | 86 |
|
| Deferred income taxes | (113 | ) | | 6 |
| | (6 | ) | | (113 | ) |
| | 174 |
| | (7 | ) | | 11 |
| | 178 |
|
| Other movements during the year: | | | | | | | |
| Net loss | 81 |
| | (56 | ) | | (11 | ) | | 14 |
|
| Prior service cost/credit | — |
| | 38 |
| | — |
| | 38 |
|
| Deferred income taxes | (32 | ) | | 7 |
| | 4 |
| | (21 | ) |
| | 49 |
| | (11 | ) | | (7 | ) | | 31 |
|
| Total movements in other comprehensive earnings/losses | $ | 223 |
| | $ | (18 | ) | | $ | 4 |
| | $ | 209 |
|
|
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 197 |
| | $ | 25 |
| | $ | 17 |
| | $ | 239 |
|
| Prior service cost/credit | 4 |
| | (38 | ) | | — |
| | (34 | ) |
| Other expense (income): | | | | | | | |
| Net loss | 86 |
| | — |
| | — |
| | 86 |
|
| Deferred income taxes | (113 | ) | | 6 |
| | (6 | ) | | (113 | ) |
| | $ | 174 |
| | $ | (7 | ) | | $ | 11 |
| | $ | 178 |
|
| Other movements during the year: | | | | | | | |
| Net loss | $ | 81 |
| | $ | (56 | ) | | $ | (11 | ) | | $ | 14 |
|
| Prior service cost/credit | — |
| | 38 |
| | — |
| | 38 |
|
| Deferred income taxes | (32 | ) | | 7 |
| | 4 |
| | (21 | ) |
| | $ | 49 |
| | $ | (11 | ) | | $ | (7 | ) | | $ | 31 |
|
| Total movements in other comprehensive earnings/losses | $ | 223 |
| | $ | (18 | ) | | $ | 4 |
| | $ | 209 |
|
68
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The movements in other comprehensive earnings/losses during the year ended December 31, 2016 were as follows: |
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 171 |
| | $ | 25 |
| | $ | 18 |
| | $ | 214 |
|
| Prior service cost/credit | 5 |
| | (39 | ) | | — |
| | (34 | ) |
| Other expense (income): | | | | | | | |
| Net loss | 9 |
| | — |
| | — |
| | 9 |
|
| Prior service cost/credit | 2 |
| | (13 | ) | | — |
| | (11 | ) |
| Deferred income taxes | (69 | ) | | 11 |
| | (7 | ) | | (65 | ) |
| | 118 |
| | (16 | ) | | 11 |
| | 113 |
|
| Other movements during the year: | | | | | | | |
| Net loss | (232 | ) | | (18 | ) | | (9 | ) | | (259 | ) |
| Prior service cost/credit | (4 | ) | | 16 |
| | — |
| | 12 |
|
| Deferred income taxes | 92 |
| | 1 |
| | 3 |
| | 96 |
|
| | (144 | ) | | (1 | ) | | (6 | ) | | (151 | ) |
| Total movements in other comprehensive earnings/losses | $ | (26 | ) | | $ | (17 | ) | | $ | 5 |
| | $ | (38 | ) |
The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows: |
| | | | | | | | | | | | | | | |
| (in millions) | Pension |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 234 |
| | $ | 43 |
| | $ | 19 |
| | $ | 296 |
|
| Prior service cost/credit | 7 |
| | (39 | ) | | — |
| | (32 | ) |
| Other expense: | | | | | | | |
| Net loss | 8 |
| | — |
| | — |
| | 8 |
|
| Deferred income taxes | (96 | ) | | (2 | ) | | (7 | ) | | (105 | ) |
| | 153 |
| | 2 |
| | 12 |
| | 167 |
|
| Other movements during the year: | | | | | | | |
| Net loss | (410 | ) | | 192 |
| | (5 | ) | | (223 | ) |
| Prior service cost/credit | (6 | ) | | 6 |
| | — |
| | — |
|
| Deferred income taxes | 160 |
| | (75 | ) | | 1 |
| | 86 |
|
| | (256 | ) | | 123 |
| | (4 | ) | | (137 | ) |
| Total movements in other comprehensive earnings/losses | $ | (103 | ) | | $ | 125 |
| | $ | 8 |
| | $ | 30 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 17.18. Additional Information
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2019 |
| | 2018 |
| | 2017 |
|
| Research and development expense | $ | 168 |
| | $ | 252 |
| | $ | 241 |
|
| Advertising expense | $ | 33 |
| | $ | 37 |
| | $ | 29 |
|
| Interest and other debt expense, net: | | | | | |
| Interest expense | $ | 1,322 |
| | $ | 697 |
| | $ | 736 |
|
| Interest income | (42 | ) | | (32 | ) | | (31 | ) |
| | $ | 1,280 |
| | $ | 665 |
| | $ | 705 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Research and development expense | $ | 241 |
| | $ | 203 |
| | $ | 186 |
|
| Advertising expense | $ | 29 |
| | $ | 27 |
| | $ | 25 |
|
| Interest and other debt expense, net: | | | | | |
| Interest expense | $ | 727 |
| | $ | 754 |
| | $ | 808 |
|
| Interest income | (31 | ) | | (13 | ) | | (4 | ) |
| Interest related to NPM Adjustment Items | 9 |
| | 6 |
| | 13 |
|
| | $ | 705 |
| | $ | 747 |
| | $ | 817 |
|
| Rent expense | $ | 43 |
| | $ | 53 |
| | $ | 48 |
|
Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, 2017 were as follows:
|
| | | | | | | |
| (in millions) | Rental Commitments |
| | Sublease Income |
|
| 2018 | $ | 38 |
| | $ | 5 |
|
| 2019 | 33 |
| | 5 |
|
| 2020 | 28 |
| | 5 |
|
| 2021 | 26 |
| | 5 |
|
| 2022 | 23 |
| | 5 |
|
| Thereafter | 44 |
| | 5 |
|
| | $ | 192 |
| | $ | 30 |
|
The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2017, 20162019, 2018 and 20152017 was as follows:
| | | (in millions) | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | Discounts |
| | Returned Goods |
| | Discounts |
| | Returned Goods |
| | Discounts |
| | Returned Goods |
| | Discounts |
| | Returned Goods |
| | Discounts |
| | Returned Goods |
| | Discounts |
| | Returned Goods |
|
| Balance at beginning of year | | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | 68 |
| | $ | — |
| | $ | 46 |
| | $ | — |
| | $ | 32 |
| | $ | — |
| | $ | 40 |
| | $ | — |
| | $ | 49 |
|
| Charged to costs and expenses | | 626 |
| | 130 |
| | 628 |
| | 133 |
| | 618 |
| | 217 |
| | 604 |
| | 127 |
| | 620 |
| | 97 |
| | 626 |
| | 130 |
|
Deductions (1) | | (626 | ) | | (139 | ) | | (628 | ) | | (152 | ) | | (618 | ) | | (195 | ) | | (604 | ) | | (127 | ) | | (620 | ) | | (105 | ) | | (626 | ) | | (139 | ) |
| Balance at end of year | | $ | — |
| | $ | 40 |
| | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | 68 |
| | $ | — |
| | $ | 32 |
| | $ | — |
| | $ | 32 |
| | $ | — |
| | $ | 40 |
|
(1) Represents the recording of discounts and returns for which allowances were created.created.
The activity in the allowance for losses on finance assets for the years ended December 31, 2019, 2018 and 2017 was as follows:
|
| | | | | | | | | | | |
| (in millions) | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 19 |
| | $ | 23 |
| | $ | 32 |
|
| Decrease to allowance | — |
| | (4 | ) | | (9 | ) |
| Balance at end of year | $ | 19 |
| | $ | 19 |
| | $ | 23 |
|
Note 18.19. Contingencies
Legal proceedings covering a wide range of matters are pending or threatened in various United StatesU.S. and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries,USSTC, as well as their respective indemnitees.indemnitees and Altria’s investees. Various types of claims may be raised in these proceedings, including product liability, consumer protection,unfair trade practices, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors, shareholders or distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in
multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, may also seek to repeal or alter bond cap statutes through legislation. Although Altria Group, Inc. cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 18. 19. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria, Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.
Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation
Types and Number of U.S. Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised
programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iv) class action suits(iii) e-vapor cases alleging that the uses of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violationsviolation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”);, fraud, failure to warn, design defect, negligence and (v)unfair trade practices; and (iv) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and “Lights/Ultra Lights” casestobacco-related litigation are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United StatesU.S. against PM USA and, in some instances, Altria Group, Inc. as of December 31, 2017, 20162019, 2018 and 2015:2017:
|
| | | | | |
| | 2017 | | 2016 | | 2015 |
Individual Smoking and Health Cases (1) | 92 | | 70 | | 65 |
Smoking and Health Class Actions and Aggregated Claims Litigation (2) | 4 | | 5 | | 5 |
Health Care Cost Recovery Actions (3) | 1 | | 1 | | 1 |
| “Lights/Ultra Lights” Class Actions | 3 | | 8 | | 11 |
|
| | | | | |
| | 2019 | | 2018 | | 2017 |
Individual Smoking and Health Cases (1) | 104 | | 100 | | 92 |
Health Care Cost Recovery Actions (2) | 1 | | 1 | | 1 |
E-vapor Cases(3) | 101 | | — | | — |
Other Tobacco-Related Cases(4) | 4 | | 4 | | 7 |
(1)Includes 21 cases filed in Massachusetts and 43 non-Engle cases filed in Florida. Does not include 2,414individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (these Engle progeny cases are discussed below in Smoking and Health Litigation - Engle Class Action). Also does not include 1,472 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. Also, does not include individual smoking and healthIn March 2018, 923 of these cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (discussed below in Smoking and Health Litigation - Engle Class Action).were voluntarily dismissed without prejudice.
(2) Includes as one case the 30 civil actions that were to be tried in six consolidated trials in West Virginia (In re: Tobacco Litigation). PM USA is a defendant in nine of the 30 cases. The parties have agreed to resolve the cases for an immaterial amount and have so notified the court.
(3)See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.
(3)Includes 22 class action lawsuits, 76 individual lawsuits, 2 state or local government lawsuits and 1 lawsuit filed by a school district relating to JUUL e-vapor products. JUUL is an additional named defendant in each of these lawsuits.
▪(4) For 2019, includes 2 inactive smoking and health cases 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, including 1 case in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, and 2 inactive class action lawsuits alleging that use of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of RICO.
International Tobacco-Related Cases: As of January 29, 2018,27, 2020, PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight8 of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in seven7 smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group,and Philip Morris International Inc. and PMI(“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪Tobacco-Related Cases Set for Trial: As of January 29, 2018, three 27, 2020, 4 Engle progeny cases are set for trial through March 31, 2018. There are no other2020. In addition, there is 1 individual smoking and health casescase against PM USA set for trial during this period. Cases against other companies in the tobacco industry may also be scheduled for trial during this period. Trial dates are subject to change.
▪Trial Results:Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 63 smoking and health, “Lights/Ultra Lights” and health care cost recovery68 tobacco-related cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 4244 of the 6368 cases. These 4244 cases were tried in Alaska (1), California (7), Connecticut (1), Florida (10), Louisiana (1), Massachusetts (2)(4), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2). A motion for a new trial was granted in one of the cases in Florida and in the case in Alaska.In the Alaska case (Hunter), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. In December 2015, the Alaska Supreme Court reversed the trial court decision and remanded the case with directions for the trial court to reassess whether to grant a new trial. In March 2016, the trial court granted a new trial and PM USA filed a petition for review of that order with the Alaska Supreme Court, which the court denied in July 2016. The retrial began in October 2016. In November 2016, the court declared a mistrial after the jury failed to reach a verdict. The plaintiff subsequently moved for a new trial, which is scheduled to begin April 9, 2018. See Types and Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).
Of the 2124 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 1820 have reached final resolution.
As of January 29, 2018, 116 stateresolution, and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision as follows: 61 verdicts were returned in favor of plaintiffs; 45 verdicts were returned in favor of PM USA. Eight verdicts1 case (Gentile) that werewas initially returned in favor of plaintiff werewas reversed post-trial or on appeal and remain pending and two verdicts in favor of PM USA were reversed for a new trial. remains pending.
See Smoking and Health Litigation - Engle Progeny Trial Court Results below for a discussion of these verdicts.
verdicts in state and federal Engle progeny cases involving PM USA as of January 27, 2020.▪Judgments Paid and Provisions for Tobacco and Health Litigation Items (Including Engle Progeny Litigation): After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments and settlements (including related costs and fees) totaling approximately $490$724 million and interest totaling approximately $184$214 million as of December 31, 2017.2019. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $99$312 million and related interest totaling approximately $22 million and payment$52 million.
The changes in Altria Group, Inc.’sAltria’s accrued liability for tobacco and health litigation items, including related interest costs, for the periods specified below are as follows:
|
| | | | | | | | | | | |
| (in millions) | 2017 | | 2016 | | 2015 |
| Accrued liability for tobacco and health litigation items at beginning of year | $ | 47 |
| | $ | 132 |
| | $ | 39 |
|
| Pre-tax charges for: | | | | | |
| Tobacco and health judgments | 72 |
| | 21 |
| | 84 |
|
| Related interest costs | 8 |
| | 7 |
| | 23 |
|
Agreement to resolve federal Engle progeny cases | — |
| | — |
| | 43 |
|
Agreement to resolve Aspinall including related interest costs | — |
| | 32 |
| | — |
|
Agreement to resolve Miner | — |
| | 45 |
| | — |
|
| Payments | (21 | ) | | (190 | ) | | (57 | ) |
Accrued liability for tobacco and health litigation items at end of year | $ | 106 |
| | $ | 47 |
| | $ | 132 |
|
|
| | | | | | | | | | | |
| (in millions) | 2019 | | 2018 | | 2017 |
Accrued liability for tobacco and health litigation items at beginning of year (1) | $ | 112 |
| | $ | 106 |
| | $ | 47 |
|
| Pre-tax charges for: | | | | | |
| Tobacco and health litigation | 72 |
| (1)(2) | 113 |
| | 72 |
|
| Related interest costs | 5 |
| | 18 |
| | 8 |
|
Payments (1) | (175 | ) | (3) | (125 | ) | | (21 | ) |
Accrued liability for tobacco and health litigation items at end of period (1) | $ | 14 |
| | $ | 112 |
| | $ | 106 |
|
(1)Includes amounts related to the costs of implementing the corrective communications remedy related to the Federal Government’s Lawsuit discussed below.
(2)Includes approximately $22 million related to pre-trial resolution of approximately 300 tobacco and health cases.
(3) Includes approximately $20 million in payments related to above-mentioned pre-trial resolution of approximately 300 tobacco and health cases (the remaining approximately $2 million was accrued but not paid in 2019).
The accrued liability for tobacco and health litigation items, including related interest costs, was included in accrued liabilities on Altria Group, Inc.’sAltria’s consolidated balance sheets. Pre-tax charges for tobacco and health judgments, the agreement to resolve federal Engle progeny cases and the agreements to resolve the Aspinall and Miner “lights” class action cases (excluding related interest costs of approximately $10 million in Aspinall)litigation were included in marketing, administration and research costs on Altria Group, Inc.’sAltria’s consolidated statements of earnings.earnings (losses). Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria Group, Inc.’sAltria’s consolidated statements of earnings.earnings (losses).
▪Security for Judgments:To obtain stays of judgments pending current appeals, as of December 31, 2017,appeal, PM USA has posted various forms of securitysecurity. As of December 31, 2019, PM USA has posted appeal bonds totaling approximately $61$43 million, the majority of which hashave been collateralized with restricted cash deposits that are included in assets on the consolidated balance sheet.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Smoking and Health Litigation
▪Overview: Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptiveunfair trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
▪Non-Engle Progeny Litigation: Summarized below are the non-Engle progeny smoking and health cases pending during 20172019 in which a verdict was returned in favor of plaintiff and against PM USA. Charts listing certain verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.
Greene: In September 2019, a jury in a Massachusetts state court returned a verdict against PM USA, awarding plaintiffs approximately $10 million in compensatory damages. An additional claim by plaintiffs remains pending.
Laramie: In August 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiff, awarding $11 million in compensatory damages and $10 million in punitive damages. PM USA and plaintiff appealed.
Capone: In December 2018, a jury in a Florida state court returned a verdict in favor of plaintiff, awarding $225,000 in compensatory damages. In the first quarter of 2019, PM USA recorded a provision on its consolidated balance sheet of approximately $325,000 for the judgment and related costs and paid this amount in April 2019, concluding this litigation.
Gentile: In October 2017, a jury in a Florida state court returned a verdict in favor of plaintiff, awarding approximately $7.1 million in compensatory damages and allocating 75% of the fault to PM USA (an amount of approximately $5.3 million). Subsequently, in October 2017, PM USA filed various post-trial motions.
Bullock:appealed. In December 2015, a jury inSeptember 2019, the U.S.Florida Fourth District Court forof Appeal reversed the Central District of California returned a verdict in favor of plaintiff, awarding $900,000 in compensatory damages. In January 2016,judgment entered by the plaintiff movedtrial court, granted PM USA judgment on certain claims and remanded for a new trial whichon the district court denied in February 2016. In March 2016, PM USA filed a notice of appeal toremaining claims. Plaintiff has petitioned the U.S.Florida Supreme Court of Appeals for the Ninth Circuit and plaintiff cross-appealed. In December 2017, the U.S. Court of Appeals for the Ninth Circuit affirmed the judgment. In the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $1 million for the judgment plus interest and associated costs.further review.
Federal Government’s Lawsuit:See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America health care cost recovery case.
▪EngleClass Action: In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.
In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Court’s order.
In August 2006, PM USA and plaintiffs sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Florida Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class.opinion. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Florida Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Florida Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Florida Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court, which the United States Supreme Court denied later in 2007.
In February 2008, the trial court decertified the class, except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Court’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and would receive no credit at that time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.class.
In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs’ claims except for those of Howard Engle. The only remaining plaintiff in the Pending Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.
▪Engle Progeny Cases: The deadline for filing Engle progeny cases as required by the Florida Supreme Court’s Engle decision, expired in January 2008.2008, at which point a total of approximately 9,300 federal and state claims were pending. As of January 29, 2018,27, 2020, approximately 2,4001,700 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 3,1002,100 state court plaintiffs. Because of a number of factors, including but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. While the Federal Engle Agreement (discussed below) resolved nearly all Engle progeny cases pending in federal court, as of January 29, 2018, approximately 1227, 2020, 4 cases were pending against PM USA in federal court representing the cases excluded from that agreement.
▪Agreement to Resolve Federal Engle Progeny Cases: In 2015, PM USA, R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and Lorillard Tobacco Company (“Lorillard”) resolved approximately 415 pending federal Engle progeny cases (the “Federal Engle Agreement”). Under the terms of the Federal Engle Agreement, PM USA paid approximately $43 million. Federal cases that were in trial and those that previously reached final verdict were not included in the Federal Engle Agreement.
▪EngleProgeny Trial Results: As of January 29, 2018, 11627, 2020, 134 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Sixty-oneNaN verdicts were returned in favor of plaintiffs and eight6 verdicts (Skolnick, Calloway, Pollari McCoy, McCoyDuignan, Duignan, McCall,Caprio Oshinsky-Blacker and Oshinsky-BlackerFreeman) that were initially returned in favor of plaintiffs were reversed post-trial or on appeal and remain pending.Skolnick was remanded for a new trial; Calloway was reversed and remanded for a new trial on an appellate finding that improper arguments by plaintiff’s counsel deprived defendants of a fair trial; Pollari and McCoy were reversed and remanded for a new trial on an appellate finding that the trial court erred in admitting certain materials into evidence that deprived defendants of a fair trial; Duignan was reversed and remanded for a new trial on an appellate finding that the trial judge erred in responding to a question from the jury during deliberations; Caprio was reversed post-trial after defendants agreed to voluntarily dismiss their appeal in exchange for a full retrial; Oshinsky-Blacker was reversed post-trial based on plaintiff’s counsel’s improper arguments at trial; and McCall was reversed based on an appellate finding that the trial judge erred in instructing the jury on the warning labels on cigarette packs.
Forty-fiveNaN verdicts were returned in favor of PM USA, of which 3642 were state cases. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of January 29, 2018. Two27, 2020. NaN verdicts (Pearson, D. Cohen, Collar andCollar Chacon) that were returned in favor of PM USA were subsequently reversed for new trials. The juriesJuries in the 2 cases (Reider and Bankscases )returned zero0 damages verdicts in favor of PM USA. The juriesJuries in the 2 other cases (Weingart and Hancock cases) returned verdicts against PM USA awarding no0 damages, but the trial court in each case granteddecided to award plaintiffs damages. NaN case, Pollari, resulted in a verdict in favor of PM USA following a retrial of an additur.initial verdict returned in favor of plaintiff. Appeals by plaintiff and defendants are pending. NaN cases, Gloger and Rintoul (Caprio), resulted in verdicts in favor of plaintiffs following retrial of initial verdicts returned in favor of plaintiffs. Post-trial motions or appeals are pending.
The charts below list the verdicts and post-trial developments in certain Engle progeny cases in which verdicts were returned in favor of plaintiffs (including Hancock, where the verdict originally was returned in favor of PM USA).plaintiffs. The first chart lists such cases that are pending as of January 29, 2018;27, 2020 where PM USA has recorded a provision in its consolidated financial statements because we have determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated; the second chart lists other such cases that wereare pending as of January 27, 2020 but where we have determined an unfavorable outcome is not probable and the amount of loss cannot be reasonably estimated; and the third chart lists other such cases that have concluded within the previous 12 months, but that are now concluded.months. Unless otherwise noted for a particular case, the jury’s award for compensatory damages will not be reduced by any finding of plaintiff’s comparative fault. Further, the damages noted reflect adjustments based on post-trial or appellate rulings.
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Currently Pending Engle Cases with Accrued Liabilities (rounded to nearest $ million)
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| Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (All Defendants) | Punitive Damages (PM USA) | Appeal Status | Accrual (1) |
Berger (Cote) | September 2014 | PM USA | Federal Court - Middle District of Florida | $6 million | $21 million | The Eleventh Circuit Court of Appeals reinstated the punitive and compensatory damages awards and remanded the case to the district court. PM USA’s challenge to the punitive damages award was denied by the district court. PM USA’s appeal to the Eleventh Circuit Court of Appeals is pending. | $6 million accrual in the fourth quarter of 2018 |
Currently-Pending Engle Cases
Plaintiff: Bryant
Date: December 2017
Verdict:
An Escambia County jury returned a verdict in favor(1) Accrual amounts include interest and associated costs, if applicable. For cases with multiple defendants, if any, accrual amounts reflect the portion of plaintiff and againstcompensatory damages PM USA awardingbelieves it will have to pay if the case is ultimately decided in plaintiff’s favor after taking into account any portion potentially payable by the other defendant(s).
Other Currently Pending Engle Cases with Verdicts Against PM USA (rounded to nearest $ million)
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| Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages
(PM USA) | Appeal Status |
| Cuddihee | January 2020 | PM USA | Duval | $3 million | $0 | Trial court entered final judgment. Defendant to file one or more post-trial motions. |
| Rintoul (Caprio) | November 2019 | PM USA and R.J. Reynolds | Broward | $9 million ($5 million PM USA) | $74 million | Defendants’ post-trial motions pending. |
| Gloger | November 2019 | 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. |
| Frogel | March 2019 | PM USA | Palm Beach | <$1 million (<$1 million PM USA) | $0 | Appeals by plaintiff and defendant to Fourth District Court of Appeal pending. |
| Mahfuz | February 2019 | PM USA and R.J. Reynolds | Broward | $12 million | $10 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 | Appeals by defendant and plaintiff to Third District Court of Appeal pending. |
| Kaplan | July 2018 | PM USA and R.J. Reynolds | Broward | $2 million | $2 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. |
| Theis | May 2018 | PM USA and R.J. Reynolds | Sarasota | $7 million | $10 million | Second District Court of Appeal affirmed judgment. Defendants’ post-appeal motion pending. |
| Freeman | March 2018 | PM USA | Alachua | $4 million | $0 | First District Court of Appeal reversed judgment against PM USA. Plaintiff petitioned Florida Supreme Court for review. This case is currently stayed. |
| 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 for review. |
Other Currently Pending Engle Cases with Verdicts Against PM USA (rounded to nearest $ million)
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| | | | | | |
| Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages
(PM USA) | Appeal Status |
| Santoro | March 2017 | PM USA, R.J. Reynolds and Liggett Group | Broward | $2 million | $0 | Trial court set aside punitive damages award; appeals by plaintiff and defendants to Fourth District Court of Appeal pending. |
| 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 | Federal Court - Middle District of Florida | $16 million | $16 million | Appeal by defendants to U.S. Court of Appeals for the Eleventh Circuit pending. |
| Harris | July 2014 | PM USA,
R.J. Reynolds and Lorillard | 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 fault to PM USA. The jury also awarded $225,000 in punitive damages against PM USA.
Post-Trial Developments:
In December 2017, PM USA filed various post-trial motions, including motions to enter judgment in its favor and for a new trial. Plaintiff also filed a motion for a new trial on the amount of punitive damages.
Plaintiff: R. Douglas
Date: November 2017
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $131,371 and allocating 4% of the fault to PM USA (an amount of $5,255).
Post-Trial Developments:
In November 2017, PM USA filed a motion to set aside the verdict, and plaintiff filed a motion for a new trial or, in the alternative, for an additur of the damages award.
Plaintiff: Wallace
Date: October 2017
Verdict:
A Brevard County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $12 million and allocating 66% of the fault to PM USA (an amount of approximately $7.9 million). The jury also awarded plaintiff $16 million in punitive damages against PM USA.
Post-Trial Developments:
In November 2017, defendants filed post-trial motions, including for a new trial or remittitur of the damages awards. In December 2017, the court denied certain post-trial motions. In January 2018, the court amended the final judgment to withdraw the comparative fault reduction for the compensatory damages award and denied the remaining post-trial motions.
Plaintiff: L. Martin
Date: May 2017
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1.1 million and allocating 55% of the fault to PM USA (an amount of $605,000). The jury also awarded plaintiff $1.3 million in punitive damages against PM USA.
Post-Trial Developments:
In May 2017, PM USA filed various post-trial motions, including motions to set aside the verdict and for a new trial. In June 2017, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In August 2017,is noted parenthetically where the court denied PM USA’s post-trial motions and PM USA filed a notice of appeal to the Florida Third District Court of Appeal and posted a bond in the amount of approximately $1.9 million. In September 2017, plaintiff cross-appealed.
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Plaintiff: Sommers
Date: April 2017
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1 million and allocating 40% of the fault to PM USA. The court dismissed the punitive damages claim prior to trial.
Post-Trial Developments:
In April 2017, PM USA filed motions for a new trial and for a directed verdict, and plaintiff filed a motion for a new trial on punitive damages. In January 2018, the trial court granted plaintiff’s motion for a new trial on punitive damages and denied PM USA’s post-trial motions.
Plaintiff: Santoro
Date: March 2017
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group LLC (“Liggett Group”) awarding compensatory damages of $1.6 million and allocating 28% of the fault to PM USA (an amount of approximately $450,000). The jury also awarded plaintiff $100,000 in punitive damages against PM USA.
Post-Trial Developments:
In April 2017, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault and defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In December 2017, the trial court granted defendants’ motion to set aside the verdict as to all claims except plaintiff’s conspiracy claim. In January 2018, plaintiff filed a motion to amend the final judgment to award the full compensatory damages without reduction for plaintiff’s comparative fault.
Plaintiff: J. Brown
Date: February 2017
Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $5.4 million and allocating 35% of the fault to PM USA. The jury also awarded plaintiff $200,000 in punitive damages against PM USA.
Post-Trial Developments:
In March 2017, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. The courthas ruled that it will not apply the comparative fault reduction to the compensatory damages. In August 2017, the trial court denied defendants’ post-trial motions and entered final judgment in favor of plaintiff. In September 2017, defendants filed a notice of appeal to the Florida Second District Court of Appeal and posted a bond in the amount of $2.5 million.
Plaintiff: Pardue
Date: December 2016
Verdict:
An Alachua County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of approximately $5.9 million and allocating 25% of the fault to PM USA. The jury also awarded plaintiff $6.75 million in punitive damages against PM USA.
Post-Trial Developments:
In December 2016, the trial court entered final judgment in favor of plaintiff without a deduction for plaintiff’s comparative fault. In January 2017, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial or, in the alternative, for remittitur of the jury’s damages awards. In February 2017, the court granted defendants’ alternative motion for remittitur, reducing the compensatory damages award against PM USA and R.J. Reynolds to approximately $5.2 million. Also in February 2017, defendants filed a renewed motion to alter or amend the judgment, which the court denied in April 2017. In March 2017, defendants filed a notice of appeal to the Florida First District Court of Appeal and plaintiff cross-appealed. In April 2017, PM USA posted a bond in the amount of $2.5 million.
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Plaintiff: S. Martin
Date: November 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of approximately $5.4 million and allocating 46% of the fault to PM USA (an amount of approximately $2.48 million). The jury also awarded plaintiff $450,000 in punitive damages against PM USA.
Post-Trial Developments:
In December 2016, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault and PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial. In January 2017, the trial court denied all post-trial motions. In February 2017, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. Also in February 2017, PM USA posted a bond in the amount of $2.9 million.
Plaintiff: Howles
Date: November 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $4 million and allocating 50% of the fault to PM USA (an amount of $2 million). The jury also awarded plaintiff $3 million in punitive damages against PM USA.
Post-Trial Developments:
In November 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in December 2016. Also in December 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal.
Plaintiff: Oshinsky-Blacker
Date: September 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $6.155 million and allocating 60% of the fault to PM USA (an amount of $3.7 million). The jury also awarded plaintiff $1 million in punitive damages against PM USA.
Post-Trial Developments:
In October 2016, PM USA and R.J. Reynolds filed motions to set aside the verdict and for a directed verdict. In March 2017, the trial court vacated the verdict, ordered a new trial based on plaintiff’s counsel’s improper arguments at trial and denied defendants’ remaining post-trial motions. Also in March 2017, plaintiff filed a notice of appeal with the Florida Fourth District Court of Appeal and defendants cross-appealed.
Plaintiff: Sermons
Date: July 2016
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $65,000 and allocating 15% of the fault to PM USA (an amount of $9,750). The jury also awarded plaintiff $51,225 in punitive damages against PM USA.
Post-Trial Developments:
In July 2016, plaintiff filed a motion for a new trial or, in the alternative, for an additur of the damages awards.
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Plaintiff: Purdo
Date: April 2016
Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $21 million and allocating 12% of the fault to PM USA (an amount of $2.52 million). The jury also awarded plaintiff $6.25 million in punitive damages against each defendant.
Post-Trial Developments:
In May 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, all of which the court denied and entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In June 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of approximately $1.5 million. In August 2017, the Florida Fourth District Court of Appeal affirmed the final judgment in favor of plaintiff. In September 2017, defendants petitioned the Florida Fourth District Court of Appeal for panel rehearing or for rehearing en banc, which the court denied in October 2017. In November 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
Plaintiff: McCall
Date: March 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $350,000 and allocating 25% of the fault to PM USA (an amount of $87,500).
Post-Trial Developments:
In March 2016, PM USA filed a motion to set aside the verdict and to enter judgment in its favor, which the court denied in May 2016. Also in March 2016, plaintiff filed a motion for a new trial on punitive damages, citing the Soffer decision (allowing Engle progeny plaintiffs to seek punitive damages on their negligence and strict liability claims) discussed below under Engle Progeny Appellate Issues, which the court granted in May 2016. In June 2016, PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. In December 2017, the Florida Fourth District Court of Appeal reversed the judgment and remanded the case for a new trial on an appellate finding that the trial judge erred in instructing the jury on the warning labels on cigarette packs.
Plaintiff: Ahrens
Date: February 2016
Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $9 million in compensatory damages and allocating 24% of the fault to PM USA. The jury also awarded plaintiff $2.5 million in punitive damages against each defendant.
Post-Trial Developments:
In February 2016, the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s comparative fault and defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In March 2016, the trial court denied defendants’ post-trial motions. In April 2016, defendants filed a notice of appeal to the Florida Second District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In May 2017, the Florida Second District Court of Appeal issued a per curiam affirmance of the final judgment against defendants and defendants filed a motion for rehearing. In July 2017, the Second District Court of Appeal withdrew its prior decision and replaced it with a written opinion affirming the trial court’s judgment, but certifying to the Florida Supreme Court a conflict with Schoeff, discussed below under Engle Progeny Appellate Issues. In August 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida Supreme Court stayed the case pending Schoeff. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $7 million for the judgment plus interest and associated costs.
applies.
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Engle Cases Concluded Within Past 12 Months (rounded to nearest $ million) |
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| Plaintiff | Verdict Date | Defendant(s) | Court | Accrual Date | Payment Amount (if any) | Payment Date |
| Alvarez Del Real | September 2019 | PM USA | Miami-Dade | Fourth quarter of 2019 | <$1 million | October 2019 |
| 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 | Third quarter of 2018 | $2 million | March 2019 |
| Boatright | November 2014 | PM USA and Liggett Group | Polk | Second quarter of 2018 | $42 million | March 2019 |
| M. Brown | May 2015 | PM USA | Duval | Second quarter of 2018 | $8 million | March 2019 |
Jordan(1) | 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 |
| Boulter | December 2018 | PM USA and
R.J. Reynolds | Lee | Fourth quarter of 2018 | <$1 million | January 2019 |
Plaintiff: Ledoux
Date: December 2015
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in compensatory damages and allocating 47% of the fault to PM USA. (1) The jury also awarded plaintiff $12.5 million in punitive damages against each defendant.
Post-Trial Developments:
In January 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, and the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s comparative fault. In February 2016, the trial court denied defendants’ post-trial motions. In March 2016, defendants filed a notice of appeal to the Florida Third District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In October 2017, the Florida Third District Court of Appeal affirmed the final judgment in favor of plaintiff. In November 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court, contending that the final judgment conflicts with Schoeff, discussed below under Engle Progeny Appellate Issues. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $20 million for the judgment plus interest and associated costs.
Plaintiff: Barbose
Date: November 2015
Verdict:
A Pasco County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in compensatory damages and allocating 42.5% of the fault to PM USA. The jury also awarded plaintiff $500,000 in punitive damages against each defendant.
Post-Trial Developments:
In November 2015, the court entered final judgment in favor of plaintiff without any deduction for plaintiff’s comparative fault and in December 2015, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in January 2016. In February 2016, PM USA posted a bond in the amount of $2.5 million and filed a notice of appeal to the Florida Second District Court of Appeal. In August 2017, the Florida Second District Court of Appeal issued a per curiam affirmance of the final judgment against defendants and defendants filed a motion seeking a written opinion with a citation to Schoeff, discussed below under Engle Progeny Appellate Issues. In October 2017, the Florida Second District Court of Appeal issued a written opinion with a citation to Schoeff and granted defendants’ March 2017 motion for rehearing en banc or certification to the Florida Supreme Court. In November 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court, contending that the final judgment conflicts with Schoeff. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $12 million for the judgment plus interest and associated costs.
Plaintiff: Tognoli
Date: November 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding $1.05 million in compensatory damages and allocating 15% of the fault to PM USA (an amount of $157,500).
Post-Trial Developments:
In December 2015, PM USA filed a motion to set aside the verdict and for judgment in accordance with its motion for directed verdict. In January 2016, the trial court entered final judgment against PM USA with a deduction for plaintiff’s comparative fault and plaintiff filed an appeal to the Florida Fourth District Court of Appeal. Additionally, the trial court denied PM USA’s post-trial motions and PM USA cross-appealed. In June 2017, the Florida Fourth District Court of Appeal issued a per curiam affirmance of the final judgment against PM USA. In July 2017, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court and, in August 2017, the Florida Supreme Court stayed the case pending Schoeff, discussed below under Engle Progeny Appellate Issues. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for
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intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $1 million for the judgment plus interest.
Plaintiff: Danielson
Date: November 2015
Verdict:
An Escambia County jury returned a verdict in favor of plaintiff and against PM USA awarding $325,000 in compensatory damages and allocating 49% of the fault to PM USA. The jury also awarded plaintiff $325,000 in punitive damages.
Post-Trial Developments:
In November 2015, plaintiff filed a motion to enforce the parties’ pretrial stipulation of $2.3 million in economic damages, which the trial court granted. The plaintiff also filed a motion for an additur or, in the alternative, for a new trial and PM USA filed post-trial motions, including a motion concerning the proper form of judgment and for a new trial. In December 2015, the trial court granted plaintiff’s motion for a new trial on damages and denied PM USA’s post-trial motions. In January 2016, PM USA filed a notice of appeal to the Florida First District Court of Appeal. In July 2017, the Florida First District Court of Appeal affirmed the trial court’s order granting a new trial on non-economic compensatory damages, but reinstated the jury’s punitive damages award.
Plaintiff: Duignan
Date: September 2015
Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $6 million in compensatory damages and allocating 37% of the fault to PM USA. The jury also awarded plaintiff $3.5 million in punitive damages against PM USA.
Post-Trial Developments:
In September 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in October 2015. In November 2015, PM USA and R.J. Reynolds filed a notice of appeal to the Florida Second District Court of Appeal and PM USA posted a bond in the amount of approximately $2.7 million. In November 2017, the Florida Second District Court of Appeal reversed the judgment against PM USA and R.J. Reynolds and ordered a new trial on an appellate finding that the trial judge erred in responding to a question from the jury during deliberations. Also in November 2017, plaintiff filed a motion for rehearing with the Florida Second District Court of Appeal, which the court denied in January 2018.
Plaintiff: Cooper
Date: September 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $4.5 million in compensatory damages and allocating 10% of the fault to PM USA (an amount of $450,000).
Post-Trial Developments:
In September 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a directed verdict. In January 2016, the trial court denied PM USA’s post-trial motions. In February 2016, the trial court entered final judgment in favor of plaintiff, reducing the compensatory damages award against PM USA to approximately $300,000. In March 2016, PM USA and R.J. Reynolds filed a notice of appeal in the Florida Fourth District Court of Appeal and plaintiff cross-appealed. Also in March 2016, PM USA posted a bond in the amount of approximately $300,000. In January 2018, the Florida Fourth District Court of Appeal affirmed the judgment in favor of plaintiff and granted plaintiff a new trial on punitive damages.
Plaintiff: Jordan
Date: August 2015
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $7.8 million in compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded approximately $3.2 million in punitive damages.
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Post-Trial Developments:
In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, but reduced the compensatory damages to approximately $6.4 million. PM USA filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in December 2015. PM USA subsequently filed a notice of appeal to the Florida First District Court of Appeal and plaintiff cross-appealed.
Plaintiff: McCoy
Date: July 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $1.5 million in compensatory damages and allocating 20% of the fault to PM USA (an amount of $300,000). The jury also awarded $3 million in punitive damages against each defendant.
Post-Trial Developments:
In July 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In January 2016, the trial court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. Subsequently, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, PM USA posted a bond in the amount of approximately $1.65 million and plaintiff filed a notice of cross-appeal. In November 2017, the Florida Fourth District Court of Appeal reversed the judgment against PM USA and R.J. Reynolds and ordered a new trial on an appellate finding that the trial court erred in admitting certain materials into evidence that deprived defendants of a fair trial. In December 2017, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
Plaintiff: M. Brown
Date: May 2015
Verdict:
In May 2015, a Duval County jury returned a verdict in favor of plaintiff and against PM USA in a partial retrial. In 2013, a jury returned a partial verdict against PM USA, but was deadlocked as to (i) the amount of compensatory damages, (ii) whether punitive damages should be awarded and, if so, (iii) the amount of punitive damages. In the partial retrial, the jury was asked to address these issues. In May 2015, the jury awarded $6.375 million in compensatory damages, but did not award any punitive damages.
Post-Trial Developments:
In May 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA posted a bond in the amount of $5 million. Additionally, PM USA filed post-trial motions, including motions to set aside the verdict and for a new trial, as well as filed a notice of appeal to the Florida First District Court of Appeal. In August 2015, the trial court denied the last of PM USA’s post-trial motions and plaintiff cross-appealed.
Plaintiff: Gore
Date: March 2015
Verdict:
An Indian River County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $2 million in compensatory damages and allocating 23% of the fault to PM USA (an amount of $460,000).
Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In September 2015, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. In October 2015, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. PM USA subsequently posted a bond in the amount of $460,000.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Plaintiff: Pollari
Date: March 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in compensatory damages and allocating 42.5% of the fault to PM USA (an amount of $4.25 million). The jury also awarded $1.5 million in punitive damages against each defendant.
Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial, and the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In January 2016, the trial court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. Also in January 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In February 2016, plaintiff cross-appealed. In August 2017, the Florida Fourth District Court of Appeal reversed the original judgment against PM USA and ordered a new trial on an appellate finding that the trial court erred in admitting certain materials into evidence that deprived defendants of a fair trial. In September 2017, plaintiff moved for rehearing, rehearing en banc, or certification of a question to the Florida Supreme Court, which the Florida Fourth District Court of Appeal denied in November 2017. In December 2017, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
Plaintiff: Zamboni
Date: February 2015
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $340,000 in compensatory damages and allocating 10% of the fault to PM USA (an amount of $34,000).
Post-Trial Developments:
In April 2015, PM USA and R.J. Reynolds filed a motion for judgment in defendants’ favor in accordance with the Eleventh Circuit’s decision in Graham, discussed below under Engle Progeny Appellate Issues. In June 2015, the trial court stayed the case pending the Eleventh Circuit’s final disposition in the Graham case. In January 2018, the United States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
Plaintiff: Caprio
Date: February 2015
Verdict:
A Broward County jury returned a partial verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The jury found against defendants on class membership, allocating 25% of the fault to PM USA. The jury also found $559,172 in economic damages. The jury deadlocked with respect to the intentional torts, certain elements of compensatory damages and punitive damages.
Post-Trial Developments:
In March 2015, PM USA filed post-trial motions, including motions to set aside the partial verdict and for a new trial. In May 2015, the court denied all of PM USA’s post-trial motions and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In January 2017, the defendants agreed to voluntarily dismiss their appeal in exchange for a full retrial and the court dismissed the appeal.
Plaintiff: McKeever
Date: February 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $5.8 million in compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded plaintiff approximately $11.63$4 million in punitive damages. However, the jury found in favor of PM USA on the statute of repose defense to plaintiff’s intentional tortfees and punitive damages claims.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Post-Trial Developments:
In March 2015, PM USA filed various post-trial motions, including motions to set aside the verdict and motions for a new trial. In April 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In June 2015, the trial court denied PM USA’s post-trial motions, and PM USA posted a bond in the amount of $5 million. PM USA also filed a notice of appeal to the Florida Fourth District Court of Appeal in June 2015. In January 2017, the Florida Fourth District Court of Appeal issued a decision largely affirming the trial court’s judgment against PM USA, but remanded the case to the trial court to amend the final judgment to apply the comparative fault deduction to the compensatory damages award. In February 2017, PM USA filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In March 2017, the Florida Supreme Court stayed the appeal pending its decisions in Marotta and Schoeff, discussed below under Engle Progeny Appellate Issues. In April 2017, the Florida Supreme Court rejected R.J. Reynolds’s federal preemption defense in Marotta. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $20 million for the judgment plus interest.
Plaintiff: D. Brown
Date: January 2015
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff approximately $8.3 million in compensatory damages and allocating 55% of the fault to PM USA. The jury also awarded plaintiff $9 million in punitive damages.
Post-Trial Developments:
In February 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In March 2015, PM USA filed various post-trial motions, including motions to alter or amend the judgment and for a new trial or, in the alternative, remittitur of the damages awards, all of which the court denied. In July 2015, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In August 2015, the Court of Appeals granted PM USA’s motion to stay the appeal pending final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues. In January 2018, the United States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
Plaintiff: Allen
Date: November 2014
Verdict:
A Duval County jury returned a verdict against PM USA and R.J. Reynolds awarding plaintiff approximately $3.1 million in compensatory damages and allocating 6% of the fault to PM USA. The jury also awarded approximately $7.76 million in punitive damages against each defendant. This was a retrial of a 2011 trial that awarded plaintiff $6 million in compensatory damages and $17 million in punitive damages against each defendant.
Post-Trial Developments:
In December 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial, which the court denied in July 2015. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. Defendants filed a notice of appeal to the Florida First District Court of Appeal in September 2015 and PM USA posted a bond in the amount of approximately $2.5 million. In February 2017, the Florida First District Court of Appeal affirmed the trial court’s judgment. In March 2017, defendants filed a motion for rehearing en banc with the Florida First District Court of Appeal or for certification to the Florida Supreme Court. In June 2017, the Florida First District Court of Appeal granted defendants’ motion for rehearing en banc. In October 2017, the Florida First District Court of Appeal dissolved the en banc proceeding. In November 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
Plaintiff: Perrotto
Date: November 2014
Verdict:
A Palm Beach County jury returned a verdict against PM USA, R.J. Reynolds, Lorillard and Liggett Group awarding plaintiff approximately $4.1 million in compensatory damages and allocating 25% of the fault to PM USA (an amount of approximately $1.02 million).
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Post-Trial Developments:
In December 2014, plaintiff filed a motion for a new trial. In May 2016, the court granted plaintiff’s motion for a new trial on punitive damages, citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. In September 2016, the court denied defendants’ post-trial motions.
Plaintiff: Boatright
Date: November 2014
Verdict:
A Polk County jury returned a verdict against PM USA and Liggett Group awarding plaintiff $15 million in compensatory damages and allocating 85% of the fault to PM USA (an amount of approximately $12.75 million). In addition, in November 2014, the jury awarded plaintiff approximately $19.7 million in punitive damages against PM USA and $300,000 in punitive damages against Liggett Group.
Post-Trial Developments:
In November 2014, PM USA filed various post-trial motions and, in January 2015, the trial court denied PM USA’s motions for a new trial and for remittitur, but entered final judgment with a deduction for plaintiff’s comparative fault. In February 2015, defendants filed a notice of appeal to the Florida Second District Court of Appeal and plaintiff cross-appealed. PM USA posted a bond in the amount of $3.98 million. In April 2017, the Florida Second District Court of Appeal rejected PM USA’s grounds for appeal and affirmed the judgment, but ruled that the trial court should not have applied the comparative fault deduction. The court remanded the case to the trial court to amend the judgment to award plaintiff the full amount of the jury’s compensatory damages award and also separately ruled that plaintiff is entitled to attorneys’ fees. In May 2017, defendants filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court on the merits and on the attorneys’ fees issue. The Florida Supreme Court stayed consideration of its jurisdiction on the merits appeal pending its ruling in Schoeff, discussed below under Engle Progeny Appellate Issues. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. PM USA intends to request that the Florida Supreme Court remand the case to the Second District Court of Appeal for further consideration.
Plaintiff: Kerrivan
Date: October 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA and R.J. Reynolds awarding plaintiff $15.8 million in compensatory damages and allocating 50% of the fault to PM USA. The jury also awarded plaintiff $25.3 million in punitive damages and allocated $15.7 million to PM USA.
Post-Trial Developments:
The trial court entered final judgment without any deduction for plaintiff’s comparative fault. In December 2014, defendants filed various post-trial motions, including a renewed motion for judgment or for a new trial. Plaintiff agreed to waive the bond for the appeal. In May 2015, the trial court deferred further briefing on the post-trial motions pending the Eleventh Circuit’s final disposition in the Graham and Searcy cases, discussed below under Engle Progeny Appellate Issues. In June 2017, the trial court lifted the stay on the post-trial motions.
Plaintiff: Berger
Date: September 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff $6.25 million in compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded $20.76 million in punitive damages.
Post-Trial Developments:
The trial court entered final judgment in September 2014 without any deduction for plaintiff’s comparative fault. In October 2014, plaintiff agreed to waive the bond for the appeal. Also in October 2014, PM USA filed a motion for a new trial or, in the alternative, remittitur of the jury’s damages awards. In April 2015, the trial court granted PM USA’s post-verdict motion in part and vacated the punitive damages award. In November 2015, the court entered final judgment with a deduction for plaintiff’s comparative fault. In April 2016, plaintiff filed a motion to reinstate the jury’s punitive damages award or, alternatively, for a new trial on punitive damages, citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. Also in April 2016, PM USA filed a motion to stay post-trial proceedings pending the Eleventh Circuit’s final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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In May 2016, (i) the trial court denied PM USA’s remaining post-trial motions and (ii) PM USA filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit and a motion to stay the appeal pending Graham, which the court granted in June 2016. In August 2016, the trial court denied plaintiff’s motion to reinstate the jury’s punitive damages or to order a new trial and, in September 2016, plaintiff cross-appealed. In June 2017, the U.S. Court of Appeals for the Eleventh Circuit lifted the stay on the post-trial motions.
Plaintiff: Harris
Date: July 2014
Verdict:
The U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding approximately $1.73 million in compensatory damages and allocating 15% of the fault to PM USA.
Post-Trial Developments:
Defendants filed motions for a defense verdict because the jury’s findings indicated that plaintiff was not a member of the Engle class. In December 2014, the trial court entered final judgment without any deduction for plaintiff’s comparative fault and, in January 2015, defendants filed a renewed motion for judgment as a matter of law or, in the alternative, a motion for a new trial. Defendants also filed a motion to alter or amend the final judgment. In April 2015, the trial court stayed the post-trial proceedings pending the Eleventh Circuit’s final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues. In January 2018, the United States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
Plaintiff: Griffin
Date: June 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA awarding approximately $1.27 million in compensatory damages and allocating 50% of the fault to PM USA (an amount of approximately $630,000).
Post-Trial Developments:
The trial court entered final judgment against PM USA in July 2014 with a deduction for plaintiff’s comparative fault. In August 2014, PM USA filed a motion to amend the judgment to reduce plaintiff’s damages by the amount paid by collateral sources, which the court denied in September 2014. In October 2014, PM USA posted a bond in the amount of $640,543 and filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In May 2015, the Eleventh Circuit stayed the appeal pending final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $1.1 million for the judgment plus interest and associated costs. In January 2018, the United States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
Plaintiff: Burkhart
Date: May 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $5 million in compensatory damages and allocating 15% of the fault to PM USA. The jury also awarded plaintiff $2.5 million in punitive damages, allocating $750,000 to PM USA.
Post-Trial Developments:
In July 2014, defendants filed post-trial motions, including a renewed motion for judgment or, alternatively, for a new trial or remittitur of the damages awards, which the court denied in September 2014. The trial court entered final judgment without any deduction for plaintiff’s comparative fault. In October 2014, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In April 2017, the Eleventh Circuit stayed the appeal pending final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues. In November 2017, the Eleventh Circuit further stayed the appeal pending Schoeff, discussed below under Engle Progeny Appellate Issues. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. In January 2018, the United States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Plaintiff: Skolnick
Date: June 2013
Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $2.555 million in compensatory damages and allocated 30% of the fault to each defendant (an amount of $766,500).
Post-Trial Developments:
In June 2013, defendants and plaintiff filed post-trial motions. The trial court entered final judgment with a deduction for plaintiff’s comparative fault. In November 2013, the trial court denied plaintiff’s post-trial motion and, in December 2013, denied defendants’ post-trial motions. Defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, and plaintiff cross-appealed in December 2013. Also in December 2013, PM USA posted a bond in the amount of $766,500. In July 2015, the District Court of Appeal reversed the compensatory damages award and ordered judgment in favor of defendants on the strict liability and negligence claims, but remanded plaintiff’s conspiracy and concealment claims for a new trial. In August 2015, defendants filed a motion for rehearing, and plaintiff filed a motion for clarification, which the District Court of Appeal denied in September 2015.
Plaintiff: Starr-Blundell
Date: June 2013
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $500,000 in compensatory damages and allocated 10% of the fault to each defendant (an amount of $50,000).
Post-Trial Developments:
In June 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed verdict or, in the alternative, for a new trial, which was denied in October 2013. In November 2013, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. In December 2013, plaintiff filed a notice of appeal to the Florida First District Court of Appeal. Plaintiff agreed to waive the bond for the appeal. In May 2015, the Florida First District Court of Appeal affirmed the final judgment. In June 2015, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In July 2015, the Florida Supreme Court stayed the case pending the outcome of Soffer, discussed below under Engle Progeny Appellate Issues. In April 2016, the Florida Supreme Court ordered defendants to show cause as to why the case should not be remanded in light of the Soffer decision. In the first quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $55,000 for the judgment plus interest and associated costs. In May 2016, the Florida Supreme Court accepted jurisdiction of plaintiff’s petition for review and remanded the case for reconsideration in light of the Soffer decision. In September 2016, the Florida First District Court of Appeal further remanded the case in light of Soffer.
Plaintiff: Searcy
Date: April 2013
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $6 million in compensatory damages (allocating 30% of the fault to each defendant) and $10 million in punitive damages against each defendant.
Post-Trial Developments:
In June 2013, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In July 2013, defendants filed various post-trial motions, including motions requesting reductions in damages. In September 2013, the district court reduced the compensatory damages award to $1 million and the punitive damages award to $1.67 million against each defendant. The district court denied all other post-trial motions. Plaintiff filed a motion to reconsider the district court’s remittitur and, in the alternative, to certify the issue to the U.S. Court of Appeals for the Eleventh Circuit, both of which the court denied in October 2013. In November 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit arguing that application of the Engle findings to the Engle progeny plaintiffs’ concealment and conspiracy claims violated defendants’ due process rights. In December 2013, defendants filed an amended notice of appeal after the district court corrected a clerical error in the final judgment, and PM USA posted a bond in the amount of approximately $2.2 million. In January 2018, the U.S. Court of Appeals for the Eleventh Circuit ordered supplemental briefing on the due process issue.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Plaintiff: Calloway
Date: May 2012
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA. The jury also awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J. Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against Liggett Group.
Post-Trial Developments:
In May and June 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions, reduced the compensatory damages to $16.1 million and entered final judgment without any deduction for plaintiff’s comparative fault. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In August 2013, plaintiff filed a motion to determine the sufficiency of the bond in the trial court on the ground that the bond cap statute is unconstitutional, which the court denied. In January 2016, a panel of the Florida Fourth District Court of Appeal vacated the punitive damages award and remanded the case for retrial on plaintiff’s claims of concealment and conspiracy, and punitive damages. The court also found that the trial court should have applied the comparative fault deduction, reducing the compensatory damages against PM USA to $4.025 million. In February 2016, defendants and plaintiff filed respective motions for rehearing and rehearing en banc. In March 2016, plaintiff filed a notice of supplemental authority citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. In September 2016, the Florida Fourth District Court of Appeal, ruling en banc, reversed the judgment against PM USA and R.J. Reynolds in its entirety on the grounds that improper arguments by plaintiff’s counsel deprived defendants of a fair trial, and ordered a new trial. In October 2016, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court, which the court denied in March 2017. In June 2017, plaintiff filed a petition for writ of certiorari with the United States Supreme Court seeking review of the 2016 en banc ruling by the Florida Fourth District Court of Appeal, which the court denied in October 2017.
Plaintiff: Putney
Date: April 2010
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA.
Post-Trial Developments:
In August 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and, in November 2010, posted a $1.6 million bond. In June 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings, holding that the trial court erred in (1) not reducing the compensatory damages award as excessive and (2) not instructing the jury on the statute of repose in connection with plaintiff’s conspiracy claim that resulted in the $2.5 million punitive damages award. In July 2013, plaintiff filed a motion for rehearing, which the Fourth District Court of Appeal denied in August 2013. In September 2013, both parties filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. In December 2013, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess, and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In February 2016, the Florida Supreme Court upheld the trial court’s decision in favor of plaintiff and, in March 2016, clarified that its February 2016 order reinstated the trial court’s decision on the statute of repose only. In August 2016, the Florida Fourth District Court of Appeal reinstated the jury’s punitive damages verdict and reaffirmed that the compensatory damages award was excessive, remanding the case to the trial court to reduce the compensatory damages. In May 2017, the trial court ruled that the 2010 jury award of $15.1 million in compensatory damages was excessive and reduced the award to $225,000. In June 2017, plaintiff requested a new trial on compensatory damages.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Engle Cases Concluded Within Past 12 Months
Plaintiff: Graham
Date: May 2013
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $2.75 million in compensatory damages and allocated 10% of the fault to PM USA (an amount of $275,000).
Post-Trial Developments:
In June 2013, defendants filed several post-trial motions, including motions for judgment as a matter of law and for a new trial, which the trial court denied in September 2013. The trial court entered final judgment with a deduction for plaintiff’s comparative fault. In October 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit arguing that Engle progeny plaintiffs’ product liability claims are impliedly preempted by federal law, and PM USA posted a bond in the amount of $277,750. In April 2015, the U.S. Court of Appeals for the Eleventh Circuit found in favor of defendants on the basis of federal preemption, reversed the trial court’s denial of judgment as a matter of law, and plaintiff filed a petition for rehearing en banc or panel rehearing. In January 2016, the Eleventh Circuit granted a rehearing en banc on both the preemption and due process issues. In May 2017, the U.S. Court of Appeals for the Eleventh Circuit affirmed the final judgment entered in plaintiff’s favor, rejecting defendants’ preemption and due process arguments. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $500,000 for the judgment plus interest and associated costs. In September 2017, defendants filed a petition for writ of certiorari with the United States Supreme Court on due process and federal preemption grounds, which the court denied in January 2018. PM USA paid the judgment plus interest and associated costs, in the amount of approximately $1 million in January 2018.
Plaintiff: Naugle
Date: November 2009
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA.
Post-Trial Developments:
In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages, but without any deduction for plaintiff’s comparative fault. In April 2010, PM USA filed its notice of appeal and posted a $5 million bond. In June 2012, the Fourth District Court of Appeal affirmed the final judgment (as amended to correct a clerical error) in the amount of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages. In December 2012, the Fourth District withdrew its prior decision, reversed the verdict as to compensatory and punitive damages and returned the case to the trial court for a new trial on the question of damages. Upon retrial, in October 2013, the new jury awarded approximately $3.7 million in compensatory damages and $7.5 million in punitive damages. PM USA filed post-trial motions, which the trial court denied in April 2014. In May 2014, PM USA filed a notice of appeal to the Fourth District Court of Appeal and plaintiff cross-appealed. Also in May 2014, PM USA filed a rider with the Florida Supreme Court to make the previously-posted Naugle bond applicable to the retrial judgment. In January 2016, the Fourth District Court of Appeal reversed the trial court’s decision and remanded the case to the trial court to conduct a juror interview. In April 2016, PM USA moved for a new trial following the juror interview, which the court denied. In May 2016, PM USA filed a notice of appeal to the Fourth District Court of Appeal. In April 2017, the Fourth District Court of Appeal issued a per curiam decision affirming the trial court’s judgment against PM USA. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $13.2 million for the judgment plus interest and associated costs, and increased its bond by $6.2 million. In September 2017, PM USA filed a petition for writ of certiorari with the United States Supreme Court on due process and federal preemption grounds, which PM USA dismissed after the court denied PM USA’s petition in Graham. PM USA paid the judgment plus interest and associated costs in the amount of approximately $13.5 million in January 2018.has appealed.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Plaintiff: Lourie
Date: October 2014
Verdict:
A Hillsborough County jury returned a verdict against PM USA, R.J. Reynolds and Lorillard awarding plaintiff approximately $1.37 million in compensatory damages and allocating 27% of the fault to PM USA (an amount of approximately $370,000).
Post-Trial Developments:
In October 2014, defendants filed a motion for judgment and a motion for a new trial. In November 2014, the trial court denied defendants’ post-trial motions and entered final judgment with a deduction for plaintiff’s comparative fault. Later in November 2014, defendants filed a notice of appeal to the Florida Second District Court of Appeal, and PM USA posted a bond in the amount of $370,318. In August 2016, the Florida Second District Court of Appeal affirmed the judgment entered in favor of the plaintiff. In September 2016, defendants filed a petition to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida Supreme Court stayed the proceedings pending final disposition in the Marotta case, discussed below under Engle Progeny Appellate Issues. In June 2017, the Florida Supreme Court denied PM USA’s petition to invoke the court’s discretionary jurisdiction. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.3 million for the judgment plus interest and associated costs. In September 2017, defendants filed a petition for writ of certiorari with the United States Supreme Court on due process and federal preemption grounds, which PM USA dismissed after the court denied PM USA’s petition in Graham. PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.5 million in January 2018.
Plaintiff: Marchese
Date: October 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $1 million in compensatory damages and allocating 22.5% of the fault to PM USA (an amount of $225,000). The jury also awarded plaintiff $250,000 in punitive damages against each defendant.
Post-Trial Developments:
In October 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In November 2015, the court entered final judgment in favor of plaintiff. In May 2016, the court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. In June 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. Also in June 2016, PM USA posted a bond in the amount of approximately $475,000. In November 2017, the Florida Fourth District Court of Appeal rejected defendants’ appeal, granted plaintiff’s cross-appeal finding that the trial court erred in applying the comparative fault deduction and remanded the case to the trial court with directions to enter an amended final judgment. In the fourth quarter of 2017, PM USA recorded a provision of approximately $1 million on its consolidated balance sheet for the judgment plus interest and paid this amount in January 2018.
Plaintiff: Merino
Date: July 2015
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding $8 million in compensatory damages and allocating 70% of the fault to PM USA. The jury also awarded $6.5 million in punitive damages.
Post-Trial Developments:
In August 2015, the trial court denied all post-trial motions, including motions to set aside the verdict and for a new trial, and entered final judgment without any deduction for plaintiff’s comparative fault. In September 2015, PM USA filed a notice of appeal to the Florida Third District Court of Appeal and posted a bond in the amount of $5 million. In November 2016, the Florida Third District Court of Appeal issued a per curiam decision affirming the trial court’s judgment against PM USA. PM USA subsequently filed a motion seeking a written opinion, which the court denied in December 2016. In the fourth quarter of 2016, PM USA recorded a provision on its consolidated balance sheet of $16.9 million for the judgment plus interest and associated costs and increased the bond to $14.5 million. In April 2017, PM USA paid the judgment plus interest and associated costs in the amount of approximately $17.4 million.
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Plaintiff: Varner
Date: July 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1.5 million and allocating 25% of the fault to PM USA (an amount of $375,000).
Post-Trial Developments:
In July 2016, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In August 2016, PM USA filed motions to set aside the verdict and for a directed verdict, and plaintiff filed a motion for a new trial. In January 2017, the trial court denied all post-trial motions. In February 2017, PM USA paid the judgment plus interest and associated costs in the amount of approximately $600,000.
▪Engle Progeny Appellate Issues: In Douglas, an Engle progeny case against PM USA and R.J. Reynolds, in March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings with respect to strict liability claims but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the final judgment entered in favor of plaintiff upholding the use of the Engle jury findings with respect to strict liability and negligence claims. PM USA’s subsequent petition for writ of certiorari with the United States Supreme Court was unsuccessful.
In Graham, an Engle progeny case against PM USA and R.J. Reynolds, in April 2015, the U.S. Court of Appeals for the Eleventh Circuit found in favor of defendants on the basis of federal preemption, reversing the trial court’s denial of judgment as a matter of law. Thereafter, plaintiff filed a petition for rehearing en banc, which the Eleventh Circuit granted in January 2016. In May 2017, the U.S. Court of Appeals for the Eleventh Circuit rejected defendants’ preemption and due process arguments and affirmed the final judgment entered in plaintiff’s favor. In September 2017, defendants filed a petition for writ of certiorari with the United States Supreme Court on due process and federal preemption grounds, which the court denied in January 2018. In January 2016, in Marotta, a case against R.J. Reynolds on appeal to the Florida Fourth District Court of Appeal, the court rejected R.J. Reynolds’s federal preemption defense, but noted the conflict with Graham and certified the preemption question to the Florida Supreme Court. In March 2016, the Florida Supreme Court accepted review of Marotta and in April 2017, affirmed the Fourth District Court of Appeal’s ruling on preemption.
In Searcy, an Engle progeny case against PM USA and R.J. Reynolds on appeal to the Eleventh Circuit, defendants argued that application of the Engle findings to the Engle progeny plaintiffs’ concealment and conspiracy claims violated defendants’ due process rights. The appeal is pending. In January 2018, the Eleventh Circuit ordered supplemental briefing on the due process issues.
In Soffer, an Engle progeny case against R.J. Reynolds, the Florida First District Court of Appeal held that Engle progeny plaintiffs can recover punitive damages only on their intentional tort claims. The Florida Supreme Court accepted jurisdiction over plaintiff’s appeal from the Florida First District Court of Appeal’s decision and, in March 2016, held that Engle progeny plaintiffs can recover punitive damages in connection with all of their claims. Plaintiffs now generally seek punitive damages in connection with all of their claims in Engle progeny cases.
In Schoeff, an Engle progeny case against R.J. Reynolds, the Florida Fourth District Court of Appeal held that comparative fault findings should apply to reduce all compensatory damage awards, including awards based on intentional fraud claims. The Florida Supreme Court accepted jurisdiction over plaintiff’s appeal of the Florida Fourth District Court of Appeal’s decision. In December 2017, the Florida Supreme Court reversed the Court of Appeal’s decision, finding that comparative fault does not reduce compensatory damages awards for intentional torts.
▪Florida Bond 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 three state Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.
Trial court rulings were rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs’ bond cap statutevarious challenges in those cases. The plaintiffs unsuccessfully appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to certify the question of the constitutionality of the bond cap statute in Clay and Alexander. The Florida Supreme Court granted review of the Hall decision, but, in September 2012, the court dismissed the appeal as moot. In October 2012, the Florida Supreme Court denied the plaintiffs’
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rehearing petition. In August 2013, in Calloway, discussed further above, plaintiff filed a motion in the trial court to determine the sufficiency of the bond posted by defendants on the ground that the bond cap statute is unconstitutional, which was denied.
In February 2016, in the Sikes case against R.J. Reynolds, the trial court held that Florida’s bond cap statute does not stay the execution of judgment after a case is final in the Florida judicial system and before the defendant files a petition for writ of certiorari with the United States Supreme Court. The District Court of Appeal for the First District of Florida issued an order staying execution of the judgment and requesting that plaintiff show cause why the stay should not remain in effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has expired. In April 2016, the District Court of Appeal held that the bond cap applies to the period between a Florida Supreme Court ruling and completion of United States Supreme Court writ of certiorari review. In April 2016, PM USA filed motions in the trial court in the R. Cohen and Kayton cases seeking confirmation that the stay on executing the judgment remains in effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has expired, which the court granted.
No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engleprogeny cases tried in federal court.
TheFrom time to time, legislation has been presented to the Florida legislature is considering legislation that would repeal the 2009 appeal bond cap statute.statute; however to date, no legislation repealing the statute has passed.
Other Smoking and Health Class Actions
Actions: 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 January 29, 2018,27, 2020, PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in seven7 class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (two(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 Group, Inc. and PMI, thatwhich provides for indemnities for certain liabilities concerning tobacco products.
Health Care Cost Recovery Litigation
▪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 United StatesU.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 appeals.appeal.
In addition to the cases brought in the United States,U.S., health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria Group, Inc., in Israel (dismissed), the Marshall Islands (dismissed) and Canada (10 cases), and other entities have stated that they are considering filing such actions.
In September 2005, in the first of several health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USA’s and other defendants’ challenge to the British Columbia court’s exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision.
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 Group, Inc. 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 legislation.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 three tobacco manufacturers (none of which are affiliated with Altria or its subsidiaries) under the 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
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the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other tobacco product manufacturers entered into the 1998 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 years ended December 31, 2017, 20162019, 2018 and 2015,2017, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $4.5$4.2 billion $4.6 billionfor 2019 and 2018, and $4.5 billion respectively.for 2017. These amounts include PM USA’s estimate of amounts related to NPM Adjustments discussed below.
The State Settlement Agreements also include advertising and marketing restrictions, require public disclosure of certain industry documents, limit challenges to certain tobacco control and underage use laws, and restrict lobbying activities.
▪NPM Adjustment Disputes: PM USA is participating in proceedings regarding the NPM Adjustment for 2003-2018. The MSA provides for potential downward adjustments to“NPM Adjustment” is a reduction in MSA payments (the “NPM Adjustment”) made by the OPMs and those manufacturers that are subsequent signatories to the MSA (collectively, the “participating manufacturers” or “PMs”). PM USA is participating in proceedings regarding the NPM Adjustment for 2003-2016. The NPM Adjustment is a reduction in MSA payments 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.
2003-2015 NPM Adjustment Disputes - Settlement with 2636 States and Territories and Settlement with New York.
PM USA has entered into two2 settlements of NPM Adjustment disputes with a total of 27 states and territories. The first settlement was originally entered into in 2012 with 1937 states and territories, and has been subsequently expanded to include a total of 26 of the 52 MSAone with 36 states and territories (the “signatory states”“multi-state settlement”). and the other with the State of New York. In the firstmulti-state settlement, PM USA, by the end of October 2017, had settled the NPM Adjustment disputes for 2003-2015 with these 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 secondNPM Adjustment disputes for 2016 and 2017 with the 26 states mentioned above. Second, 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 and another $121 million of which it received in April 2019. 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 related specificallycredit it expects to New
receive under the multi-state settlement.In the NPM Adjustment settlement with New York, which was entered into in 2015, PM USA has received approximately $170$265 million for 2004-2015. 2004-2017 and will receive an additional amount for 2018 in April 2020. PM USA and 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. PM USA expects to receive such amounts in April 2021 and April 2022, respectively.
Both settlementsthe New York settlement and the multi-state settlement also resolvedcontain provisions resolving certain disputes regarding the application of the NPM Adjustment going forward.forward, although the applicability of those provisions with respect to the signatory states that joined the multi-state settlement after 2017 is contingent on satisfaction, in the PMs’ sole discretion, of certain conditions.
2003 and Subsequent NPM Adjustment DisputesAdjustments - Continuing Disputes with States that have not Settled.
▪2003 NPM Adjustment. | |
| ▪ | 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. |
The hearings in the arbitration, ruling that six of them did not establish valid defenses to the NPM Adjustment for 2003. Two of these states later joined the first settlement discussed above. With respect to the remaining four states, following the outcome of challenges in state courts, PM USA ultimately recorded $74 million primarily as a reduction to cost of sales. Two potential disputes remain outstanding regarding the amount of interest 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 either of the settlements discussed above. New Mexico is currently appealing a trial court ruling that the state must participate in the multi-state arbitration for 2004. The Montana state courts ruled that Montana may litigate its claims in state court, rather than participate in arbitration.
The 2004 multi-state arbitration is currently pending with all of the states that have not settled other than Montana and New Mexico. Decisions are not expected until late 2018 atMexico concluded in July 2019. As of January 27, 2020, no decisions have resulted from the earliest.arbitration.
No assurance can be given as to when proceedings for 2005 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 2004-20162004-2018 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; $223$224 million for 2013; $246$258 million
for 2014; $299 million for 2014;2015; $292 million for 2015 and $2962016; $285 million for 2016.2017 and $332 million for 2018. These maximum amounts will be reduced, likely substantially, to reflect the settlements with the signatory states and New York, 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.defenses and disputes with other PMs.
▪Other Disputes Under the State Settlement Agreements: 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’Reynolds’s acquisition of Lorillard and its related sale of certain cigarette brands to ITG (the “ITG brands”). In particular, R.J. Reynolds and ITG have asserted that they do not have to make payments on
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the ITG brands under the Florida, Minnesota and Texas State Settlement Agreements or include the ITG brands for purposes of certain calculations under the State Settlement Agreements. PM USA believes that R.J. Reynolds’Reynolds’s and ITG’s position violates the State Settlement Agreements and applicable law. PM USA further believes that these actions: (i) improperly increased PM USA’s payments for 2015 and 2016 by at least $84 million;2015-2019; (ii) may improperly increase PM USA’s payments for subsequent years; (iii) may improperly decreasedecreased PM USA’s share of the 2015 and 20162015-2018 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 December 2017,August 2018, the Florida trial court ruledentered final judgment ruling that R.J. Reynolds (and not ITG) must make settlement payments under the Florida State Settlement Agreement on the ITG brands.brands, and ordering R.J. Reynolds to pay PM USA approximately $9.8 million (inclusive of interest) for the 2015-2017 period. R.J. Reynolds and PM USA have each filed notices of appeal of the trial court’s decision, which proceedings may result in further modifications to PM USA’s settlement payments under the Florida State Settlement Agreement.
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’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 currently scheduled for April 2020.
▪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 brands. 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 calculation of the April 2019 payments.
In January 2019, PM USA and the State of Texas each filed a motion in federal court in the Eastern District of Texas against R.J. Reynolds and ITG seeking to enforce the Texas State Settlement Agreement.
Federal Government’s 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, Group, Inc., asserting claims under three federal statutes, namely the Medical Care Recovery Act (“MCRA”), the MSP provisions of the Social Security Act and the civil provisions of RICO.statutes. The case ultimately proceeded only under the civil provisions of RICO, and the trial ended in June 2005.RICO. In August 2006, the district court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. 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:
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| ▪ | defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking; |
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| ▪ | defendants hid from the public that cigarette smoking and nicotine are addictive; |
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| ▪ | defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction; |
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| ▪ | defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes; |
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| ▪ | defendants falsely denied that they intentionally marketed to youth; |
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| ▪ | defendants publicly and falsely denied that ETS is hazardous to non-smokers; and |
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| ▪ | 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”;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
“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 Federal Trade Commission (“FTC”)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 United States;U.S.; and (ix) payment of the government’s costs in bringing the action.
Defendants appealed and, in May 2009, a three judge panelFollowing several years of the Court of Appeals for the District of Columbia Circuit (“D.C. Court of Appeals”) largely affirmed the trial court’s remedial order, but vacated the following aspects of the order:
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▪ | its applicationappeals relating to defendants’ subsidiaries; |
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▪ | the prohibition on the use of express or implied health messages or health descriptors, but only to the extent of extraterritorial application; |
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▪ | its point-of-sale display provisions; and |
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▪ | its application to Brown & Williamson Holdings. |
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The appellate panel remanded the case for the trial court to reconsider these four aspects of the injunction and to reformulate its remedial order accordingly.
In November 2012, the district court issued its order specifying the content of the corrective communicationsstatements remedy described above, and defendants appealed. In April 2014, the parties submitted a motion for entry of a consent order in the district court, setting forth their agreement on the implementation details of the corrective communications remedy, which the district court approved in June 2014. In May 2015, the D.C. Court of Appeals affirmed in part and reversed in part the appeal on the content of the corrective communications, concluding that certain portions of the statements exceeded the district court’s jurisdiction under RICO, but upheld other portions challenged by defendants. The D.C. Court of Appeals remanded the case to the trial court for further proceedings.
In February 2016, the district court issued an order adopting modified corrective statements. Defendants appealed and, in AprilOctober 2017, the D.C. Court of Appeals reversed in part the district court’s decision on the content of the corrective communications, striking certain content and remanding to the district court the decision on how to revise certain other content. In June 2017, the district court issued an order adopting modified corrective statements. In October 2017, the court approved the parties’ proposed consent order implementing the corrective communications remedy forstatements in newspapers and on television. The corrective statements began appearing in newspapers and on television in the fourth quarter of 2017. In JanuaryApril 2018, the parties submitted a status report and a request for a status conference to address open issues regarding onsert and website implementation details. The defendants also filed a motion inreached agreement on the U.S. District Court for the District of Columbia seeking to mediate the remaining implementation details of the corrective statements on websites and for an order clarifying that the DOJ may not enforce the previous consent order with respect to onserts andonserts. The corrective statements began appearing on websites prior to resolution of all implementation details.
Inin the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018.
In 2014, Altria Group, Inc. and PM USA recorded provisions on each of their respective balance sheets totaling $31 million for the estimated costs of implementing the corrective communications remedy. This estimate is subject to change due to several factors, though Altria Group, Inc. andIn the fourth quarter of 2019, PM USA do not expect any change in thisupdated its estimate and recorded approximately $5 million for additional costs to be material.finish implementing the corrective communications remedy.
The consent order approved by the district court in June 2014 did not address the requirements related to corrective statements at point-of-sale signage.remain outstanding. In May 2014, the district court ordered further briefing by the parties on the issue, of corrective statements on point-of-sale signage, which was completed in June 2014.
In December 2011,May 2018, the parties submitted a joint status report and additional briefing on point-of-sale signage to the lawsuit entered into an agreement as to the issues concerning the document repository. Pursuant to this agreement, PM USA agreed to deposit an amount of approximately $3.1 million intodistrict court. In May 2019, the district court ordered a hearing on the point-of-sale signage issue.
E-vapor Litigation
As of January 27, 2020, Altria and/or its subsidiaries, including PM USA, were named as defendants in installments over21 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 seek various remedies, including compensatory and punitive damages and an injunction prohibiting product sales.
Altria and/or its subsidiaries, including PM USA, also have been named as defendants in other lawsuits involving JUUL e-vapor products, including 76 individual lawsuits, 2 lawsuits filed by state or local governments and 1 lawsuit filed by a five-year period.
school district. 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.
Neither Altria nor any of its subsidiaries has filed a response in any of these cases, and 0 case 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
“Lights/Ultra Lights” Cases
▪Overview: 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 Group, Inc. or its other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights.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. As of January 29, 2018, a total of three such cases are pending in various U.S. state courts, none of which is active.
▪State “Lights” Cases Dismissed, Not Certified or Ordered De-Certified: As of January 29, 2018, 21NaN state courts in 2223 “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 January 27, 2020, 2 “Lights/Ultra Lights” class actions are pending in U.S. state court. Neither case is active.
As of January 27, 2020, 2 smoking and health cases 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, are pending in their respective U.S. state courts. Neither case is active.
▪State Trial Court Class Certifications: State trial courts have certified classes against PM USA in several jurisdictions. Over time, all such cases have been dismissed by the courts at the summary judgment stage, were settled by the parties or were resolved in favor of PM USA, including Larsen discussed below.
Larsen: In August 2005, a Missouri Court of Appeals affirmed the class certification order. Trial in the case began in September 2011 and, in October 2011, the court declared a mistrial after the jury failed to reach a verdict. Upon retrial, in April 2016, the jury returned a verdict in favor of PM USA. In August 2016, plaintiffs filed a notice of appeal and PM USA cross-appealed. In November 2016, the court of appeals dismissed PM USA’s cross-appeal without prejudice upon joint motion of the parties. On appeal, in November 2017, the Missouri Court of Appeals affirmed the judgment in favor of PM USA. Plaintiffs did not seek further appellate review, concluding this litigation.
Certain Other Tobacco-Related Litigation
▪Ignition Propensity Cases: PM USA and Altria Group, Inc. are currently facing litigation alleging that a fire caused by cigarettes led to individuals’ deaths. In a Kentucky case (Walker), the federal district court denied plaintiffs’ motion to remand the case to state court and dismissed plaintiffs’ claims in February 2009. Plaintiffs subsequently filed a notice of appeal. In October 2011, the U.S. Court of Appeals for the Sixth Circuit reversed the portion of the district court decision that denied remand of the case to Kentucky state court and remanded the case to Kentucky
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
state court. The Sixth Circuit did not address the merits of the district court’s dismissal order. Defendants’ petition for rehearing with the Sixth Circuit was denied in December 2011. Defendants filed a renewed motion to dismiss in state court in March 2013. Based on new evidence, in June 2013, defendants removed the case for a second time to the U.S. District Court for the Western District of Kentucky and re-filed their motion to dismiss in June 2013. In July 2013, plaintiffs filed a motion to remand the case to Kentucky state court, which was granted in March 2014. In November 2016, defendants filed renewed motions to dismiss the case, which the court granted in March 2017.
▪Argentine Grower Cases: PM USA and Altria Group, Inc. were sued in six cases (Hupan, Chalanuk, Rodriguez Da Silva, Aranda, Taborda and Biglia) filed in Delaware state court against multiple defendants by the parents of Argentine children born with alleged birth defects. Plaintiffs in these cases allege that they grew tobacco in Argentina under contract with Tabacos Norte S.A., an alleged subsidiary of PMI, and that they and their infant children were exposed directly and in utero to Monsanto Company’s (“Monsanto”) Roundup herbicide during the production and cultivation of tobacco. Plaintiffs seek compensatory and punitive damages against all defendants. Altria Group, Inc. and certain other defendants were dismissed from the Hupan, Chalanuk, Rodriguez Da Silva,Aranda, Taborda and Biglia cases. The three remaining defendants in the six cases were PM USA, Philip Morris Global Brands Inc. (a subsidiary of PMI) and Monsanto. Following discussions regarding indemnification for these cases pursuant to the Distribution Agreement between PMI and Altria Group, Inc.,PMI and PM USA agreed to resolve conflicting indemnity demands after final judgments are entered. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement. In April 2014, all three defendants in the Hupan case filed motions to dismiss for failure to state a claim, and PM USA and Philip Morris Global Brands filed separate motions to dismiss based on the doctrine of forum non conveniens. All proceedings in the other five cases were stayed pending the court’s resolution of the motions to dismiss filed in Hupan. In November 2015, the trial court granted PM USA’s motion to dismiss on forum non conveniens grounds. Plaintiffs filed a motion for clarification or re-argument in December 2015, which the court denied in August 2016. Later in August 2016, PM USA and Philip Morris Global Brands moved for entry of final judgment in the Hupan case and also moved to lift the stays in the other five cases for the limited purpose of entering final judgment of dismissal in those cases as well based on the forum non conveniens decision in Hupan. The court granted those motions in September 2016, and entered final judgment of dismissal in all six cases. In October 2016, plaintiffs filed their notice of appeal to the Delaware Supreme Court. Oral argument occurred before a panel of the Delaware Supreme Court in September 2017. In January 2018, the case was re-argued before the Delaware Supreme Court en banc.
UST Litigation
Claims related to smokeless tobacco products generally fall within the following categories:
First, UST and/or its tobacco subsidiaries have been named in certain actions in West Virginia (See In re: Tobacco Litigation above) brought by or on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are six individuals alleging use of USSTC’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. USSTC, along with other non-cigarette manufacturers, has remained severed from such proceedings since December 2001.
Second, Litigation: UST and/or its tobacco subsidiaries have been named in a number of other individual tobacco and health suitslawsuits over time. Plaintiffs’ allegations of liability in these cases arehave 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 seekhave typically sought various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not 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 January 27, 2020, there is 1 case pending against USSTC.
Shareholder Class Actions
In July 2016, USSTCOctober and December 2019, 2 purported Altria Group, Inc. were named as defendants, along with other named defendants,shareholders filed putative class action lawsuits against Altria, Howard A. Willard III, Altria’s Chairman and Chief Executive Officer, and William F. Gifford, Jr., Altria’s Vice Chairman and Chief Financial Officer, in one such casethe United States District Court for the Eastern District of New York. The lawsuits assert claims under Sections 10(b) and 20(a) and under Rule 10b-5 of the Exchange Act. The claims involve allegedly false and misleading statements and omissions relating to Altria’s investment in California (Gwynn).JUUL. Plaintiffs seek various remedies, including damages and attorneys’ fees. In August 2016, defendants removed the case to federal court. In September 2016, plaintiffs filed a motion to remand the case back to state court, whichDecember 2019, the court granted in January 2017. In May 2017,consolidated the court granted plaintiffs’ motion2 lawsuits into a single proceeding. A response to dismiss all defendants except USSTC.
the consolidated lawsuit has not yet been filed.
Environmental Regulation
Altria Group, Inc. 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 United States: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 Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.’sAltria’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.
Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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 Group, Inc. 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 Group, Inc.’sAltria’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 Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At December 31, 2017,2019, Altria Group, Inc. and certain of its subsidiaries (i) had $57$51 million of unused letters of credit obtained in the ordinary course of business; (ii) were contingently liable for $33 million of guarantees consisting primarily of surety bonds, related to their own performance;performance, including $26 million for surety bonds; and (iii) had a redeemable noncontrolling interest of $38 million recorded on its consolidated balance sheet. In addition, from time to time, subsidiaries of Altria Group, Inc. issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’sAltria’s liquidity.
Under the terms of a distribution agreement between Altria Group, Inc. and PMI (the “Distribution Agreement”), entered into as a result of Altria Group, Inc.’sAltria’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 Group, Inc. 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 Group, Inc. does not have a related liability recorded on its consolidated balance sheet at December 31, 20172019 as the fair value of this indemnification is insignificant.
As more fully discussed in Note 19. 20. Condensed Consolidating Financial Information, PM USA has issued guarantees relating to Altria Group, Inc.’sAltria’s obligations under its outstanding debt securities, borrowings under theits $3.0 billion Credit Agreement and amounts outstanding under its commercial paper program.
Redeemable Noncontrolling Interest
In September 2007, Ste. Michelle completed the acquisition of Stag’s Leap Wine Cellars through one of its consolidated subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in which Ste. Michelle holds an 85% ownership interest with a 15% noncontrolling interest held by Antinori California (“Antinori”). In connection with the acquisition of Stag’s Leap Wine Cellars,
Ste. Michelle entered into a put arrangement with Antinori. The put arrangement, as later amended, provides Antinori with the right to require Ste. Michelle to purchase its 15% ownership interest in Michelle-Antinori at a price equal to Antinori’s initial investment of $27 million. The put arrangement became exercisable in September 2010 and has no expiration date. As of December 31, 2017, the redemption value of the put arrangement did not exceed the noncontrolling interest balance. Therefore, no adjustment to the value of the redeemable noncontrolling interest was recognized on the consolidated balance sheet for the put arrangement.
The noncontrolling interest put arrangement is accounted for as mandatorily redeemable securities because redemption is outside of the control of Ste. Michelle. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section on the consolidated balance sheets at December 31, 2017 and 2016.
Note 19.20. Condensed Consolidating Financial Information
PM USA, which is a 100% owned subsidiary of Altria, Group, Inc., has guaranteed Altria Group, Inc.’sAltria’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.’sAltria’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.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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 of A or higher.
| |
| ▪ | the date, if any, on which PM USA consolidates with or merges into Altria or any successor; |
| |
| ▪ | the date, if any, on which Altria 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’s long-term senior unsecured debt by Standard & Poor’s of A or higher. |
At December 31, 2017,2019, 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 December 31, 20172019 and 2016,2018, condensed consolidating statements of earnings (losses) and comprehensive earnings (losses) for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, and condensed consolidating statements of cash flows for the years ended December 31, 2017, 20162019, 2018 and 20152017 for Altria, Group, Inc., PM USA and, collectively, Altria Group, Inc.’sAltria’s other subsidiaries that are not guarantors of Altria Group, Inc.’sAltria’s debt instruments (the “Non-Guarantor Subsidiaries”). The financial information is based on Altria Group, Inc.’s understanding of the Securities and Exchange Commission (“SEC”) interpretation and application of Rule 3-10 of SEC Regulation S-X.
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.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________ | | | at December 31, 2017 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| |
| at December 31, 2019 | | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 1,203 |
| | $ | 1 |
| | $ | 49 |
| | $ | — |
| | $ | 1,253 |
| $ | 2,022 |
| | $ | — |
| | $ | 95 |
| | $ | — |
| | $ | 2,117 |
|
| Receivables | 1 |
| | 10 |
| | 131 |
| | — |
| | 142 |
| — |
| | 30 |
| | 122 |
| | — |
| | 152 |
|
| Inventories: | | | | | | | | | | | | | | | | | | |
| Leaf tobacco | — |
| | 579 |
| | 362 |
| | — |
| | 941 |
| — |
| | 494 |
| | 380 |
| | — |
| | 874 |
|
| Other raw materials | — |
| | 111 |
| | 59 |
| | — |
| | 170 |
| — |
| | 120 |
| | 72 |
| | — |
| | 192 |
|
| Work in process | — |
| | 5 |
| | 555 |
| | — |
| | 560 |
| — |
| | 4 |
| | 692 |
| | — |
| | 696 |
|
| Finished product | — |
| | 128 |
| | 426 |
| | — |
| | 554 |
| — |
| | 119 |
| | 412 |
| | — |
| | 531 |
|
| | — |
| | 823 |
| | 1,402 |
| | — |
| | 2,225 |
| — |
| | 737 |
| | 1,556 |
| | — |
| | 2,293 |
|
| Due from Altria Group, Inc. and subsidiaries | 2 |
| | 2,413 |
| | 1,022 |
| | (3,437 | ) | | — |
| |
| Due from Altria and subsidiaries | | 88 |
| | 4,005 |
| | 1,359 |
| | (5,452 | ) | | — |
|
| Income taxes | — |
| | 542 |
| | 17 |
| | (98 | ) | | 461 |
| 80 |
| | 47 |
| | 38 |
| | (49 | ) | | 116 |
|
| Other current assets | 11 |
| | 147 |
| | 105 |
| | — |
| | 263 |
| 53 |
| | 17 |
| | 76 |
| | — |
| | 146 |
|
| Total current assets | 1,217 |
| | 3,936 |
| | 2,726 |
| | (3,535 | ) | | 4,344 |
| 2,243 |
| | 4,836 |
| | 3,246 |
| | (5,501 | ) | | 4,824 |
|
| Property, plant and equipment, at cost | — |
| | 2,930 |
| | 1,949 |
| | — |
| | 4,879 |
| — |
| | 2,956 |
| | 2,118 |
| | — |
| | 5,074 |
|
| Less accumulated depreciation | — |
| | 2,086 |
| | 879 |
| | — |
| | 2,965 |
| — |
| | 2,166 |
| | 909 |
| | — |
| | 3,075 |
|
| | — |
| | 844 |
| | 1,070 |
| | — |
| | 1,914 |
| — |
| | 790 |
| | 1,209 |
| | — |
| | 1,999 |
|
| Goodwill | — |
| | — |
| | 5,307 |
| | — |
| | 5,307 |
| — |
| | — |
| | 5,177 |
| | — |
| | 5,177 |
|
| Other intangible assets, net | — |
| | 2 |
| | 12,398 |
| | — |
| | 12,400 |
| — |
| | 2 |
| | 12,685 |
| | — |
| | 12,687 |
|
| Investment in AB InBev | 17,952 |
| | — |
| | — |
| | — |
| | 17,952 |
| |
| Investments in equity securities | | 18,071 |
| | — |
| | 5,510 |
| | — |
| | 23,581 |
|
| Investment in consolidated subsidiaries | 13,111 |
| | 2,818 |
| | — |
| | (15,929 | ) | | — |
| 19,312 |
| | 2,831 |
| | — |
| | (22,143 | ) | | — |
|
| Finance assets, net | — |
| | — |
| | 899 |
| | — |
| | 899 |
| |
| Due from Altria Group, Inc. and subsidiaries | 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
| |
| Due from Altria and subsidiaries | | 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
|
| Other assets | 34 |
| | 671 |
| | 157 |
| | (476 | ) | | 386 |
| 58 |
| | 951 |
| | 603 |
| | (609 | ) | | 1,003 |
|
| Total Assets | $ | 37,104 |
| | $ | 8,271 |
| | $ | 22,557 |
| | $ | (24,730 | ) | | $ | 43,202 |
| $ | 44,474 |
| | $ | 9,410 |
| | $ | 28,430 |
| | $ | (33,043 | ) | | $ | 49,271 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
| | | at December 31, 2017 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| |
| at December 31, 2019 | | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Liabilities | | | | | | | | | | | | | | | | | | |
| Current portion of long-term debt | $ | 864 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 864 |
| $ | 1,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,000 |
|
| Accounts payable | 2 |
| | 91 |
| | 281 |
| | — |
| | 374 |
| — |
| | 146 |
| | 179 |
| | — |
| | 325 |
|
| Accrued liabilities: | | | | | | | | | | | | | | | | | | |
| Marketing | — |
| | 578 |
| | 117 |
| | — |
| | 695 |
| — |
| | 320 |
| | 73 |
| | — |
| | 393 |
|
| Employment costs | 21 |
| | 14 |
| | 153 |
| | — |
| | 188 |
| |
| Settlement charges | — |
| | 2,437 |
| | 5 |
| | — |
| | 2,442 |
| — |
| | 3,340 |
| | 6 |
| | — |
| | 3,346 |
|
| Other | 389 |
| | 433 |
| | 247 |
| | (98 | ) | | 971 |
| 576 |
| | 482 |
| | 536 |
| | (49 | ) | | 1,545 |
|
| Dividends payable | 1,258 |
| | — |
| | — |
| | — |
| | 1,258 |
| 1,565 |
| | — |
| | — |
| | — |
| | 1,565 |
|
| Due to Altria Group, Inc. and subsidiaries | 3,040 |
| | 317 |
| | 80 |
| | (3,437 | ) | | — |
| |
| Due to Altria and subsidiaries | | 4,693 |
| | 514 |
| | 245 |
| | (5,452 | ) | | — |
|
| Total current liabilities | 5,574 |
| | 3,870 |
| | 883 |
| | (3,535 | ) | | 6,792 |
| 7,834 |
| | 4,802 |
| | 1,039 |
| | (5,501 | ) | | 8,174 |
|
| Long-term debt | 13,030 |
| | — |
| | — |
| | — |
| | 13,030 |
| 27,042 |
| | — |
| | — |
| | — |
| | 27,042 |
|
| Deferred income taxes | 2,809 |
| | — |
| | 2,914 |
| | (476 | ) | | 5,247 |
| 3,099 |
| | — |
| | 2,593 |
| | (609 | ) | | 5,083 |
|
| Accrued pension costs | 206 |
| | — |
| | 239 |
| | — |
| | 445 |
| 197 |
| | — |
| | 276 |
| | — |
| | 473 |
|
| Accrued postretirement health care costs | — |
| | 1,214 |
| | 773 |
| | — |
| | 1,987 |
| — |
| | 1,078 |
| | 719 |
| | — |
| | 1,797 |
|
| Due to Altria Group, Inc. and subsidiaries | — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
| |
| Due to Altria and subsidiaries | | — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
|
| Other liabilities | 108 |
| | 49 |
| | 126 |
| | — |
| | 283 |
| 80 |
| | 87 |
| | 178 |
| | — |
| | 345 |
|
| Total liabilities | 21,727 |
| | 5,133 |
| | 9,725 |
| | (8,801 | ) | | 27,784 |
| 38,252 |
| | 5,967 |
| | 9,595 |
| | (10,900 | ) | | 42,914 |
|
| Contingencies |
| |
| |
| |
| |
|
| |
| |
| |
| |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 38 |
| | — |
| | 38 |
| — |
| | — |
| | 38 |
| | — |
| | 38 |
|
| Stockholders’ Equity | | | | | | | | | | | | | | | | | | |
| Common stock | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
| 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
|
| Additional paid-in capital | 5,952 |
| | 3,310 |
| | 12,045 |
| | (15,355 | ) | | 5,952 |
| 5,970 |
| | 3,310 |
| | 27,565 |
| | (30,875 | ) | | 5,970 |
|
| Earnings reinvested in the business | 42,251 |
| | 96 |
| | 2,243 |
| | (2,339 | ) | | 42,251 |
| 36,539 |
| | 352 |
| | (6,997 | ) | | 6,645 |
| | 36,539 |
|
| Accumulated other comprehensive losses | (1,897 | ) | | (268 | ) | | (1,506 | ) | | 1,774 |
| | (1,897 | ) | (2,864 | ) | | (219 | ) | | (1,877 | ) | | 2,096 |
| | (2,864 | ) |
| Cost of repurchased stock | (31,864 | ) | | — |
| | — |
| | — |
| | (31,864 | ) | (34,358 | ) | | — |
| | — |
| | — |
| | (34,358 | ) |
| Total stockholders’ equity attributable to Altria Group, Inc. | 15,377 |
| | 3,138 |
| | 12,791 |
| | (15,929 | ) | | 15,377 |
| |
| Total stockholders’ equity attributable to Altria | | 6,222 |
| | 3,443 |
| | 18,700 |
| | (22,143 | ) | | 6,222 |
|
| Noncontrolling interests | — |
| | — |
| | 3 |
| | — |
| | 3 |
| — |
| | — |
| | 97 |
| | — |
| | 97 |
|
| Total stockholders’ equity | 15,377 |
| | 3,138 |
| | 12,794 |
| | (15,929 | ) | | 15,380 |
| 6,222 |
| | 3,443 |
| | 18,797 |
| | (22,143 | ) | | 6,319 |
|
| Total Liabilities and Stockholders’ Equity | $ | 37,104 |
| | $ | 8,271 |
| | $ | 22,557 |
| | $ | (24,730 | ) | | $ | 43,202 |
| $ | 44,474 |
| | $ | 9,410 |
| | $ | 28,430 |
| | $ | (33,043 | ) | | $ | 49,271 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________ | | | at December 31, 2016 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| |
| at December 31, 2018 | | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 4,521 |
| | $ | 1 |
| | $ | 47 |
| | $ | — |
| | $ | 4,569 |
| $ | 1,277 |
| | $ | — |
| | $ | 56 |
| | $ | — |
| | $ | 1,333 |
|
| Receivables | — |
| | 8 |
| | 143 |
| | — |
| | 151 |
| — |
| | 18 |
| | 124 |
| | — |
| | 142 |
|
| Inventories: | | | | | | | | | | | | | | | | | | |
| Leaf tobacco | — |
| | 541 |
| | 351 |
| | — |
| | 892 |
| — |
| | 561 |
| | 379 |
| | — |
| | 940 |
|
| Other raw materials | — |
| | 111 |
| | 53 |
| | — |
| | 164 |
| — |
| | 123 |
| | 63 |
| | — |
| | 186 |
|
| Work in process | — |
| | 3 |
| | 509 |
| | — |
| | 512 |
| — |
| | 2 |
| | 645 |
| | — |
| | 647 |
|
| Finished product | — |
| | 112 |
| | 371 |
| | — |
| | 483 |
| — |
| | 128 |
| | 430 |
| | — |
| | 558 |
|
| | — |
|
| 767 |
|
| 1,284 |
|
| — |
|
| 2,051 |
| — |
| | 814 |
| | 1,517 |
| | — |
| | 2,331 |
|
| Due from Altria Group, Inc. and subsidiaries | — |
| | 3,797 |
| | 1,511 |
| | (5,308 | ) | | — |
| |
| Due from Altria and subsidiaries | | 46 |
| | 3,828 |
| | 1,194 |
| | (5,068 | ) | | — |
|
| Income taxes | 167 |
| | 10 |
| | 92 |
| | — |
| | 269 |
| 100 |
| | 94 |
| | — |
| | (27 | ) | | 167 |
|
| Other current assets | 3 |
| | 108 |
| | 109 |
| | — |
| | 220 |
| 41 |
| | 167 |
| | 118 |
| | — |
| | 326 |
|
| Total current assets | 4,691 |
| | 4,691 |
| | 3,186 |
| | (5,308 | ) | | 7,260 |
| 1,464 |
| | 4,921 |
| | 3,009 |
| | (5,095 | ) | | 4,299 |
|
| Property, plant and equipment, at cost | — |
| | 2,971 |
| | 1,864 |
| | — |
| | 4,835 |
| — |
| | 2,928 |
| | 2,022 |
| | — |
| | 4,950 |
|
| Less accumulated depreciation | — |
| | 2,073 |
| | 804 |
| | — |
| | 2,877 |
| — |
| | 2,111 |
| | 901 |
| | — |
| | 3,012 |
|
| | — |
| | 898 |
| | 1,060 |
| | — |
| | 1,958 |
| — |
| | 817 |
| | 1,121 |
| | — |
| | 1,938 |
|
| Goodwill | — |
| | — |
| | 5,285 |
| | — |
| | 5,285 |
| — |
| | — |
| | 5,196 |
| | — |
| | 5,196 |
|
| Other intangible assets, net | — |
| | 2 |
| | 12,034 |
| | — |
| | 12,036 |
| — |
| | 2 |
| | 12,277 |
| | — |
| | 12,279 |
|
| Investment in AB InBev | 17,852 |
| | — |
| | — |
| | — |
| | 17,852 |
| |
| Investments in equity securities | | 17,696 |
| | — |
| | 12,800 |
| | — |
| | 30,496 |
|
| Investment in consolidated subsidiaries | 11,636 |
| | 2,632 |
| | — |
| | (14,268 | ) | | — |
| 25,996 |
| | 2,825 |
| | — |
| | (28,821 | ) | | — |
|
| Finance assets, net | — |
| | — |
| | 1,028 |
| | — |
| | 1,028 |
| |
| Due from Altria Group, Inc. and subsidiaries | 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
| |
| Due from Altria and subsidiaries | | 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
|
| Other assets | 18 |
| | 1,748 |
| | 131 |
| | (1,384 | ) | | 513 |
| 193 |
| | 955 |
| | 773 |
| | (670 | ) | | 1,251 |
|
| Total Assets | $ | 38,987 |
| | $ | 9,971 |
| | $ | 22,724 |
| | $ | (25,750 | ) | | $ | 45,932 |
| $ | 50,139 |
| | $ | 9,520 |
| | $ | 35,176 |
| | $ | (39,376 | ) | | $ | 55,459 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________ |
| | | | | | | | | | | | | | | | | | | |
| at December 31, 2018 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Liabilities | | | | | | | | | |
| Short-term borrowings | 12,704 |
| | — |
| | — |
| | — |
| | 12,704 |
|
| Current portion of long-term debt | $ | 1,144 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,144 |
|
| Accounts payable | 1 |
| | 91 |
| | 307 |
| | — |
| | 399 |
|
| Accrued liabilities: | | | | | | | | | |
| Marketing | — |
| | 483 |
| | 103 |
| | — |
| | 586 |
|
| Settlement charges | — |
| | 3,448 |
| | 6 |
| | — |
| | 3,454 |
|
| Other | 295 |
| | 524 |
| | 611 |
| | (27 | ) | | 1,403 |
|
| Dividends payable | 1,503 |
| | — |
| | — |
| | — |
| | 1,503 |
|
| Due to Altria and subsidiaries | 4,499 |
| | 407 |
| | 162 |
| | (5,068 | ) | | — |
|
| Total current liabilities | 20,146 |
| | 4,953 |
| | 1,189 |
| | (5,095 | ) | | 21,193 |
|
| Long-term debt | 11,898 |
| | — |
| | — |
| | — |
| | 11,898 |
|
| Deferred income taxes | 3,010 |
| | — |
| | 2,653 |
| | (670 | ) | | 4,993 |
|
| Accrued pension costs | 187 |
| | — |
| | 357 |
| | — |
| | 544 |
|
| Accrued postretirement health care costs | — |
| | 1,072 |
| | 677 |
| | — |
| | 1,749 |
|
| Due to Altria and subsidiaries | — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
|
| Other liabilities | 111 |
| | 47 |
| | 96 |
| | — |
| | 254 |
|
| Total liabilities | 35,352 |
| | 6,072 |
| | 9,762 |
| | (10,555 | ) | | 40,631 |
|
| Contingencies |
| |
| |
| |
| |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 39 |
| | — |
| | 39 |
|
| Stockholders’ Equity | | | | | | | | | |
| Common stock | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
|
| Additional paid-in capital | 5,961 |
| | 3,310 |
| | 25,047 |
| | (28,357 | ) | | 5,961 |
|
| Earnings reinvested in the business | 43,962 |
| | 359 |
| | 2,201 |
| | (2,560 | ) | | 43,962 |
|
| Accumulated other comprehensive losses | (2,547 | ) | | (221 | ) | | (1,884 | ) | | 2,105 |
| | (2,547 | ) |
| Cost of repurchased stock | (33,524 | ) | | — |
| | — |
| | — |
| | (33,524 | ) |
| Total stockholders’ equity attributable to Altria | 14,787 |
| | 3,448 |
| | 25,373 |
| | (28,821 | ) | | 14,787 |
|
| Noncontrolling interests | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Total stockholders’ equity | 14,787 |
| | 3,448 |
| | 25,375 |
| | (28,821 | ) | | 14,789 |
|
| Total Liabilities and Stockholders’ Equity | $ | 50,139 |
| | $ | 9,520 |
| | $ | 35,176 |
| | $ | (39,376 | ) | | $ | 55,459 |
|
|
| | | | | | | | | | | | | | | | | | | |
| at December 31, 2016 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Liabilities | | | | | | | | | |
| Accounts payable | $ | 1 |
| | $ | 92 |
| | $ | 332 |
| | $ | — |
| | $ | 425 |
|
| Accrued liabilities: | | | | | | | | | |
| Marketing | — |
| | 619 |
| | 128 |
| | — |
| | 747 |
|
| Employment costs | 104 |
| | 14 |
| | 171 |
| | — |
| | 289 |
|
| Settlement charges | — |
| | 3,696 |
| | 5 |
| | — |
| | 3,701 |
|
| Other | 261 |
| | 438 |
| | 326 |
| | — |
| | 1,025 |
|
| Dividends payable | 1,188 |
| | — |
| | — |
| | — |
| | 1,188 |
|
| Due to Altria Group, Inc. and subsidiaries | 5,030 |
| | 237 |
| | 41 |
| | (5,308 | ) | | — |
|
| Total current liabilities | 6,584 |
| | 5,096 |
| | 1,003 |
| | (5,308 | ) | | 7,375 |
|
| Long-term debt | 13,881 |
| | — |
| | — |
| | — |
| | 13,881 |
|
| Deferred income taxes | 5,424 |
| | — |
| | 4,376 |
| | (1,384 | ) | | 8,416 |
|
| Accrued pension costs | 207 |
| | — |
| | 598 |
| | — |
| | 805 |
|
| Accrued postretirement health care costs | — |
| | 1,453 |
| | 764 |
| | — |
| | 2,217 |
|
| Due to Altria Group, Inc. and subsidiaries | — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
|
| Other liabilities | 121 |
| | 146 |
| | 160 |
| | — |
| | 427 |
|
| Total liabilities | 26,217 |
| | 6,695 |
| | 11,691 |
| | (11,482 | ) | | 33,121 |
|
| Contingencies |
| |
| |
| |
| |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 38 |
| | — |
| | 38 |
|
| Stockholders’ Equity | | | | | | | | | |
| Common stock | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
|
| Additional paid-in capital | 5,893 |
| | 3,310 |
| | 11,585 |
| | (14,895 | ) | | 5,893 |
|
| Earnings reinvested in the business | 36,906 |
| | 237 |
| | 1,118 |
| | (1,355 | ) | | 36,906 |
|
| Accumulated other comprehensive losses | (2,052 | ) | | (271 | ) | | (1,720 | ) | | 1,991 |
| | (2,052 | ) |
| Cost of repurchased stock | (28,912 | ) | | — |
| | — |
| | — |
| | (28,912 | ) |
| Total stockholders’ equity attributable to Altria Group, Inc. | 12,770 |
| | 3,276 |
| | 10,992 |
| | (14,268 | ) | | 12,770 |
|
| Noncontrolling interests | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Total stockholders’ equity | 12,770 |
| | 3,276 |
| | 10,995 |
| | (14,268 | ) | | 12,773 |
|
| Total Liabilities and Stockholders’ Equity | $ | 38,987 |
| | $ | 9,971 |
| | $ | 22,724 |
| | $ | (25,750 | ) | | $ | 45,932 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings (Losses) and Comprehensive Earnings (Losses)
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2017 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,826 |
| | $ | 3,787 |
| | $ | (37 | ) | | $ | 25,576 |
|
| Cost of sales | — |
| | 6,414 |
| | 1,166 |
| | (37 | ) | | 7,543 |
|
| Excise taxes on products | — |
| | 5,864 |
| | 218 |
| | — |
| | 6,082 |
|
| Gross profit | — |
| | 9,548 |
| | 2,403 |
| | — |
| | 11,951 |
|
| Marketing, administration and research costs | 173 |
| | 1,710 |
| | 479 |
| | — |
| | 2,362 |
|
| Asset impairment and exit costs | — |
| | 1 |
| | 32 |
| | — |
| | 33 |
|
| Operating (expense) income | (173 | ) | | 7,837 |
| | 1,892 |
| | — |
| | 9,556 |
|
| Interest and other debt expense (income), net | 510 |
| | (20 | ) | | 215 |
| | — |
| | 705 |
|
| Earnings from equity investment in AB InBev | (532 | ) | | — |
| | — |
| | — |
| | (532 | ) |
| Gain on AB InBev/SABMiller business combination | (445 | ) | | — |
| | — |
| | — |
| | (445 | ) |
| Earnings before income taxes and equity earnings of subsidiaries | 294 |
| | 7,857 |
| | 1,677 |
| | — |
| | 9,828 |
|
| (Benefit) provision for income taxes | (2,624 | ) | | 3,127 |
| | (902 | ) | | — |
| | (399 | ) |
| Equity earnings of subsidiaries | 7,304 |
| | 558 |
| | — |
| | (7,862 | ) | | — |
|
| Net earnings | 10,222 |
| | 5,288 |
| | 2,579 |
| | (7,862 | ) | | 10,227 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 10,222 |
| | $ | 5,288 |
| | $ | 2,574 |
| | $ | (7,862 | ) | | $ | 10,222 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 10,222 |
| | $ | 5,288 |
| | $ | 2,579 |
| | $ | (7,862 | ) | | $ | 10,227 |
|
| Other comprehensive earnings, net of deferred income taxes | 155 |
| | 3 |
| | 214 |
| | (217 | ) | | 155 |
|
| Comprehensive earnings | 10,377 |
| | 5,291 |
| | 2,793 |
| | (8,079 | ) | | 10,382 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 10,377 |
| | $ | 5,291 |
| | $ | 2,788 |
| | $ | (8,079 | ) | | $ | 10,377 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2019 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,065 |
| | $ | 4,081 |
| | $ | (36 | ) | | $ | 25,110 |
|
| Cost of sales | — |
| | 5,997 |
| | 1,124 |
| | (36 | ) | | 7,085 |
|
| Excise taxes on products | — |
| | 5,111 |
| | 203 |
| | — |
| | 5,314 |
|
| Gross profit | — |
| | 9,957 |
| | 2,754 |
| | — |
| | 12,711 |
|
| Marketing, administration and research costs | 182 |
| | 1,591 |
| | 453 |
| | — |
| | 2,226 |
|
| Asset impairment and exit costs | 1 |
| | 39 |
| | 119 |
| | — |
| | 159 |
|
| Operating (expense) income | (183 | ) | | 8,327 |
| | 2,182 |
| | — |
| | 10,326 |
|
| Interest and other debt expense (income), net | 1,152 |
| | (85 | ) | | 213 |
| | — |
| | 1,280 |
|
| Net periodic benefit (income) cost, excluding service cost | 5 |
| | (34 | ) | | (8 | ) | | — |
| | (37 | ) |
| Earnings from equity investments | (1,229 | ) | | — |
| | (496 | ) | | — |
| | (1,725 | ) |
| Impairment of JUUL equity securities | — |
| | — |
| | 8,600 |
| | — |
| | 8,600 |
|
| Loss on Cronos-related financial instruments | — |
| | — |
| | 1,442 |
| | — |
| | 1,442 |
|
| Earnings (losses) before income taxes and equity earnings of subsidiaries | (111 | ) | | 8,446 |
| | (7,569 | ) | | — |
| | 766 |
|
| Provision (benefit) for income taxes | (243 | ) | | 2,102 |
| | 205 |
| | — |
| | 2,064 |
|
| Equity earnings (losses) of subsidiaries | (1,425 | ) | | 450 |
| | — |
| | 975 |
| | — |
|
| Net earnings (losses) | (1,293 | ) | | 6,794 |
| | (7,774 | ) | | 975 |
| | (1,298 | ) |
| Net (earnings) losses attributable to noncontrolling interests | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Net earnings (losses) attributable to Altria | $ | (1,293 | ) | | $ | 6,794 |
| | $ | (7,769 | ) | | $ | 975 |
| | $ | (1,293 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings (losses) | $ | (1,293 | ) | | $ | 6,794 |
| | $ | (7,774 | ) | | $ | 975 |
| | $ | (1,298 | ) |
| Other comprehensive earnings (losses), net of deferred income taxes | (317 | ) | | 2 |
| | 7 |
| | (9 | ) | | (317 | ) |
| Comprehensive earnings (losses) | (1,610 | ) | | 6,796 |
| | (7,767 | ) | | 966 |
| | (1,615 | ) |
| Comprehensive (earnings) losses attributable to noncontrolling interests | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Comprehensive earnings (losses) attributable to Altria | $ | (1,610 | ) | | $ | 6,796 |
| | $ | (7,762 | ) | | $ | 966 |
| | $ | (1,610 | ) |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings (Losses) and Comprehensive Earnings (Losses)
(in millions of dollars)
_____________________________ |
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2016 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 22,146 |
| | $ | 3,633 |
| | $ | (35 | ) | | $ | 25,744 |
|
| Cost of sales | — |
| | 6,628 |
| | 1,153 |
| | (35 | ) | | 7,746 |
|
| Excise taxes on products | — |
| | 6,187 |
| | 220 |
| | — |
| | 6,407 |
|
| Gross profit | — |
| | 9,331 |
| | 2,260 |
| | — |
| | 11,591 |
|
| Marketing, administration and research costs | 165 |
| | 1,996 |
| | 489 |
| | — |
| | 2,650 |
|
| Asset impairment and exit costs | 5 |
| | 97 |
| | 77 |
| | — |
| | 179 |
|
| Operating (expense) income | (170 | ) | | 7,238 |
| | 1,694 |
| | — |
| | 8,762 |
|
| Interest and other debt expense, net | 519 |
| | 10 |
| | 218 |
| | — |
| | 747 |
|
| Loss on early extinguishment of debt | 823 |
| | — |
| | — |
| | — |
| | 823 |
|
| Earnings from equity investment in SABMiller | (795 | ) | | — |
| | — |
| | — |
| | (795 | ) |
| Gain on AB InBev/SABMiller business combination | (13,865 | ) | | — |
| | — |
| | — |
| | (13,865 | ) |
| Earnings before income taxes and equity earnings of subsidiaries | 13,148 |
| | 7,228 |
| | 1,476 |
| | — |
| | 21,852 |
|
| Provision for income taxes | 4,453 |
| | 2,631 |
| | 524 |
| | — |
| | 7,608 |
|
| Equity earnings of subsidiaries | 5,544 |
| | 268 |
| | — |
| | (5,812 | ) | | — |
|
| Net earnings | 14,239 |
| | 4,865 |
| | 952 |
| | (5,812 | ) | | 14,244 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 14,239 |
| | $ | 4,865 |
| | $ | 947 |
| | $ | (5,812 | ) | | $ | 14,239 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 14,239 |
| | $ | 4,865 |
| | $ | 952 |
| | $ | (5,812 | ) | | $ | 14,244 |
|
Other comprehensive earnings (losses), net of deferred income taxes | 1,228 |
| | (16 | ) | | (28 | ) | | 44 |
| | 1,228 |
|
| Comprehensive earnings | 15,467 |
| | 4,849 |
| | 924 |
| | (5,768 | ) | | 15,472 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 15,467 |
| | $ | 4,849 |
| | $ | 919 |
| | $ | (5,768 | ) | | $ | 15,467 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2018 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,422 |
| | $ | 3,980 |
| | $ | (38 | ) | | $ | 25,364 |
|
| Cost of sales | — |
| | 6,153 |
| | 1,258 |
| | (38 | ) | | 7,373 |
|
| Excise taxes on products | — |
| | 5,517 |
| | 220 |
| | — |
| | 5,737 |
|
| Gross profit | — |
| | 9,752 |
| | 2,502 |
| | — |
| | 12,254 |
|
| Marketing, administration and research costs | 219 |
| | 1,892 |
| | 645 |
| | — |
| | 2,756 |
|
| Asset impairment and exit costs | — |
| | 81 |
| | 302 |
| | — |
| | 383 |
|
| Operating (expense) income | (219 | ) | | 7,779 |
| | 1,555 |
| | — |
| | 9,115 |
|
| Interest and other debt expense (income), net | 511 |
| | (61 | ) | | 215 |
| | — |
| | 665 |
|
| Net periodic benefit (income) cost, excluding service cost | 16 |
| | (41 | ) | | (9 | ) | | — |
| | (34 | ) |
| Earnings from equity investments | (890 | ) | | — |
| | — |
| | — |
| | (890 | ) |
| (Gain) loss on ABI/SABMiller business combination | 33 |
| | — |
| | — |
| | — |
| | 33 |
|
| Earnings (losses) before income taxes and equity earnings of subsidiaries | 111 |
| | 7,881 |
| | 1,349 |
| | — |
| | 9,341 |
|
| Provision (benefit) for income taxes | 36 |
| | 1,980 |
| | 358 |
| | — |
| | 2,374 |
|
| Equity earnings (losses) of subsidiaries | 6,888 |
| | 402 |
| | — |
| | (7,290 | ) | | — |
|
| Net earnings (losses) | 6,963 |
| | 6,303 |
| | 991 |
| | (7,290 | ) | | 6,967 |
|
| Net (earnings) losses attributable to noncontrolling interests | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Net earnings (losses) attributable to Altria | $ | 6,963 |
| | $ | 6,303 |
| | $ | 987 |
| | $ | (7,290 | ) | | $ | 6,963 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings (losses) | $ | 6,963 |
| | $ | 6,303 |
| | $ | 991 |
| | $ | (7,290 | ) | | $ | 6,967 |
|
| Other comprehensive earnings (losses), net of deferred income taxes | (242 | ) | | 104 |
| | (54 | ) | | (50 | ) | | (242 | ) |
| Comprehensive earnings (losses) | 6,721 |
| | 6,407 |
| | 937 |
| | (7,340 | ) | | 6,725 |
|
| Comprehensive (earnings) losses attributable to noncontrolling interests | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Comprehensive earnings (losses) attributable to Altria | $ | 6,721 |
| | $ | 6,407 |
| | $ | 933 |
| | $ | (7,340 | ) | | $ | 6,721 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings (Losses) and Comprehensive Earnings (Losses)
(in millions of dollars)
_____________________________ |
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2017 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,826 |
| | $ | 3,787 |
| | $ | (37 | ) | | $ | 25,576 |
|
| Cost of sales | — |
| | 6,394 |
| | 1,174 |
| | (37 | ) | | 7,531 |
|
| Excise taxes on products | — |
| | 5,864 |
| | 218 |
| | — |
| | 6,082 |
|
| Gross profit | — |
| | 9,568 |
| | 2,395 |
| | — |
| | 11,963 |
|
| Marketing, administration and research costs | 161 |
| | 1,713 |
| | 464 |
| | — |
| | 2,338 |
|
| Asset impairment and exit costs | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
| Operating (expense) income | (161 | ) | | 7,855 |
| | 1,899 |
| | — |
| | 9,593 |
|
| Interest and other debt expense (income), net | 510 |
| | (20 | ) | | 215 |
| | — |
| | 705 |
|
| Net periodic benefit (income) cost, excluding service cost | 12 |
| | 18 |
| | 7 |
| | — |
| | 37 |
|
| Earnings from equity investments | (532 | ) | | — |
| | — |
| | — |
| | (532 | ) |
| (Gain) loss on ABI/SABMiller business combination | (445 | ) | | — |
| | — |
| | — |
| | (445 | ) |
| Earnings (losses) before income taxes and equity earnings of subsidiaries | 294 |
| | 7,857 |
| | 1,677 |
| | — |
| | 9,828 |
|
| Provision (benefit) for income taxes | (2,624 | ) | | 3,127 |
| | (902 | ) | | — |
| | (399 | ) |
| Equity earnings (losses) of subsidiaries | 7,304 |
| | 558 |
| | — |
| | (7,862 | ) | | — |
|
| Net earnings (losses) | 10,222 |
| | 5,288 |
| | 2,579 |
| | (7,862 | ) | | 10,227 |
|
| Net (earnings) losses attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Net earnings (losses) attributable to Altria | $ | 10,222 |
| | $ | 5,288 |
| | $ | 2,574 |
| | $ | (7,862 | ) | | $ | 10,222 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings (losses) | $ | 10,222 |
| | $ | 5,288 |
| | $ | 2,579 |
| | $ | (7,862 | ) | | $ | 10,227 |
|
| Other comprehensive earnings (losses), net of deferred income taxes | 155 |
| | 3 |
| | 214 |
| | (217 | ) | | 155 |
|
| Comprehensive earnings (losses) | 10,377 |
| | 5,291 |
| | 2,793 |
| | (8,079 | ) | | 10,382 |
|
| Comprehensive (earnings) losses attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Comprehensive earnings (losses) attributable to Altria | $ | 10,377 |
| | $ | 5,291 |
| | $ | 2,788 |
| | $ | (8,079 | ) | | $ | 10,377 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2015 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 22,133 |
| | $ | 3,342 |
| | $ | (41 | ) | | $ | 25,434 |
|
| Cost of sales | — |
| | 6,664 |
| | 1,117 |
| | (41 | ) | | 7,740 |
|
| Excise taxes on products | — |
| | 6,369 |
| | 211 |
| | — |
| | 6,580 |
|
| Gross profit | — |
| | 9,100 |
| | 2,014 |
| | — |
| | 11,114 |
|
| Marketing, administration and research costs | 189 |
| | 2,094 |
| | 425 |
| | — |
| | 2,708 |
|
| Reduction of PMI tax-related receivable | 41 |
| | — |
| | — |
| | — |
| | 41 |
|
| Asset impairment and exit costs | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Operating (expense) income | (230 | ) | | 7,006 |
| | 1,585 |
| | — |
| | 8,361 |
|
| Interest and other debt expense, net | 560 |
| | 33 |
| | 224 |
| | — |
| | 817 |
|
| Loss on early extinguishment of debt | 228 |
| | — |
| | — |
| | — |
| | 228 |
|
| Earnings from equity investment in SABMiller | (757 | ) | | — |
| | — |
| | — |
| | (757 | ) |
| Gain on AB InBev/SABMiller business combination | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (256 | ) | | 6,973 |
| | 1,361 |
| | — |
| | 8,078 |
|
| (Benefit) provision for income taxes | (184 | ) | | 2,536 |
| | 483 |
| | — |
| | 2,835 |
|
| Equity earnings of subsidiaries | 5,313 |
| | 268 |
| | — |
| | (5,581 | ) | | — |
|
| Net earnings | 5,241 |
| | 4,705 |
| | 878 |
| | (5,581 | ) | | 5,243 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 5,241 |
| | $ | 4,705 |
| | $ | 876 |
| | $ | (5,581 | ) | | $ | 5,241 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 5,241 |
| | $ | 4,705 |
| | $ | 878 |
| | $ | (5,581 | ) | | $ | 5,243 |
|
Other comprehensive (losses) earnings, net of deferred income taxes | (598 | ) | | 86 |
| | (69 | ) | | (17 | ) | | (598 | ) |
| Comprehensive earnings | 4,643 |
| | 4,791 |
| | 809 |
| | (5,598 | ) | | 4,645 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 4,643 |
| | $ | 4,791 |
| | $ | 807 |
| | $ | (5,598 | ) | | $ | 4,643 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2017 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 6,910 |
| | $ | 4,049 |
| | $ | 841 |
| | $ | (6,878 | ) | | $ | 4,922 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Capital expenditures | — |
| | (34 | ) | | (165 | ) | | — |
| | (199 | ) |
| Acquisitions of businesses and assets | — |
| | — |
| | (415 | ) | | — |
| | (415 | ) |
| Proceeds from finance assets | — |
| | — |
| | 133 |
| | — |
| | 133 |
|
| Payment for derivative financial instruments | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Other | — |
| | 4 |
| | 15 |
| | — |
| | 19 |
|
| Net cash used in investing activities | (5 | ) | | (30 | ) | | (432 | ) | | — |
| | (467 | ) |
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Repurchases of common stock | (2,917 | ) | | — |
| | — |
| | — |
| | (2,917 | ) |
| Dividends paid on common stock | (4,807 | ) | | — |
| | — |
| | — |
| | (4,807 | ) |
Changes in amounts due to/from Altria Group, Inc. and subsidiaries | (2,459 | ) | | 1,410 |
| | 1,049 |
| | — |
| | — |
|
| Cash dividends paid to parent | — |
| | (5,429 | ) | | (1,449 | ) | | 6,878 |
| | — |
|
| Other | (40 | ) | | — |
| | (7 | ) | | — |
| | (47 | ) |
| Net cash used in financing activities | (10,223 | ) | | (4,019 | ) | | (407 | ) | | 6,878 |
| | (7,771 | ) |
| Cash and cash equivalents: | | | | | | | | | |
| (Decrease) increase | (3,318 | ) | | — |
| | 2 |
| | — |
| | (3,316 | ) |
| Balance at beginning of year | 4,521 |
| | 1 |
| | 47 |
| | — |
| | 4,569 |
|
| Balance at end of year | $ | 1,203 |
| | $ | 1 |
| | $ | 49 |
| | $ | — |
| | $ | 1,253 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2019 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by (Used In) Operating Activities | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 7,769 |
| | $ | 6,936 |
| | $ | 1,362 |
| | $ | (8,230 | ) | | $ | 7,837 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Capital expenditures | — |
| | (56 | ) | | (190 | ) | | — |
| | (246 | ) |
| Investment in Cronos | — |
| | — |
| | (1,899 | ) | | — |
| | (1,899 | ) |
| Acquisitions of businesses and assets | — |
| | — |
| | (421 | ) | | — |
| | (421 | ) |
| Investment in JUUL | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Investment in consolidated subsidiaries | (2,518 | ) | | — |
| | — |
| | 2,518 |
| | — |
|
| Other, net | 41 |
| | 1 |
| | 131 |
| | — |
| | 173 |
|
| Net cash provided by (used in) investing activities | (2,477 | ) | | (55 | ) | | (2,384 | ) | | 2,518 |
| | (2,398 | ) |
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Repayment of short-term borrowings | (12,800 | ) | | — |
| | — |
| | — |
| | (12,800 | ) |
| Long-term debt issued | 16,265 |
| | — |
| | — |
| | — |
| | 16,265 |
|
| Long-term debt repaid | (1,144 | ) | | — |
| | — |
| | — |
| | (1,144 | ) |
| Repurchases of common stock | (845 | ) | | — |
| | — |
| | — |
| | (845 | ) |
| Dividends paid on common stock | (6,069 | ) | | — |
| | — |
| | — |
| | (6,069 | ) |
| Changes in amounts due to/from Altria and subsidiaries | 169 |
| | (137 | ) | | 2,486 |
| | (2,518 | ) | | — |
|
| Cash dividends paid to parent | — |
| | (6,801 | ) | | (1,429 | ) | | 8,230 |
| | — |
|
| Other, net | (123 | ) | | — |
| | 4 |
| | — |
| | (119 | ) |
| Net cash provided by (used in) financing activities | (4,547 | ) | | (6,938 | ) | | 1,061 |
| | 5,712 |
| | (4,712 | ) |
Cash, cash equivalents and restricted cash (1): | | | | | | | | | |
| Increase (decrease) | 745 |
| | (57 | ) | | 39 |
| | — |
| | 727 |
|
| Balance at beginning of year | 1,277 |
| | 100 |
| | 56 |
| | — |
| | 1,433 |
|
| Balance at end of year | $ | 2,022 |
| | $ | 43 |
| | $ | 95 |
| | $ | — |
| | $ | 2,160 |
|
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 19. Contingencies.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2016 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 4,356 |
| | $ | 5,138 |
| | $ | 319 |
| | $ | (5,992 | ) | | $ | 3,821 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Capital expenditures | — |
| | (45 | ) | | (144 | ) | | — |
| | (189 | ) |
| Acquisition of assets | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) |
| Proceeds from finance assets | — |
| | — |
| | 231 |
| | — |
| | 231 |
|
| Proceeds from AB InBev/SABMiller business combination | 4,773 |
| | — |
| | — |
| | — |
| | 4,773 |
|
| Purchase of AB InBev ordinary shares | (1,578 | ) | | — |
| | — |
| | — |
| | (1,578 | ) |
| Payment for derivative financial instrument | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Proceeds from derivative financial instruments | 510 |
| | — |
| | — |
| | — |
| | 510 |
|
| Other | — |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Net cash provided by (used in) investing activities | 3,702 |
| | (45 | ) | | 51 |
| | — |
| | 3,708 |
|
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Long-term debt issued | 1,976 |
| | — |
| | — |
| | — |
| | 1,976 |
|
| Long-term debt repaid | (933 | ) | | — |
| | — |
| | — |
| | (933 | ) |
| Repurchases of common stock | (1,030 | ) | | — |
| | — |
| | — |
| | (1,030 | ) |
| Dividends paid on common stock | (4,512 | ) | | — |
| | — |
| | — |
| | (4,512 | ) |
Changes in amounts due to/from Altria Group, Inc. and subsidiaries | (530 | ) | | (28 | ) | | 558 |
| | — |
| | — |
|
| Premiums and fees related to early extinguishment of debt | (809 | ) | | — |
| | — |
| | — |
| | (809 | ) |
| Cash dividends paid to parent | — |
| | (5,064 | ) | | (928 | ) | | 5,992 |
| | — |
|
| Other | (12 | ) | | — |
| | (9 | ) | | — |
| | (21 | ) |
| Net cash used in financing activities | (5,850 | ) | | (5,092 | ) | | (379 | ) | | 5,992 |
| | (5,329 | ) |
| Cash and cash equivalents: | | | | | | | | | |
| Increase (decrease) | 2,208 |
| | 1 |
| | (9 | ) | | — |
| | 2,200 |
|
| Balance at beginning of year | 2,313 |
| | — |
| | 56 |
| | — |
| | 2,369 |
|
| Balance at end of year | $ | 4,521 |
| | $ | 1 |
| | $ | 47 |
| | $ | — |
| | $ | 4,569 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2018 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by (Used In) Operating Activities | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 6,907 |
| | $ | 7,580 |
| | $ | 1,354 |
| | $ | (7,450 | ) | | $ | 8,391 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Capital expenditures | — |
| | (57 | ) | | (181 | ) | | — |
| | (238 | ) |
| Acquisitions of businesses and assets | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
| Investment in JUUL | — |
| | — |
| | (12,800 | ) | | — |
| | (12,800 | ) |
| Investment in consolidated subsidiaries | (13,003 | ) | | — |
| | — |
| | 13,003 |
| | — |
|
| Other, net | 35 |
| | — |
| | 30 |
| | — |
| | 65 |
|
| Net cash provided by (used in) investing activities | (12,968 | ) | | (57 | ) | | (12,966 | ) | | 13,003 |
| | (12,988 | ) |
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Proceeds from short-term borrowings | 12,800 |
| | — |
| | — |
| | — |
| | 12,800 |
|
| Long-term debt repaid | (864 | ) | | — |
| | — |
| | — |
| | (864 | ) |
| Repurchases of common stock | (1,673 | ) | | — |
| | — |
| | — |
| | (1,673 | ) |
| Dividends paid on common stock | (5,415 | ) | | — |
| | — |
| | — |
| | (5,415 | ) |
| Changes in amounts due to/from Altria and subsidiaries | 1,415 |
| | (1,388 | ) | | 12,976 |
| | (13,003 | ) | | — |
|
| Cash dividends paid to parent | — |
| | (6,097 | ) | | (1,353 | ) | | 7,450 |
| | — |
|
| Other | (128 | ) | | — |
| | (4 | ) | | — |
| | (132 | ) |
| Net cash provided by (used in) financing activities | 6,135 |
| | (7,485 | ) | | 11,619 |
| | (5,553 | ) | | 4,716 |
|
Cash, cash equivalents and restricted cash (1): | | | | | | | | | |
| Increase (decrease) | 74 |
| | 38 |
| | 7 |
| | — |
| | 119 |
|
| Balance at beginning of year | 1,203 |
| | 62 |
| | 49 |
| | — |
| | 1,314 |
|
| Balance at end of year | $ | 1,277 |
| | $ | 100 |
| | $ | 56 |
| | $ | — |
| | $ | 1,433 |
|
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 19. Contingencies.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2015 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 5,118 |
| | $ | 5,204 |
| | $ | 961 |
| | $ | (5,440 | ) | | $ | 5,843 |
|
| Cash Provided by (Used in) Investing Activities |
| |
| |
| |
| | |
| Capital expenditures | — |
| | (51 | ) | | (178 | ) | | — |
| | (229 | ) |
| Proceeds from finance assets | — |
| | — |
| | 354 |
| | — |
| | 354 |
|
| Payment for derivative financial instrument | (132 | ) | | — |
| | — |
| | — |
| | (132 | ) |
| Other | — |
| | 10 |
| | (18 | ) | | — |
| | (8 | ) |
| Net cash (used in) provided by investing activities | (132 | ) | | (41 | ) | | 158 |
| | — |
| | (15 | ) |
| Cash Provided by (Used in) Financing Activities |
| |
| |
| |
| | |
| Long-term debt repaid | (1,793 | ) | | — |
| | — |
| | — |
| | (1,793 | ) |
| Repurchases of common stock | (554 | ) | | — |
| | — |
| | — |
| | (554 | ) |
| Dividends paid on common stock | (4,179 | ) | | — |
| | — |
| | — |
| | (4,179 | ) |
Changes in amounts due to/from Altria Group, Inc. and subsidiaries | 814 |
| | (495 | ) | | (319 | ) | | — |
| | — |
|
| Premiums and fees related to early extinguishment of debt | (226 | ) | | — |
| | — |
| | — |
| | (226 | ) |
| Cash dividends paid to parent | — |
| | (4,671 | ) | | (769 | ) | | 5,440 |
| | — |
|
| Other | (16 | ) | | — |
| | (12 | ) | | — |
| | (28 | ) |
| Net cash used in financing activities | (5,954 | ) | | (5,166 | ) | | (1,100 | ) | | 5,440 |
| | (6,780 | ) |
| Cash and cash equivalents: |
| |
| |
| |
| | |
| (Decrease) increase | (968 | ) | | (3 | ) | | 19 |
| | — |
| | (952 | ) |
| Balance at beginning of year | 3,281 |
| | 3 |
| | 37 |
| | — |
| | 3,321 |
|
| Balance at end of year | $ | 2,313 |
| | $ | — |
| | $ | 56 |
| | $ | — |
| | $ | 2,369 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2017 | Altria |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by (Used In) Operating Activities | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 6,910 |
| | $ | 4,028 |
| | $ | 841 |
| | $ | (6,878 | ) | | $ | 4,901 |
|
| Cash Provided by (Used in) Investing Activities |
| |
| |
| |
| | |
| Capital expenditures | — |
| | (34 | ) | | (165 | ) | | — |
| | (199 | ) |
| Acquisitions of businesses and assets | — |
| | — |
| | (415 | ) | | — |
| | (415 | ) |
| Investment in consolidated subsidiaries | (460 | ) | | — |
| | — |
| | 460 |
| | — |
|
| Other, net | (5 | ) | | 4 |
| | 148 |
| | — |
| | 147 |
|
| Net cash provided by (used in) investing activities | (465 | ) | | (30 | ) | | (432 | ) | | 460 |
| | (467 | ) |
| Cash Provided by (Used in) Financing Activities |
| |
| |
| |
| | |
| Repurchases of common stock | (2,917 | ) | | — |
| | — |
| | — |
| | (2,917 | ) |
| Dividends paid on common stock | (4,807 | ) | | — |
| | — |
| | — |
| | (4,807 | ) |
| Changes in amounts due to/from Altria and subsidiaries | (1,999 | ) | | 1,410 |
| | 1,049 |
| | (460 | ) | | — |
|
| Cash dividends paid to parent | — |
| | (5,429 | ) | | (1,449 | ) | | 6,878 |
| | — |
|
| Other | (40 | ) | | — |
| | (7 | ) | | — |
| | (47 | ) |
| Net cash provided by (used in) financing activities | (9,763 | ) | | (4,019 | ) | | (407 | ) | | 6,418 |
| | (7,771 | ) |
Cash, cash equivalents and restricted cash (1): |
| |
| |
| |
| | |
| Increase (decrease) | (3,318 | ) | | (21 | ) | | 2 |
| | — |
| | (3,337 | ) |
| Balance at beginning of year | 4,521 |
| | 83 |
| | 47 |
| | — |
| | 4,651 |
|
| Balance at end of year | $ | 1,203 |
| | $ | 62 |
| | $ | 49 |
| | $ | — |
| | $ | 1,314 |
|
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 19. Contingencies.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 20.21. Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | |
| | 2019 Quarters |
| (in millions, except per share data) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Net revenues | $ | 5,628 |
| | $ | 6,619 |
| | $ | 6,856 |
| | $ | 6,007 |
|
| Gross profit | $ | 2,811 |
| | $ | 3,319 |
| | $ | 3,497 |
| | $ | 3,084 |
|
| Net earnings (losses) | $ | 1,121 |
| | $ | 1,997 |
| | $ | (2,602 | ) | | $ | (1,814 | ) |
| Net earnings (losses) attributable to Altria | $ | 1,120 |
| | $ | 1,996 |
| | $ | (2,600 | ) | | $ | (1,809 | ) |
| Per share data: |
| |
| |
| |
|
| Basic earnings (losses) per share attributable to Altria | $ | 0.60 |
| | $ | 1.07 |
| | $ | (1.39 | ) | | $ | (0.97 | ) |
| Diluted earnings (losses) per share attributable to Altria | $ | 0.60 |
| | $ | 1.07 |
| | $ | (1.39 | ) | | $ | (1.00 | ) |
| | | | | | | | |
| | 2018 Quarters |
| (in millions, except per share data) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Net revenues | $ | 6,108 |
| | $ | 6,305 |
| | $ | 6,837 |
| | $ | 6,114 |
|
| Gross profit | $ | 2,936 |
| | $ | 3,141 |
| | $ | 3,255 |
| | $ | 2,922 |
|
| Net earnings (losses) | $ | 1,895 |
| | $ | 1,877 |
| | $ | 1,944 |
| | $ | 1,251 |
|
| Net earnings (losses) attributable to Altria | $ | 1,894 |
| | $ | 1,876 |
| | $ | 1,943 |
| | $ | 1,250 |
|
| Per share data: |
| |
| |
| |
|
| Basic earnings (losses) per share attributable to Altria | $ | 1.00 |
| | $ | 0.99 |
| | $ | 1.03 |
| | $ | 0.67 |
|
| Diluted earnings (losses) per share attributable to Altria | $ | 1.00 |
| | $ | 0.99 |
| | $ | 1.03 |
| | $ | 0.66 |
|
|
| | | | | | | | | | | | | | | |
| | 2017 Quarters |
| (in millions, except per share data) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Net revenues | $ | 6,083 |
| | $ | 6,663 |
| | $ | 6,729 |
| | $ | 6,101 |
|
| Gross profit | $ | 2,779 |
| | $ | 3,119 |
| | $ | 3,183 |
| | $ | 2,870 |
|
| Net earnings | $ | 1,402 |
| | $ | 1,990 |
| | $ | 1,867 |
| | $ | 4,968 |
|
| Net earnings attributable to Altria Group, Inc. | $ | 1,401 |
| | $ | 1,989 |
| | $ | 1,866 |
| | $ | 4,966 |
|
| Per share data: |
| |
| |
| |
|
| Basic and diluted EPS attributable to Altria Group, Inc. | $ | 0.72 |
| | $ | 1.03 |
| | $ | 0.97 |
| | $ | 2.60 |
|
| | | | | | | | |
| | 2016 Quarters |
| (in millions, except per share data) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Net revenues | $ | 6,066 |
| | $ | 6,521 |
| | $ | 6,905 |
| | $ | 6,252 |
|
| Gross profit | $ | 2,656 |
| | $ | 2,957 |
| | $ | 3,150 |
| | $ | 2,828 |
|
| Net earnings | $ | 1,218 |
| | $ | 1,654 |
| | $ | 1,094 |
| | $ | 10,278 |
|
| Net earnings attributable to Altria Group, Inc. | $ | 1,217 |
| | $ | 1,653 |
| | $ | 1,093 |
| | $ | 10,276 |
|
| Per share data: |
| |
| |
| |
|
| Basic and diluted EPS attributable to Altria Group, Inc. | $ | 0.62 |
| | $ | 0.84 |
| | $ | 0.56 |
| | $ | 5.27 |
|
During 20172019 and 2016,2018, the following pre-tax charges(gains) or (gains)charges were included in net earnings attributable to Altria Group, Inc.:Altria: | | | | | 2019 Quarters |
| (in millions) | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Impairment of JUUL equity securities | | $ | — |
| | $ | — |
| | $ | 4,500 |
| | $ | 4,100 |
|
| Tobacco and health litigation items, including accrued interest | | 17 |
| | 28 |
| | 3 |
| | 29 |
|
| Asset impairment, exit, implementation and acquisition-related costs | | 159 |
| | 45 |
| | 11 |
| | 116 |
|
| ABI-related special items | | 114 |
| | (90 | ) | | (14 | ) | | (364 | ) |
| Cronos-related special items | | 425 |
| | 119 |
| | 549 |
| | (165 | ) |
| | $ | 715 |
| | $ | 102 |
| | $ | 5,049 |
|
| $ | 3,716 |
|
| | | | | | | | | | | | | | | | |
| | 2017 Quarters | 2018 Quarters |
| (in millions) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| NPM Adjustment Items | $ | (1 | ) | | $ | — |
| | $ | 5 |
| | $ | — |
| $ | (68 | ) | | $ | (77 | ) | | $ | — |
| | $ | — |
|
| Tobacco and health litigation items, including accrued interest | 1 |
| | 17 |
| | — |
| | 62 |
| 28 |
| | 70 |
| | 21 |
| | 12 |
|
| Asset impairment, exit, implementation and acquisition-related costs | 30 |
| | 30 |
| | 17 |
| | 12 |
| 3 |
| | 6 |
| | (3 | ) | | 532 |
|
| Settlement charge for lump sum pension payments | — |
| | — |
| | — |
| | 81 |
| |
| Gain on AB InBev/SABMiller business combination | — |
| | (408 | ) | | (37 | ) | | — |
| |
| AB InBev special items | 73 |
| | 2 |
| | 34 |
| | 51 |
| |
| (Gain) loss on ABI/SABMiller business combination | | 33 |
| | — |
| | — |
| | — |
|
| ABI-related special items | | (117 | ) | | (72 | ) | | 35 |
| | 69 |
|
| | $ | 103 |
| | $ | (359 | ) | | $ | 19 |
|
| $ | 206 |
| $ | (121 | ) | | $ | (73 | ) | | $ | 53 |
| | $ | 613 |
|
| | | | | | | | | |
| | 2016 Quarters | |
| (in millions) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| |
| NPM Adjustment Items | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Tobacco and health litigation items, including accrued interest | 38 |
| | 5 |
| | 45 |
| | 17 |
| |
| Patent litigation settlement | — |
| | — |
| | — |
| | 21 |
| |
| Asset impairment, exit, implementation and acquisition-related costs | 122 |
| | 5 |
| | 6 |
| | 73 |
| |
| Loss on early extinguishment of debt | — |
| | — |
| | 823 |
| | — |
| |
| Gain on AB InBev/SABMiller business combination | (40 | ) | | (117 | ) | | (48 | ) | | (13,660 | ) | |
| SABMiller special items | 166 |
| | 21 |
| | (40 | ) | | (236 | ) | |
| | $ | 304 |
| | $ | (86 | ) | | $ | 786 |
| | $ | (13,785 | ) | |
As discussed in Note 14. 15. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated statements of earnings (losses) during 20172019 and 20162018 as a result of various tax events, including the impact of the Tax Reform Act in the fourth quarter of 2017.2018.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Altria Group, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Altria Group, Inc. and its subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of earnings (losses), comprehensive earnings (losses), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited Altria Group, Inc.’sthe Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Altria Group, Inc. and its subsidiaries atthe Company as of December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Altria Group, Inc.the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
Altria Group, Inc.’sThe Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management On Internal Control Over Financial Reporting. Our responsibility is to express opinions on Altria Group, Inc.’sthe Company’s consolidated financial statements and on Altria Group, Inc.’sthe Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Altria Group, Inc.the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated beloware mattersarising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Tobacco and Health Litigation Provisions and Disclosures
As described in Note 19 to the consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened in various U.S. and foreign jurisdictions against the Company. Management records provisions in the consolidated financial statements for pending litigation when an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. The Company’s most significant category of legal proceedings is tobacco and health litigation. The Company’s accrued liability for tobacco and health litigation was $14 million as of December 31, 2019. While it is reasonably possible that an unfavorable outcome in a case may occur, except for those cases which have been accrued for: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco and health related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco and health related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.
The principal considerations for our determination that performing procedures relating to tobacco and health litigation provisions and disclosures is a critical audit matter are (i) there was significant judgment by management when determining if a loss for tobacco and health litigation should be recorded in the consolidated financial statements, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s determination of whether a loss should be recorded, and (ii) there was significant judgment by management when disclosing facts and circumstances related to the litigation, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures related to the disclosures, including evaluating the audit evidence obtained related to management’s disclosures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s loss determination for tobacco and health litigation matters and controls over the related financial statement disclosures. These procedures also included, among others, evaluating the completeness of the Company’s description of tobacco and health litigation matters, confirming with external and internal legal counsel the likelihood of an unfavorable outcome and the extent to which a loss is estimable, evaluating the reasonableness of management’s determination regarding the likelihood of an unfavorable outcome and evaluating the sufficiency of the Company’s tobacco and health litigation disclosures.
Impairment Assessment - Investment in JUUL
As described in Notes 1, 2 and 7 to the consolidated financial statements, in December 2018, Altria Group, Inc., through a wholly-owned subsidiary, purchased shares of non-voting convertible common stock of JUUL Labs, Inc. (“JUUL”), representing a 35% economic interest, for $12.8 billion. As of December 31, 2019, the Company accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares do not have a readily determinable fair value, the Company has elected to measure its investment in JUUL at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management reviews the investment in JUUL for impairment by performing a qualitative assessment of impairment indicators. If a qualitative assessment indicates that the Company’s investment in JUUL is impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value. During 2019, management performed its qualitative assessment of impairment indicators for its investment in JUUL and determined that indicators of impairment existed. These indicators included recent significant adverse changes in both the e-vapor regulatory environment and the industry in which JUUL operates, as well as a significant increase in the number of legal cases pending against JUUL. Given the existence of these impairment indicators, management performed a quantitative valuation of its investment in JUUL as of December 31, 2019 and recorded a pre-tax charge of $8.6 billion, for the year ended December 31, 2019, reported as impairment of JUUL equity securities in the consolidated statement of earnings (losses). Management used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. In determining the fair value of the investment in JUUL, management made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates, and perpetual growth rates. Future cash flows in the U.S. were based on a range of scenarios that consider various potential regulatory and market outcomes. Management made significant assumptions regarding the likelihood and extent of various potential regulatory actions, and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of the future state of the e-vapor category.
The principal considerations for our determination that performing procedures relating to the impairment assessment of the investment in JUUL is a critical audit matter are there was significant judgment by management when determining the fair value of the investment in JUUL. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s cash flow projections, including the range of scenarios that consider various potential regulatory and market outcomes, as well as management’s significant assumptions for volume, operating margins, discount rates, and perpetual growth rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s determination of the fair value of the investment in JUUL. These procedures also included, among others, testing management’s process for determining the fair value estimate. Procedures related to the determination of fair value of the investment in JUUL included (i) evaluating the appropriateness of the discounted cash flow model used in the assessment, (ii) testing the completeness, accuracy, and relevance of underlying data used by management in the discounted cash flow model, (iii) evaluating the reasonableness of the range of scenarios that consider various potential regulatory and market outcomes and (iv) evaluating the reasonableness of significant assumptions used by management, including sales volume, operating margins, discount rates, and perpetual growth rates. Evaluating the reasonableness of management’s assumptions involved consideration of whether these assumptions were consistent with (i) the current and past performance of the investee, (ii) external market and industry data, and (iii) evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and reasonableness of the discount rates.
Other Than Temporary Impairment Assessment - Investment in Anheuser-Busch InBev SA/NV (“ABI”)
As described in Notes 1, 2 and 7 to the consolidated financial statements, as of December 31, 2019, the Company had a 10.1% economic and voting interest in ABI, consisting of185 million restricted shares of ABI and 12 million ordinary shares of ABI. Management reviews its equity investment in ABI accounted for under the equity method of accounting for impairment by comparing the fair value of its investment to its carrying value. If the carrying value of the 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. The factors used by management to make this determination include the duration and magnitude of the fair value decline, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold its investment in ABI until recovery. In October 2019, the fair value of the Company’s equity investment in ABI declined below its carrying value. The fair value of the Company’s equity investment in ABI at December 31, 2019 was $16.1 billion (carrying value of $18.1 billion). Based on management’s evaluation of duration and magnitude of the fair value decline, management’s evaluation of ABI’s financial condition and near-term prospects, and the Company’s intent and ability to hold its investment in ABI until recovery, management concluded that the decline in fair value of its investment in ABI below its carrying value is temporary, and, therefore, no impairment was recorded.
The principal considerations for our determination that performing procedures relating to the other than temporary impairment assessment for the investment in ABI is a critical audit matter are there was significant judgment by management when determining whether the impairment represented a temporary or other than temporary impairment. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s assessment of the likelihood that the fair value of the investment in ABI will recover in the near term, as well as the Company’s intent and ability to hold the investment in ABI until recovery.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment assessment for the investment in ABI. These procedures also included, among others, evaluating management’s assessment that the loss in value was temporary including the reasonableness of management’s assessment of the likelihood that fair value of the investment in ABI will recover in the near term, as well as the Company’s intent and ability to hold the investment in ABI until recovery. Evaluating the reasonableness of management’s assessment related to the likelihood of recovery in the near term involved consideration of whether the factors in the assessment were consistent with (i) the current and past performance of the investee, (ii) external market and industry data and (iii) evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 1, 2018January 30, 2020
We have served as the Company’s auditor since at least 1934, which is when the Company became subject to SEC reporting requirements. We have not determinedbeen able to determine the specific year we began serving as auditor of the Company.
Report of Management On Internal Control Over Financial Reporting
Management of Altria Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Altria Group, Inc.’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:
npertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Altria Group, Inc.;
nprovide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
nprovide reasonable assurance that receipts and expenditures of Altria Group, Inc. are being made only in accordance with the authorization of management and directors of Altria Group, Inc.; and
nprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Altria Group, Inc.’s internal control over financial reporting as of December 31, 2017.2019. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). Management’s assessment included an evaluation of the design of Altria Group, Inc.’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of ourAltria Group, Inc.’s Board of Directors.
Based on this assessment, management determined that, as of December 31, 2017,2019, Altria Group, Inc. maintained effective internal control over financial reporting.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who audited and reported on the consolidated financial statements of Altria Group, Inc. included in this report, has audited the effectiveness of Altria Group, Inc.’s internal control over financial reporting as of December 31, 2017,2019, as stated in their report herein.
February 1, 2018January 30, 2020
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.’sAltria’s management, including Altria Group, Inc.’sits Chief Executive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.’sits disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, Altria Group, Inc.’sAltria’s Chief Executive Officer and Chief Financial Officer concluded
that Altria Group, Inc.’sAltria’s disclosure controls and procedures are effective.
There have been no changes in Altria Group, Inc.’sAltria’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, Altria Group, Inc.’sits internal control over financial reporting.
The Report of Independent Registered Public Accounting Firm and the Report of Management on Internal Control over Financial Reporting are included in Item 8.
Item 9B. Other Information.
None.
Part III
Except for the information relating to the executive officers set forth in Item 10, the information called for by Items 10-14 is hereby incorporated by reference to Altria Group, Inc.’sAltria’s definitive proxy statement for use in connection with its Annual Meeting of Shareholders to be held on May 17, 201814, 2020 that willis expected to be filed with the SEC on or about April 5, 20182, 2020 (the “proxy statement”), and, except as indicated therein, made a part hereof.
Item 10. Directors, Executive Officers and Corporate Governance.
Refer to “Proposals Requiring Your Vote“Board and Governance Matters - Proposal 1 - Election of Directors,” “Ownership of Equity Securities of Altria - Section 16(a) Beneficial Ownership Reporting Compliance”Directors” and “Board and Governance Matters - Committees of Our Board of Directors”and Committee Governance” sections of the proxy statement.
Information about Our Executive Officers as of February 13, 2018:14, 2020:
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| | |
| Name | Office | Age |
Martin J. BarringtonJody L. Begley | Chairman, Chief Executive Officer andSenior Vice President, Tobacco Products | 6448 |
| Daniel J. Bryant | Vice President and Treasurer | 4850 |
Kevin C. Crosthwaite, Jr. | President and Chief Executive Officer, Philip Morris USA Inc. | 42 |
James E. Dillard III | Senior Vice President, Research, Development and Sciences | 54 |
Ivan S. FeldmanSteven D’Ambrosia | Vice President and Controller | 5153 |
| Murray R. Garnick | Executive Vice President and General Counsel | 5860 |
| William F. Gifford, Jr. | Executive Vice PresidentChairman and Chief Financial Officer | 47 |
Craig A. Johnson | President and Chief Executive Officer, Altria Group Distribution Company | 6549 |
| Salvatore Mancuso | Senior Vice President, Strategy, PlanningFinance and Procurement | 5254 |
Brian W. QuigleyHeather A. Newman | Senior Vice President, and Chief Executive Officer, U.S. Smokeless Tobacco Company LLCCorporate Strategy | 4442 |
| W. Hildebrandt Surgner, Jr. | Vice President, Corporate Secretary and Associate General Counsel | 5254 |
| Charles N. Whitaker | Senior Vice President, Chief Human Resources Compliance and Information ServicesOfficer and Chief Compliance Officer | 5153 |
| Howard A. Willard III | Executive Vice PresidentChairman and Chief OperatingExecutive Officer | 5456 |
All of the above-mentioned executive officers have been employed by Altria Group, Inc. or its subsidiaries in various capacities during the past five years.
Effective April 25, 2017, Mr. CrosthwaiteJanuary 1, 2020, Ms. Newman was appointedelected Senior Vice President, and Chief Executive Officer, Philip Morris USA Inc. Mr. CrosthwaiteCorporate Strategy of Altria. Ms. Newman has been continuously employed by Altria
Group, Inc. subsidiaries in positions across their businesses, including Strategyas President and Business Development,Chief Executive Officer of PM USA and in various Brand Management and Sales roles, since 1997.
Effective July 1, 2017, Mr. Garnick was appointed Executive Vice President and General Counsel of Altria Group, Inc. Mr. Garnick previously served as Deputy General Counsel of
Altria Client Services LLC and has been continuously employed by Altria Group, Inc. or its subsidiaries since 2008.
Effective August 24, 2017, Mr. Dillard, previously Senior Vice President, Research, Development and Regulatory Affairs of Altria Group, Inc., was appointed Senior Vice President, Research, Development and Sciences of Altria Group, Inc.
Effective January 1, 2018, Mr. Surgner, previously Corporate Secretary and Senior Assistant General Counsel of Altria Group, Inc., was appointed Vice President, Corporate Secretary and Associate General Counsel of Altria Group, Inc.
As previously announced, effective upon the conclusion of the Annual Meeting of Shareholders on May 17, 2018, Mr. Barrington will retire as Chairman, Chief Executive Officer and President and Mr. Willard will become Chairman and Chief Executive Officer. Additionally, Mr. Gifford will become Vice Chairman and Chief Financial Officer, effective upon the conclusion of the Annual Meeting of Shareholders.1998.
Mr. Whitaker’s wife and Mr. Surgner’s wife are first cousins.
Codes of Conduct and Corporate Governance
Altria Group, Inc. has adopted the Altria Code of Conduct for Compliance and Integrity, which complies with requirements set forth in Item 406 of Regulation S-K. This Code of Conduct applies to all of its employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Altria Group, Inc. has also adopted a code of business conduct
and ethics that applies to the members of its Board of Directors. These documents are available free of charge on Altria Group, Inc.’sAltria’s website at www.altria.com.
Any waiver granted by Altria Group, Inc. to its principal executive officer, principal financial officer or controller under the Code of Conduct, and certain amendments to the Code of Conduct, will be disclosed on Altria Group, Inc.’sAltria’s website at www.altria.com within the time period required by applicable rules.
In addition, Altria Group, Inc. has adopted corporate governance guidelines and charters for its Audit, Compensation and Nominating, Corporate Governance and Social Responsibility Committees and the other committees of the Board of Directors. All of these documents are available free of charge on Altria Group, Inc.’sAltria’s website at www.altria.com.
The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings Altria Group, Inc. makes with the SEC.
Item 11. Executive Compensation.
Refer to “Executive Compensation,” “Compensation Committee Matters - Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Matters - Compensation Committee Report for the Year Ended December 31, 2017” and “Board and Governance Matters - Directors - Director Compensation” sections of the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under Altria Group, Inc.’sAltria’s equity compensation plans at December 31, 2017,2019, were as follows:
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| | | |
| | | | |
| | Number of Shares to be Issued upon Exercise of Outstanding Options and Vesting of Deferred Stock (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (c) |
Equity compensation plans approved by shareholders (1) | 2,606,482 2,378,531 (2)
| $— | 39,082,184 36,909,792 (3)
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| |
(1) | The following plans have been approved by Altria Group, Inc. shareholders and have shares referenced in column (a) or column (c): the 2010 Performance Incentive Plan, the 2015 Performance Incentive Plan and the 2015 Stock Compensation Plan for Non-Employee Directors. |
| |
(2) | Represents 2,384,501shares1,909,642 shares of restricted stock units and 221,981468,889 shares that may be issued upon vesting of performance stock units if maximum performance measures are achieved. |
| |
(3) | Includes 38,161,24236,078,232 shares available under the 2015 Performance Incentive Plan and 920,942831,560 shares available under the 2015 Stock Compensation Plan for Non-Employee Directors, and excludes shares reflected in column (a). |
Refer to “Ownership of Equity Securities of Altria - Directors and Executive Officers” and “Ownership of Equity Securities of Altria - Certain Other Beneficial Owners” sections of the proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Refer to “Related Person Transactions and Code of Conduct” and “Board and Governance Matters - Altria Board of Directors - Director Independence Determinations” sections of the proxy statement.
Item 14. Principal Accounting Fees and Services.
Refer to “Audit Committee Matters - Independent Registered Public Accounting Firm’s Fees” and “Audit Committee Matters - Pre-Approval Policy” sections of the proxy statement.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements
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| | Page |
Consolidated Balance Sheets at December 31, 20172019 and 20162018 | |
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Consolidated Statements of Earnings (Losses) for the years ended December 31, 2017, 20162019, 2018 and 20152017 | |
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Consolidated Statements of Comprehensive Earnings (Losses) for the years ended December 31, 2017, 20162019, 2018 and 20152017 | |
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Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162019, 2018 and 20152017 | |
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Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 20162019, 2018 and 20152017 | |
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| Notes to Consolidated Financial Statements | |
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| Report of Independent Registered Public Accounting Firm | |
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| Report of Management on Internal Control Over Financial Reporting | |
Schedules have been omitted either because such schedules are not required or are not applicable.
In accordance with Regulation S-X Rule 3-09, the audited financial statements of AB InBevABI for the year ended December 31, 20172019 will be filed by amendment within six months after AB InBev’sABI’s year ended December 31, 2017.2019.
(b) The following exhibits are filed as part of this Annual Report on Form 10-K:
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| | 2.1 | | |
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| | 2.2 | | |
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| | 2.3 | | Class C-1 Common Stock Purchase Agreement, and Plandated as of MergerDecember 20, 2018, by and among USTJUUL Labs, Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of September 7, 2008.Altria Enterprises LLC. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on September 8, 2008December 20, 2018 (File No. 1-08940). |
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| | 2.4 | | Amendment No. 1 to theRelationship Agreement, and Plan of Merger, dated as of September 7, 2008,December 20, 2018, by and among USTJUUL Labs, Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of October 2, 2008.Altria Enterprises LLC. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on October 3, 2008December 20, 2018 (File No. 1-08940). |
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| | 3.1 | | |
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| | 3.2 | | |
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| | 4.1 | | |
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| 4.2 | | Indenture between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of December 2, 1996. Incorporated by reference to Altria Group, Inc.’s Registration Statement on Form S-3/A filed on January 29, 1998 (No. 333-35143). |
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| | 4.24.3 | | First Supplemental Indenture to Indenture, dated as of December 2, 1996, between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of February 13, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on February 15, 2008 (File No. 1-08940). |
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| | 4.34.4 | | Indenture among Altria Group, Inc., as Issuer, Philip Morris USA Inc., as Guarantor, and Deutsche Bank Trust Company Americas, as Trustee, dated as of November 4, 2008. Incorporated by reference to Altria Group, Inc.’s Registration Statement on Form S-3 filed on November 4, 2008 (No. 333-155009). |
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| | 4.44.5 | | Amended and Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013,1, 2018, among Altria Group, Inc. and, the Initial Lenderslenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents.administrative agents. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 23, 20131, 2018 (File No. 1-08940).
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| 4.5 | | |
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| | 4.6 | | ExtensionAmendment No. 1 to the Credit Agreement, effective August 19, 2015,dated January 25, 2019, among Altria Group, Inc. and the lenders theretoLenders and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents.administrative agents. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 21, 2015January 31, 2019 (File No. 1-08940). |
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| | 4.7 | | The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request. |
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| | 10.1 | | Comprehensive Settlement Agreement and Release related to settlement of Mississippi health care cost recovery action, dated as of October 17, 1997. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940). |
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| | 10.2 | | Settlement Agreement related to settlement of Florida health care cost recovery action, dated August 25, 1997. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on September 3, 1997 (File No. 1-08940). |
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| | 10.3 | | Comprehensive Settlement Agreement and Release related to settlement of Texas health care cost recovery action, dated as of January 16, 1998. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 28, 1998 (File No. 1-08940). |
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| | 10.4 | | Settlement Agreement and Stipulation for Entry of Judgment regarding the claims of the State of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940). |
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| | 10.5 | | Settlement Agreement and Release regarding the claims of Blue Cross and Blue Shield of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940). |
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| | 10.6 | | Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order regarding the settlement of the Mississippi health care cost recovery action, dated as of July 2, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940). |
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| | 10.7 | | Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Texas health care cost recovery action, dated as of July 24, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940). |
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| | 10.8 | | Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Florida health care cost recovery action, dated as of September 11, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File No. 1-08940). |
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| | 10.9 | | Master Settlement Agreement relating to state health care cost recovery and other claims, dated as of November 23, 1998. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on November 25, 1998, as amended by Form 8-K/A filed on December 24, 1998 (File No. 1-08940). |
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| | 10.10 | | |
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| | 10.11 | | |
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| | 10.12 | | |
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| | 10.13 | | |
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| 10.14 | | |
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| | 10.1510.14 | | |
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| | 10.1610.15 | | |
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| 10.17 | | Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 5-Year Revolving Credit Agreement, dated as of June 30, 2011,August 1, 2018, among Altria Group, Inc., the lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents,administrative agents, dated as of June 30, 2011.August 1, 2018. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on June 30, 2011August 1, 2018 (File No. 1-08940). |
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| | 10.1810.16 | | |
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| | 10.1910.17 | | |
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| | 10.2010.18 | |
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| | 10.2110.19 | | |
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| 10.20 | | Form of Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).* |
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| | 10.2210.21 | | |
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| | 10.23 | | Automobile Policy. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).* |
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| 10.2410.22 | | |
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| | 10.2510.23 | | |
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| | 10.2610.24 | | |
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| | 10.2710.25 | | |
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| | 10.2810.26 | | |
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| | 10.2910.27 | | |
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| | 10.3010.28 | | |
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| | 10.3110.29 | | |
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| 10.32 | | |
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| 10.33 | | |
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| 10.34 | | |
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| | 10.3510.30 | | |
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| | 10.3610.31 | | |
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| | 10.3710.32 | | |
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| 10.33 | | |
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| 10.34 | | |
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| 10.35 | | |
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| 10.36 | | |
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| 10.37 | | |
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| | 10.38 | | |
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| 10.39 | | |
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| | 10.3910.40 | | |
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| | 10.4010.41 | | |
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| 10.42 | | |
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| | 1210.43 | | |
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Table of Contents | 10.44 | |
| | | | | | 10.45 | | | | | | | | | 21 | | | | | | | | | | 23 | | | | | | | | | | 24 | | | | | | | | | | 31.1 | | | | | | | | | | 31.2 | | | | | | | | | | 32.1 | | | | | | | | | | 32.2 | | | | | | | | | | 99.1 | | | | | | | | | | 99.2 | | | | | | | | 99.3 | | | | | | | | | | 101.INS | | Inline XBRL Instance Document.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 | | Inline XBRL Taxonomy Extension Schema. | | | | | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase. | | | | | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase. | | | | | | | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase. | | | | | |
| | | | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase. | | | | | | 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.
Item 16. Form 10-K Summary. None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | | | | | | | By: | /s/ MARTIN J. BARRINGTONHOWARD A. WILLARD III | | | | (Martin J. BarringtonHoward A. Willard III Chairman and Chief Executive Officer and President)Officer) |
Date: February 27, 201825, 2020 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
| | | | | | | Signature | | Title | | Date | | | | | | | /s/ MARTIN J. BARRINGTONHOWARD A. WILLARD III (Martin J. Barrington)(Howard A. Willard III) | | Director, Chairman and Chief Executive Officer and President | | February 27, 201825, 2020 | | | | | | | /s/ WILLIAM F. GIFFORD, JR. (William F. Gifford, Jr.) | | Executive Vice PresidentChairman and
Chief Financial Officer | | February 27, 201825, 2020 | | | | | | | /s/ IVAN S. FELDMANSTEVEN D’AMBROSIA (Ivan S. Feldman)(Steven D’Ambrosia) | | Vice President and Controller | | February 27, 201825, 2020 | | | | | | | * GERALD L. BALILES, JOHN T. CASTEEN III, DINYAR S. DEVITRE, THOMAS F. FARRELL II, DEBRA J. KELLY-ENNIS, W. LEO KIELY III, KATHRYN B. MCQUADE, GEORGE MUÑOZ, MARK E. NEWMAN, NABIL Y. SAKKAB, VIRGINIA E. SHANKS HOWARD A. WILLARD III
| | Directors | | | | | | | | | | *By: | /s/ MARTIN J. BARRINGTONHOWARD A. WILLARD III (MARTIN J. BARRINGTONHOWARD A. WILLARD III ATTORNEY-IN-FACT) | | | | February 27, 201825, 2020 |
|