| Virginia | 13-3260245 | ||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 6601 West Broad Street, | Richmond, | Virginia | 23230 | ||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
804-274-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | Name of each exchange on which registered | ||||||
Common Stock, $0.33 | 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.
Large accelerated filer | þ | Accelerated filer | ☐ | |||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting | ☐ | |||||||||||||||||
| 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. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
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, 2017,2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $143$73 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Class | Outstanding at February 15, 2021 | |||||||
Common Stock, $0.33 1/3 par value | shares | |||||||
DOCUMENTS INCORPORATED BY REFERENCE
| Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on May | ||
| TABLE OF CONTENTS | ||||||||
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
Part I
Item 1. Business.
General Development of Business
Altria’s 10-Year Vision is to responsibly lead the transition of adult smokers to a non-combustible future (“Vision”). Altria is Moving Beyond Smoking, leading the way in moving adult smokers away from cigarettes by taking action to transition millions to potentially less harmful choices - believing it is a holding company incorporated in the Commonwealth of Virginia in 1985. substantial opportunity for adult tobacco consumers, Altria’s businesses and society.
At December 31, 2017, Altria Group, Inc.’s wholly-owned2020, 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;States (including super premium cigarettes previously manufactured and sold by Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”)); John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-ownedwholly 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-ownedwholly 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 moist smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”MST”), a wholly-owned subsidiary that is engaged in the manufacturesnus products 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, at December 31, 2020, Altria owned an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of oral nicotine pouches. Other Altria Group, Inc. wholly-ownedwholly 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.
In 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 September 30, 2016,closing, Altria Group, Inc. hadowned an approximate 27% ownership of SABMiller plc (“SABMiller”),80% interest in Helix, for which Altria Group, Inc. accounted for underpaid $353 million in 2019.
In the equity methodfirst quarter of accounting. In October 2016, Anheuser-Busch InBev SA/NV (“Legacy AB InBev”) completed2020, Altria renamed its business combination with SABMiller, and Altria Group, Inc. received cash and shares representing a 9.6% ownership insmokeless products segment as 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”).
At December 31, 2020, Altria’s investments in equity securities consisted of Anheuser-Busch InBev SA/NV (“ABI”), Cronos Group Inc.’s consolidated results. (“Cronos”) and JUUL Labs, Inc. (“JUUL”). Altria accounts for its investments in ABI and Cronos under the equity method of accounting using a one-quarter lag. Altria accounts for its equity investment in JUUL under the fair value option.
At December 31, 2020, Altria Group, Inc.’s chief operating decision maker (the “CODM”) reviews operating companies incomehad a 10.0% ownership interest in ABI.
In December 2018, Altria made an investment in JUUL by purchasing shares of non-voting convertible common stock of JUUL representing a 35% ownership interest. JUUL is engaged in the manufacture and sale of e-vapor products in the U.S. and certain international markets. In November 2020, Altria exercised its rights to evaluateconvert its non-voting shares to voting shares (“Share Conversion”). Altria does not currently intend to exercise its additional governance rights obtained upon Share Conversion, including the performance of, and allocate resourcesright to elect directors to JUUL’s board, or to vote its JUUL shares other than as a passive investor, pending 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 eachoutcome of the last three years are set forthU.S. Federal Trade Commission (“FTC”) administrative complaint. At December 31, 2020, Altria had a 35% ownership interest in JUUL.
In March 2019, Altria acquired a 45% ownership interest in Cronos, a global cannabinoid company headquartered in Toronto, Canada. At December 31, 2020, Altria had a 43.5% ownership interest in Cronos.
For further discussion of Altria’s investments in equity securities, see Note 15. Segment Reporting6. Investments in Equity Securities to the consolidated financial statements in Item 8 (“Note 15”6”). Information about total assets by segment 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 to the consolidated financial statements in Item 8 (“Note 3”). The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8 (“Note 2”).
| 2017 | 2016 | 2015 | ||||
| Smokeable products | 85.8 | % | 86.2 | % | 87.4 | % |
| Smokeless products | 13.2 | 13.1 | 12.8 | |||
| Wine | 1.5 | 1.8 | 1.8 | |||
| All other | (0.5 | ) | (1.1 | ) | (2.0 | ) |
| Total | 100.0 | % | 100.0 | % | 100.0 | % |
Portions of the information called for byrelating to 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
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 (including super premium cigarettes previously manufactured and sold by Nat Sherman,Sherman) and machine-made large
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cigars and pipe tobacco manufactured and sold by MiddletonMiddleton; and premium cigars sold by Nat Sherman; smokeless(ii) oral tobacco products, consisting of 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 4045 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 116.6101.4 billion units in 2017,2020, a decrease of 5.1%0.4% from 2016.2019.
▪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 1.51.8 billion units in 2017,2020, an increase of 9.9%9.0% from 2016.
2019.▪SmokelessOral tobacco products: USSTC is the leading producer and marketer of moist smokeless tobacco (“MST”)MST products. The smokelessoral tobacco products segment includes the premium brands, Copenhagen and Skoal, and value brands, Red Seal and Husky.Husky, sold by USSTC. In addition, the oral tobacco products segment includes on! oral nicotine pouches sold by Helix. Substantially all of the smokelessoral tobacco products are manufactured and sold to customers in the United States. Total smokelessoral tobacco products segment’s shipment volume was 841.3819.6 million units in 2017, a decrease2020, an increase of 1.4%1.2% from 2016.2019, primarily driven by on!. The oral tobacco products category volume increased in 2020 driven primarily by growth in oral nicotine pouches.
▪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.
▪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 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.
USSTC purchases dark fire-cured, dark air-cured and burley leaf tobaccos from domestic tobacco growers under a contract growing program. Under the terms of this program, as well as from leaf merchants.USSTC agrees to purchase the amount of tobacco specified in the grower contracts that meets USSTC’s grade and quality standard.
Middleton purchases burley, dark air-cured and flue-cured leaf tobaccos through leaf merchants. Middleton does not have a contract growing program.
For further discussion of the foregoing matters, the tobacco business environment, trends in market demand and competitive conditions, and related risks, 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 Productsin Item 7 for a discussion of risks associated with tobacco supply.7.
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 20172020 wine shipment volume of approximately 8.57.3 million cases decreased 8.6%12.0% from 2016.2019.
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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, Torreswine and Villa Maria Estate wines and Champagne Nicolas Feuillatte products 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 accountretail channels 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 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
For further discussion of the foregoing matters, the wine business environment, trends in market demand and competitive conditions, and related risks, see Item 1A for a discussion of risks associated with competition, unfavorable changesand Wine Segment - Business Environment in grape supply and governmental regulations.Item 7.
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, netAltria expects to complete the consolidated financial statements in Item 8.wind-down of this business by the end of 2022.
Other Matters
▪Customers: The largest customerFor a discussion of PM USA, USSTC, MiddletonHelix and Nat Sherman, McLane Company, Inc., accounted for approximately 26%, 25% and 26%Middleton’s largest customers, including their percentages of Altria Group, Inc.’s consolidated net revenues for the years ended December 31, 2017, 2016 and 2015, respectively. In addition, Core-Mark Holding Company, Inc. accounted for approximately 14%, 14% and 10% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162020, 2019 and 2015, respectively. Substantially all of these net revenues were reported2018, see Note 15. Segment Reporting to the consolidated financial statements in the smokeable products and smokeless products segments.
▪Employees: At December 31, 2017, Altria Group, Inc. and its subsidiaries employed approximately 8,300 people.
▪ResearchHuman Capital Resources: We believe our workforce is critical to achieving our Vision. Attracting, developing and Development: Researchretaining the best talent with the skills to make significant progress against our Vision is a key business priority. Moreover, we recognize the importance of doing business the right way. We believe culture influences employee actions and decision-making. This is why we dedicate resources to promoting a vibrant, inclusive workplace; attracting, developing and retaining talented, diverse employees; promoting a culture of compliance and integrity; creating a safe workplace; and rewarding and recognizing employees for both the results they deliver and, importantly, how they deliver them.
Oversight and Management
Our Human Resources department is responsible for managing employment-related matters, including recruiting and hiring, onboarding, compensation design and implementation, performance management, advancement and succession planning and professional and learning development. Our inclusion and diversity (“I&D”) programs are managed by our Corporate Citizenship department. Our Board of Directors (“Board of Directors” or “Board”) and two of our Board’s committees provide oversight of human capital matters. The Compensation and Talent Development Committee reviews initiatives and programs related to corporate culture and enterprise-wide talent development, including our I&D initiatives. The Nominating, Corporate Governance and Social Responsibility Committee reviews our social responsibility initiatives and goals, which include our efforts to work with diverse, high-quality suppliers and to address societal issues within our companies’ supply chains.
Inclusion and Diversity
We recognize the critical importance of I&D in pursuing our Vision and believe in the value of a workforce composed of a broad spectrum of backgrounds and cultures. In 2020, we established the following aspirational I&D aiming points to help guide our efforts over the next 10 years:
▪Be an inclusive place to work for all employees, regardless of level, demographic group or work function.
▪Have equal numbers of men and women among our vice president and director-level employees.
▪Increase our vice president and director-level employees who are Asian, Black, Hispanic or two or more races to at least 30%.
▪Increase our vice president and director-level employees who are LGBTQ+, a person with a disability or a veteran.
▪Have diverse functional leadership teams that reflect the organizations they lead.
We also believe in the importance of diverse suppliers throughout our companies’ supply chains, including minority, women, veteran and LGBTQ+-owned businesses.
Compensation and Benefits
Our compensation and benefits programs are designed to help us attract, retain and motivate strong talent. However, we recognize that the decreasing social acceptance of tobacco usage may impact our ability to attract and retain talent. We work to manage this risk by, among other things, targeting total compensation packages to be above peer companies for which we compete for talent. Depending on
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employee level, total compensation includes different elements – base salary, annual cash incentives, long-term equity and cash incentives and benefits. Our goal is to provide total compensation packages between the 50th and 75th percentiles of total compensation packages paid to employees in comparable positions at our peer companies upon attainment of business and individual goals.
We are committed to pay equity across our companies. Based on the most recent annual analysis we conducted in November 2020, for employees performing the same or similar duties, salaries of our female employees were 98.2% of those of our male employees, and salaries of our non-white employees were 98.5% of those of our white employees. After adjusting for factors generally considered to be legitimate differentiators of salary, such as performance and tenure, the percentages increased to 99.4% and 99.6%, respectively.
In addition to cash and equity compensation, we offer generous employee benefits such as significant company contributions to deferred profit sharing plans, consumer-driven health plan coverage, vacation and holiday pay, up to 12 weeks paid parental and family leave for birth, adoption and foster placement, and disability and life insurance. Our benefits also include wellness benefits and family creation assistance benefits, such as adoption assistance and coverage for fertility treatments. In response to the COVID-19 pandemic, for 2020 and 2021, we expanded dependent care coverage to include $5,000 employee reimbursement for remote learning and other dependent care costs. While there is some variability in employee benefits across our companies, the examples we provide are available to most employees.
We are also committed to investing in the educational development of our workforce through an unlimited tuition refund program for job-related courses or company-related degrees.
Attracting, Developing and Retaining Talent
Our salaried entry-level recruitment efforts focus on recruiting relationships with universities, internship opportunities and partnerships with organizations that support diverse students. We complement these recruiting efforts with hiring experienced employees with demonstrated leadership capabilities.
To help our employees succeed in their roles and develop in their careers, we emphasize ongoing training and leadership development opportunities. Building skills that drive innovation and aligning our employees to our Vision is important for our long-term success. The Human Resources department leads our learning and development expenseefforts partnering with learning professionals embedded in functions throughout our operating and services companies. Employees have access to a wide variety of development programs, including new employee onboarding, classroom and self-guided training programs, technical training and our educational refund program for continuing education.
We regularly conduct anonymous employee engagement surveys to seek feedback on a variety of topics, including employee satisfaction, confidence in company leadership, corporate culture and culture of compliance. In addition, in 2020, we conducted employee surveys to gauge employee well-being in light of the years ended COVID-19 pandemic and altered work environments, including working from home. Survey results, including comparisons to prior results, are shared with our employees and our Board and are used to modify or enhance our human capital management programs.
Workplace Safety
Our safety goal is for all employees to have an injury-free career. We regularly update our policies, procedures and equipment as new developments occur in safety and health standards and communicate safety messages and provide safety training as appropriate throughout our companies. Our most recent OSHA recordable injury rate of 1.9% from 2019 is lower than the benchmark for companies in the U.S. Beverage and Tobacco Product Manufacturing industry classification.
In response to the COVID-19 pandemic, we rapidly implemented safety measures to help protect our employees, including remote work for non-manufacturing salaried employees and, at our manufacturing locations, social distancing protocols, daily temperature checks and additional cleaning and sanitation practices.
Number of Employeesand Labor Relations
At December 31, 2017, 20162020, we employed approximately 7,100 people. Twenty-seven percent of those employees were hourly manufacturing employees and 2015 is set forthmembers of labor unions subject to collective bargaining agreements. We believe we engage and collaborate effectively with our hourly employees, as demonstrated by the positive working relationship between our companies and the unions. We also have long-term agreements that resolve any collective bargaining dispute through binding arbitration, which further demonstrates the trust-based relationship with the unions.
Supply Chain Human Capital Matters
In addition to supplier diversity efforts referenced above, we support efforts to address human capital concerns in Note 17. Additional Informationthe tobacco supply chain. For example, in our domestic tobacco supply chain, we use on-farm good agricultural practices assessments to the consolidated financial statementsassess growers’ compliance with practices related to labor management. Our tobacco companies also establish contract terms and conditions with tobacco growers addressing child and forced labor and conduct social compliance audits in Item 8.high-risk tobacco growing regions.
More information about efforts discussed in this section can be found in our Corporate Responsibility Progress Report at www.altria.com/responsibility.
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▪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, 2017,2020, the portfolio of approximately 800 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.’s2020. 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: Government Regulations: Altria Group, Inc.and its subsidiaries are subject to various federal, state and local laws and regulations. For discussion of laws and regulations impacting Altria’s tobacco operating companies, see Tobacco Space - Business Environment in Item 7. For discussion of laws and regulations impacting the wine segment, see Wine Segment - Business Environment in Item 7.
Altria and its subsidiaries (and former subsidiaries) are also 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.
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 reportForm 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
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,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
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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.
Risks Related to Litigation, Legislative or Regulatory Action
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, indemnitors 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. Legislative action, such as changes to tort law, also may expand the types of claims and remedies available to plaintiffs.
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. Contingencies to the consolidated financial statements in Item 8 (“Note 18”), 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.that could have a material adverse effect on our businesses. For example, in the lawsuit brought by the United States Department of Justice discussed in detail in Note 18, the district court did not impose monetary penalties but ordered significant non-monetary remedies, including the issuance of “corrective statements”statements.” In the patent lawsuit pending before the United States International Trade Commission (“ITC”) discussed in Note 18, the plaintiffs seek a prohibition on the importation of the IQOS electronic device, HeatSticks and component parts into the United States. Additionally the on! transaction, discussed in Note 1. Background and Basis of Presentation to the consolidated financial statements in Item 8(“Note 1”), had been the subject of an arbitration, which the parties agreed to settle for an immaterial amount to Altria in February 2021. An adverse outcome in the arbitration could have adversely affected Helix’s ability to compete effectively with oral nicotine pouches.
In 2019, we determined that our investment in JUUL was impaired in part due to the increase in the number and type of legal cases pending against JUUL. Altria Group, Inc. and PM USA began makingare also defendants in various mediamany of these cases. In addition, in April 2020 the fourth quarter of 2017.FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute unreasonable restraint on trade. E-vapor litigation and the FTC action, including the remedies the FTC is seeking, are further discussed in Note 18.
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 Proceedings of this Annual Report on Form 10-K (“(“Item 3”), Note 18 and Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K for a discussion of pending tobacco-related litigation.
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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 facePM USA faces significant governmental and private sector actions, including efforts aimed at reducing the incidence of tobacco use and efforts seeking to hold these subsidiariesPM USA 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.
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 and local levels. The frequency and magnitude of excise tax increases can be influenced by various factors, including federal and local levels.state budgets (which have been negatively impacted by the COVID-19 pandemic) and the composition of executive and legislative bodies. 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 also have an adverse impact on the reported share performance of tobacco products of Altria Group, Inc.’sAltria’s tobacco subsidiaries. For further discussion, seeTobacco Space - Business Environment - Excise Taxes in Item 7.
Unfavorable outcomes of any governmental investigations could materially affect the businesses of Altria and its subsidiaries or its investees.
From time to time, Altria, its subsidiaries and its investees are subject to federal and state governmental investigations on a range of matters. For further discussion of current pending investigations, see Tobacco Space - Business Environment - Other International, Federal, State and Local Regulation and Governmental and Private Activity in Item 7. We cannot predict 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 any current or future investigation.
A challenge to our tax positions or an increase in the income tax rate could adversely affect our 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 (which could give rise to additional liabilities, including interest and potential penalties) or an increase in the corporate income tax rate could adversely affect our earnings or cash flow.
International business operations subject Altria 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 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 foreign privacy laws, 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.
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Risks Related to Our Businesses
Altria, its subsidiaries and its investees face various risks related to health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, which could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its subsidiaries and investees.
Altria’s, its subsidiaries’ and its investees’ business and financial results, consolidated results of operations, cash flows or financial position could be negatively impacted by health epidemics, pandemics and similar outbreaks. The spreading COVID-19 pandemic could have negative impacts, such as (i) a global or U.S. recession or other economic crisis, including a financial crisis, (ii) credit and capital markets volatility (and access to these markets, including by those in the distribution and supply chains), (iii) significant volatility in demand for our tobacco and wine subsidiaries’ and investees’ products, (iv) changes in adult consumer accessibility to those products, including due to government action, (v) changes in adult consumer behavior and preferences, including trading down to lower-priced products or cessation of product use due to public health actions or concerns and economic conditions (including those stemming from potential changes in government stimulus or reductions in unemployment payments or other benefits), and (vi) extended or multiple disruptions in our subsidiaries’ or investees’ manufacturing operations, or in their distribution and supply chains. In addition, our subsidiaries’ and investees’ operations may incur increased costs and otherwise be negatively affected if significant portions of their respective workforces (or the workforces within their respective distribution or supply chains) are unable to work or work effectively, including because of illness, unavailability of personal protective equipment, quarantines, government actions, facility closures or other restrictions.
The impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, increases in the number of cases in future periods, and actions taken to contain its spread and mitigate the public health effects. We cannot at this time predict the impact of the COVID-19 pandemic on our or our investees’ future financial or operational results, but the impact could be material over time. See the risks below related to extended disruptions at a facility, of a distributor or in service by a service provider and the risks related to our investment in ABI and the earnings from and carrying value of that investment. For further discussion on the impact of the COVID-19 pandemic on the tobacco and wine businesses, see Tobacco Space - Business Environment and Wine Segment - Business Environment 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. Growth of the e-vapor product category and other innovative tobacco products, including oral nicotine pouches, 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, including smokeless tobacco. In addition, growth of unregulated synthetic nicotine products, which may not be subject to the same regulatory restrictions (including marketing restrictions and FDA pre-marketing requirements) as the tobacco-derived oral nicotine products of Altria’s tobacco subsidiaries, could negatively impact the growth of our oral nicotine pouch 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.States and, as such, are not required to make annual settlement payments as required by the parties to the settlements. These settlement payments are significant for PM USA, as described in Debt and Liquidity - Payments under State Settlement Agreements and FDA Regulation in Item7. These settlements, among other factors, have resulted in substantial cigarette price increases. These manufacturers may failincreases to comply with relatedhelp cover the cost of the settlement payments. Manufacturers not party to the settlements are subject to state escrow legislation orrequiring escrow deposits. Such manufacturers may avoid these 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 competitive brands. In the cigar category, additional competition has resulted from increased imports
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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:
▪promote brand equity successfully;
▪anticipate and respond to new and evolving adult consumer preferences;
▪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);
▪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. 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 currentcertain other 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, 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 arrangement with PMI to commercialize IQOS and related HeatStick products in the United States, which is governed by an exclusive license and distribution agreement. The initial 5-year term of this agreement expires in April 2024 and renews at our option for an additional 5-year period so long as we achieve certain performance objectives. The initial term performance objectives are based on achieving 0.5% dollar share of the cigarette category within a certain period of time in a certain number of geographic areas. In addition, to maintain our exclusive distribution rights as to PMI during the term of the agreement, we must achieve certain performance objectives within a specified time period by April 2022. The exclusive distribution rights performance objectives are based on achieving 0.5% dollar share of the cigarette category within a certain period of time in a single geographic area. While we believe Altria will meet the initial term and exclusive distribution rights performance objectives, it is possible that we may not meet them or that we may have a disagreement with PMI as to whether those objectives have been met. In either case, it could result in the loss of (i) our unilateral right to extend the agreement for the additional 5-year period, and therefore we would no longer be able to commercialize IQOS and related HeatStick products after April 2024, or (ii) our exclusive distribution rights as to PMI.
Additionally, our 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.
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Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of any particular 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. Nor can weIn addition, the FDA could, for a variety of reasons, determine that innovative products currently on the market but pending FDA review of the associated PMTA (such as on! oral nicotine pouches), or those that have previously received authorization, including with a claim of reduced exposure (such as IQOS), are not appropriate for the public health and the FDA could require such products be taken off the market. See Tobacco Space - Business Environment - FSPTCA and FDA Regulation in Item 7 for further discussion. We also cannot 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.subsidiaries and investees.
Any significant change in tobacco leaf prices, quality or availability of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic, could adversely affect our tobacco subsidiaries’ and our investees’ profitability and business. The COVID-19 pandemic also may impact the availability of direct materials necessary for our tobacco subsidiaries and JUUL to remain compliant with FDA and other regulatory requirements for tobacco products. For further discussion, seeTobacco Space - Business Environment - Price, Availability and Qualityof Agricultural ProductsTobacco, Other Raw Materials and Component Parts in Item 7.7.
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.
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
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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.
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 may enjoy greater societal acceptance and fewer longer-term challenges. As a result, we may be unable to attract and retain the best talent.
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 (such as continued uncertainty of the COVID-19 pandemic), regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product expansions, competitive activity and income and excise 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. For further discussion, see Discussion and Analysis - Critical Accounting Policies and Estimates in Item 7.
Competition, changes in adult consumer preferences, unfavorable changes in grape supply and new governmental regulations or revisions to existing governmental regulations could adversely affect Ste. Michelle’s wine business.
Ste. Michelle’s business is impacted by evolving adult consumer preferences. Shifts away from the wine category to other alcohol categories or shifts to lower-priced wines have resulted, and could continue to result, in slowing growth in Ste. Michelle’s sales and increased inventory levels and have a material adverse effect on Ste. Michelle’s wine business. As discussed in Note 5. Asset Impairment, Exit and Implementation Costs to the consolidated financial statements in Item 8 (“Note 5”), during the year ended December 31, 2020, as a result of inventory levels significantly exceeding long-term forecasted demand, Ste. Michelle recorded pre-tax charges of $411 million in cost of sales, including a $292 million inventory write off, $100 million in estimated losses on future non-cancelable grape purchase commitments and $19 million in inventory disposal costs and other charges. Evolving adult consumer preferences, an economic downturn or recession or other factors could result in a further slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business.
The adequacy of Ste. Michelle’s grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington. Supply shortages or surpluses related to any one or more of these factors could impact production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle’s sales. In addition, Ste. Michelle’s business is subject to significant competition, including from many large, well-established domestic and international companies. Federal, state and local governmental investigations could materiallyagencies also regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business. For further discussion see Wine Segment - Business Environment in Item 7.
Risks Related to the Capital Markets and Financing
Acquisitions or other events may adversely affect the businessesAltria’s credit rating, and Altria may not achieve its anticipated strategic or financial objectives of Altria Group, Inc. and its subsidiaries.a transaction.
From time to time, Altria Group, Inc.considers acquisitions, investments or dispositions and its subsidiariesmay engage in confidential negotiations that are subjectnot publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to governmental investigations on a range of matters. We cannot predict whether new investigations may be commencedmaintain or the outcome of any such investigation, andimprove 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 businessinvestment grade credit ratings or the outlook for those ratings as occurred following our investment in JUUL.
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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 (losses).
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. For example, we typically access the commercial paper market early in the second quarter to help fund payments under the Master Settlement Agreement, tax obligations and shareholder dividends. 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 materially adversely affectedunable to attract investors due to the impact of decreasing social acceptance of tobacco usage.
There is increasing investor focus on environmental, social and governance (“ESG”) matters. Organizations that provide ESG information to investors have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by ansome investors to inform their investment and voting decisions. Decreasing social acceptance of tobacco products or unfavorable outcome of a future investigation.
Risks Related to prevent and detect violations of applicable law, no system can provide assurance that it will always protect against improper actions by employees or third parties. Violations of these laws, or allegations of such violations,Our Investments
A challenge to our investment in JUUL, if successful, could result in reputational harm, legal challengesa broad range of resolutions, including divestiture of the investment or rescission of the transaction.
A challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction. In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act, and substantially lessened competition in violation of Section 7 of the Clayton Act. The FTC seeks a broad range of remedies, including divestiture of Altria’s investment in JUUL, rescission of the transaction and prohibition against any officer or director of either Altria or JUUL serving on the other’s board of directors or attending meetings. The administrative trial will take place before an FTC administrative law judge and is currently scheduled to begin June 2021. Any ruling by the FTC is subject to review by the FTC Commissioners and subsequently by a federal appellate court if appealed.
Also, various putative class action lawsuits have been filed against Altria (and in some cases, subsidiaries of Altria) and JUUL. The lawsuits cite the FTC administrative complaint referenced above and allege claims similar to those made by the FTC. Plaintiffs in these lawsuits are seeking various remedies, including treble damages, attorneys’ fees, a declaration that the agreements between Altria and JUUL are invalid, divestiture of Altria’s investment in JUUL and rescission of the transaction.
A successful challenge by the FTC or the plaintiffs in the lawsuits to the investment would adversely affect us, including by eliminating, or substantially limiting, our rights with respect to our investment in JUUL. For further discussion see Note 18.
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, competitive risks and regulatory and legislative 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 18, 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 costs.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 Investments in Equity Securities in Note 6, as part of the preparation of our financial statements for the quarters ended September 30, 2019, December 31, 2019 and September 30, 2020, we performed valuations of our investment in JUUL as a result of the existence of impairment indicators. As a result, we determined that our investment in JUUL was impaired and recorded total non-cash
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pre-tax impairment charges of $11.2 billion. Following Share Conversion in the fourth quarter of 2020, Altria Group, Inc.’selected to account for its equity method investment in JUUL under the fair value option. Under this option, Altria’s consolidated statements of earnings (losses) include any cash dividends received from its investment in JUUL and any changes in the fair value of its investment, which is calculated quarterly. While we believe the December 31, 2020 valuation of $1.7 billion is the appropriate current fair value of our investment, the risks identified in this paragraph, some of which are also further discussed in Discussion and Analysis - Investments in JUUL and Tobacco Space - Business Environment in Item 7 and in Note 18, are ongoing with respect to the current fair value. Quarterly fair value changes could create volatility in Altria’s consolidated financial position and earnings and, if the fair value of our investment in JUUL decreases, 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 elect to compete with JUUL in the e-vapor category prior to December 20, 2024. In addition, in the event we elect to exercise our board designation rights at JUUL, 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 and are restricted from competing with 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 or to terminate such obligations in the circumstances described above, 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 ABI’s business results, including as a result of the COVID-19 pandemic, and stock price. In addition, if the carrying value of our investment in ABI exceeds its fair value and the loss in value is other factors.than temporary, the investment is considered impaired, which would result in impairment losses.
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.business, its business outlook, cash flow requirements and financial performance, the state of the market and the general economic climate, including the impact of the COVID-19 pandemic. For example, in 2020, as a result of the uncertainty, volatility and impact of the COVID-19 pandemic on ABI’s business, ABI reduced by 50% its final 2019 dividend paid in the second quarter of 2020 and did not pay its interim 2020 dividend that would have been paid in the fourth quarter of 2020, which resulted in a reduction of cash dividends Altria received from ABI.
In addition, since October 2019, the carrying value of our investment in ABI has exceeded the fair value of our equity investment in ABI. We concluded at December 31, 2020, that the decline in fair value of our investment in ABI below its carrying value continues to be temporary. If, however, 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,price. See Note 6 for example through mark-to-market losses on AB InBev’s derivative financial instruments used to hedge certain share commitments.further discussion.
We received a substantial portion of our consideration from the TransactionOctober 2016 SABMiller plc (“SABMiller”)/ABI business combination (“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, sufferincur 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, (i) we may be subject to additional tax liabilities, (ii) the number of directors that we have the right to have appointed to the AB InBev BoardABI board of Directorsdirectors could be
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reduced from two to one or zero and (iii) we may be unable to continue to account for our use ofinvestment in ABI under the equity method of accounting for our investment in AB InBev could be challenged.accounting.
While we expect the equitytax treatment of the consideration that we received from the ABI Transaction to qualifybe respected, the statute of limitations for tax-deferred treatment,the tax year in which the transaction occurred has not expired. Therefore, 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; or that Cronos will successfully execute its business plans and strategies. 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.
At December 31, 2017,2020, 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 by Middleton and USSTCto other Altria subsidiaries for use in the manufacturing of cigars (smokeable products segment) and smokelessMST, snus and oral nicotine pouch products (oral tobacco products respectively.
At December 31, 2017, in addition to2020, the Richmond Manufacturing Center, the smokelessoral tobacco 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 Nashville, Tennessee.
At December 31, 2020, the wine segment owned and operated by USSTC, with the exception of the facility leased by USSTC in Franklin Park, Illinois.
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 18 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, 20172020 were filed on Form 8-K on February 1, 2018January 28, 2021 (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:Results
In GlogerBerger (Cote), in February 2018,as a Miami-Dade County jury returned a verdict in favorresult of plaintiff and againstthe Eleventh Circuit Court of Appeals’ decision affirming the punitive damages award, PM USA and R.J. Reynolds Tobacco Company (“R.J. Reynolds”) awarding $7.5recorded a pre-tax provision of $21 million, including interest, for such award in compensatory damages. The jury also awarded plaintiff $5 million in punitive damages against each defendant.the first quarter of 2021. PM USA postedpreviously recorded a bondpre-tax provision of approximately $6 million, including interest, for the compensatory damages award. PM USA paid these amounts, plus fees in the amount of $2.5 million. Defendants filed various post-trial motions, which remain pending,$1.5 million, in February 2021.
In Santoro, as a result of the Florida Supreme Court’s denial of PM USA’s appeal of the punitive damages award, PM USA recorded a pre-tax provision of $0.1 million, including interest, for such award in the first quarter of 2021. PM USA previously recorded a pre-tax
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provision of approximately $0.8 million, including interest, for the compensatory damages award. In January 2021, PM USA paid the recorded amounts, plus fees and appealed toadditional interest.
In Sommers, as a result of the Florida Third District Court of Appeal.Appeals’ non-appealable decision affirming an award of attorneys’ fees, costs and interest, PM USA recorded a pre-tax provision of approximately $3 million, including interest, for such award in the first quarter of 2021.
▪Non-Engle Progeny Trial Results
In WallaceGreene, a case with a trial court judgment against PM USA for $30 million, in February 2018, PM USA filed an appeal to2021, the Florida Fifth District Court of Appealtrial court awarded plaintiff attorneys’ fees and posted a bondcosts in the amount of approximately $3$2.3 million. In February 2021, PM USA served its post-trial motions, including to reverse the judgment or for a new trial.
In Allen,February 2021, the Massachusetts Supreme Judicial Court asserted jurisdiction over the appeal in Laramie.
▪Health Care Cost Recovery Litigation
NPM Adjustment Disputes: In connection with a proceeding pursuant to the New York settlement where an independent investigator was to determine the amounts due to the participating manufacturers from New York for 2019 and 2020, the investigator issued its determination in February 2018, the Florida Supreme Court denied PM USA’s petition2021. Pursuant to invoke the court’s discretionary jurisdiction.that determination, PM USA will record a pre-tax provisionexpects to receive approximately $56 million in April 2021 and approximately the same amount in April 2022.
▪IQOS Litigation
In the lawsuit filed by RAI Strategic Holdings, Inc. and R.J. Reynolds Vapor Co. claiming patent infringement based on the sale of approximately $10 million for the judgment plus interestIQOS electronic device and HeatSticks in the first quarter of 2018.United States, the defendants filed counterclaims alleging that plaintiffs’ e-vapor products infringe patents owned by one or more defendants. In December 2020, the court stayed the case due to the COVID-19 pandemic. In February 2021, the court lifted the stay with respect to defendants’ counterclaims.
The FTC has postponed the administrative trial against Altria and JUUL, originally scheduled to begin in February 2018, the Florida Fourth District Court of Appeal affirmed the judgment 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. PM USA will record a pre-tax provision of approximately $1 million for the judgment plus interest in the first quarter of 2018.April 2021, until June 2021.
Item 4. Mine Safety Disclosures.
Not applicable.
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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 and the AltriaS&P Food, Beverage and Tobacco Industry Group Inc. Peer Group (1).Total Return Index. The graph assumes the investment of $100 in common stock and each of the indices as of the market close on December 31, 20122015 and the reinvestment of all dividends on a quarterly basis.
| Date | Altria Group, Inc. | Altria Group, Inc. Peer Group | S&P 500 | Date | Altria | S&P Food, Beverage & Tobacco | 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 | ||||||||||||||||||||||||||
| December 2015 | $ | 212.87 | $ | 162.74 | $ | 152.55 | December 2015 | $ | 100.00 | $ | 100.00 | $ | 100.00 | |||||||||||||||||||
| December 2016 | $ | 256.43 | $ | 177.01 | $ | 170.78 | December 2016 | $ | 120.46 | $ | 108.76 | $ | 111.95 | |||||||||||||||||||
| December 2017 | $ | 280.65 | $ | 193.86 | $ | 208.05 | December 2017 | $ | 131.84 | $ | 122.19 | $ | 136.38 | |||||||||||||||||||
| December 2018 | December 2018 | $ | 96.13 | $ | 103.96 | $ | 130.39 | |||||||||||||||||||||||||
| December 2019 | December 2019 | $ | 103.78 | $ | 129.88 | $ | 171.44 | |||||||||||||||||||||||||
| December 2020 | December 2020 | $ | 93.00 | $ | 137.10 | $ | 202.98 | |||||||||||||||||||||||||
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
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, 2018,15, 2021, there were approximately 64,00054,000 holders of record of Altria Group, Inc.’sAltria’s common stock.
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| 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, 20172020
In July 2015, Altria Group, Inc.’s2019, the Board of Directors (the “Board of Directors”) authorized a $1.0 billion share repurchase program. In April 2020, the Board rescinded the $500 million remaining in this program that it expandedas part of Altria’s efforts to $3.0 billionenhance its liquidity position in October 2016 andresponse to $4.0 billionthe COVID-19 pandemic. There were no share repurchases made in July 2017 (as expanded, the “July 2015 share repurchase program”). The July 2015 share repurchase program was completed in January 2018.2020 under a publicly announced program. In January 2018,2021, the Board of Directors authorized a new $1.0$2.0 billion share repurchase program, which Altria Group, Inc. expects to complete by the end of 2018.June 30, 2022. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.Board.
| 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, 2020 | 836 | $ | 37.17 | — | $ | — | ||||||||||||||||||||
| November 1- November 30, 2020 | — | $ | — | — | $ | — | ||||||||||||||||||||
| December 1- December 31, 2020 | 24 | $ | 43.00 | — | $ | — | ||||||||||||||||||||
| For the Quarter Ended December 31, 2020 | 860 | $ | 37.33 | — | ||||||||||||||||||||||
(1) The total number of shares purchased represents shares withheld by Altria in an amount equal to the statutory withholding taxes for vested stock-based awards previously granted to eligible employees.
| 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 | ||||||||||
Item 6. Selected Financial 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 | ||||||||||||||
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
Executive Summary
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, Altria refers to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted OCI margins; adjusted net earnings attributable to Altria; adjusted diluted earnings (losses) per share (“EPS”) attributable to Altria; and adjusted effective tax rates. These adjusted financial measures are not required by, or calculated in accordance with, United States generally accepted accounting principles (“GAAP”) and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Except as noted in 2021 Forecasted Results section below, when Altria provides a non-GAAP measure in this Form 10-K, it also provides a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below.
COVID-19 Pandemic
The COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and continues to create economic uncertainty. Although much uncertainty still surrounds the pandemic, including its duration and ultimate overall impact on U.S. and global economies, its subsidiaries’ operations and those of Altria’s investees, Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic and continues to carefully evaluate potential outcomes and work to mitigate risks. Specifically, Altria remains focused on any potential impact to its liquidity, operations, supply and distribution chains and on economic conditions.
In terms of Altria’s liquidity, despite some volatility in the commercial paper market in March 2020, Altria was able to build and maintain a higher cash balance than normal to preserve its financial flexibility. As a precautionary measure, in March 2020, Altria borrowed the full $3.0 billion available under its senior unsecured 5-year revolving credit agreement (as amended, the “Credit Agreement”), which Altria subsequently repaid in full in June 2020. In May 2020, Altria issued $2.0 billion of long-term debt in the form of senior unsecured notes. In April 2020, the Board of Directors rescinded the $500 million remaining in the previously authorized $1.0 billion share repurchase program. Altria did not repurchase any shares under its share repurchase program in 2020.
As with so many other companies throughout the U.S. and globally, Altria’s operations have been affected by the COVID-19 pandemic. Altria has implemented remote working for many employees and aligned with the social distancing protocols recommended by public
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health authorities. To date, Altria believes its tobacco businesses have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but continues to monitor these factors. Altria continues to believe that remote working due to the COVID-19 pandemic has had minimal impact on productivity. Also, Altria’s critical information technology systems have remained operational. Although Altria’s tobacco businesses previously suspended operations temporarily at several of their manufacturing facilities in March 2020, the businesses resumed operations at those facilities under enhanced safety protocols in April 2020 and all manufacturing facilities are currently operational under enhanced safety protocols. Altria continues to monitor the risks associated with facility disruptions and workforce availability as a result of uncertainty related to the COVID-19 pandemic.
Altria’s suppliers and those within its distribution chain are also subject to government actions that may require the closure of a facility and remote working protocols. To date, Altria has not experienced any material disruptions to its supply chains or distribution systems, but is continuing to monitor these factors. The majority of retail stores in which Altria’s tobacco products are sold, including convenience stores, have been deemed to be essential businesses by authorities and have remained open. Altria continues to monitor the risk that one or more suppliers, distributors or any other entities within our supply and distribution chain closes temporarily or permanently.
In March 2020, PM USA temporarily closed its Atlanta and Richmond IQOS stores and paused its IQOS interactive marketing efforts. In June 2020, PM USA re-opened its Atlanta and Richmond IQOS stores, and in July 2020, PM USA launched IQOS in Charlotte, with all stores operating under enhanced safety protocols.
In 2020, Altria incurred net pre-tax charges of $50 million, which were directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic. These costs, which were recorded in the second quarter and excluded from Altria’s adjusted results, included premium pay, personal protective equipment and health screenings, partially offset by certain employment tax credits. These net pre-tax charges do not include the inventory-related implementation costs associated with the wine business strategic reset.
Although Altria’s tobacco businesses have not been materially impacted to date by the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic may impact adult tobacco consumers in the future. Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic and their effect on adult tobacco consumers, including stay-at-home practices and disposable income (which may be impacted by unemployment rates and fiscal stimulus). Altria also continues to monitor adult tobacco consumers’ purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of non-combustible products.
While Altria’s tobacco businesses have not been materially impacted to date by the COVID-19 pandemic, Altria has experienced adverse impacts to its alcohol assets. In the wine business, Ste. Michelle’s direct-to-consumer sales and on-premise wine sales in restaurants, bars and hospitality venues and on cruise lines have been, and continue to be, negatively impacted by disruptions arising from the COVID-19 pandemic, which also may have an impact on adult wine consumers going forward. In 2020, against a backdrop of product volume demand uncertainty and long-term, non-cancelable grape purchase commitments, which have been further negatively impacted by the COVID-19 pandemic (including economic uncertainty and government actions that restrict direct-to-consumer sales and on-premise sales), Ste. Michelle recorded pre-tax charges of $411 million consisting primarily of (i) the write-off of inventory and (ii) estimated losses on future non-cancelable grape purchase commitments. Altria and Ste. Michelle also undertook a review of the wine business resulting in a strategic reset. Ste. Michelle continues to monitor the impact of the COVID-19 pandemic associated risks to its business, results of operations, cash flows and financial position.
ABI has also been impacted by the COVID-19 pandemic, including (i) a 50% reduction to its final 2019 dividend paid in the second quarter of 2020 and a decision to forgo its interim 2020 dividend that would have been paid in the fourth quarter of 2020; (ii) the withdrawal of its guidance for 2020 due to the uncertainty, volatility and impact of the COVID-19 pandemic; and (iii) a goodwill impairment charge related to its Africa businesses in 2020. In addition, the extreme market disruption and volatility associated with the COVID-19 pandemic resulted in a steep decline in ABI’s stock price in the first half of 2020. Although there was a gradual recovery in ABI’s stock price in the second half of 2020, the fair value of Altria’s investment in ABI is below the carrying value. While Altria believes that this decline is temporary, it will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic on ABI’s business and market valuation.
Altria considered the impact of the COVID-19 pandemic on the business of JUUL, including its sales, distribution, operations, supply chain and liquidity, in conducting its periodic impairment assessment and quantitative valuations. While the impact of the COVID-19 pandemic was considered in our quantitative valuations during the year ended December 31, 2017,2020, Altria Group, Inc.’s wholly-owned subsidiaries included PM USA, which is engageddoes not believe the COVID-19 pandemic was a primary driver of the non-cash pre-tax impairment charge of $2.6 billion recorded during the three months ended September 30, 2020 or the $100 million increase in fair value during the manufacturethree months ended December 31, 2020. Altria will continue to monitor the impact of the COVID-19 pandemic on JUUL’s business in our quarterly valuations of JUUL.
Altria has considered the impact of the COVID-19 pandemic on the business of Cronos, including its sales, distribution, operations, supply chain and saleliquidity. Cronos has been and continues to be impacted by the COVID-19 pandemic, due in part to government action requiring closures or limited occupancy of cigarettesretail stores in the United States; Middleton, which is engaged inStates. During the manufacturesecond quarter of 2020, Cronos recorded an impairment charge on goodwill 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 financeintangible 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.
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third quarter of 2020 due to its one-quarter lag andin reporting Cronos’s results). Altria will continue to monitor its investment in Cronos, including the timingimpact of the completionCOVID-19 pandemic on Cronos’s business and market valuation.
Consolidated Results of the Transaction, noOperations
The changes in net earnings from(losses) and diluted EPS attributable to 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”).
| (in millions, except per share data) | Net Earnings (Losses) | Diluted EPS | |||||||||
| For the year ended December 31, 2019 | $ | (1,293) | $ | (0.70) | |||||||
| 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 (1) | (303) | (0.16) | |||||||||
| 2019 Cronos-related special items | 640 | 0.34 | |||||||||
| 2019 Tax items | (99) | (0.05) | |||||||||
| Subtotal 2019 special items | 9,165 | 4.91 | |||||||||
| 2020 NPM Adjustment Items | (3) | — | |||||||||
| 2020 Asset impairment, exit, implementation and acquisition-related costs | (342) | (0.18) | |||||||||
| 2020 Tobacco and health litigation items | (62) | (0.03) | |||||||||
| 2020 Impairment of JUUL equity securities | (2,600) | (1.40) | |||||||||
| 2020 JUUL changes in fair value | 100 | 0.05 | |||||||||
| 2020 ABI-related special items | (603) | (0.32) | |||||||||
| 2020 Cronos-related special items | (53) | (0.03) | |||||||||
| 2020 COVID-19 special items | (37) | (0.02) | |||||||||
| 2020 Tax items | (50) | (0.03) | |||||||||
| Subtotal 2020 special items | (3,650) | (1.96) | |||||||||
| Fewer shares outstanding | — | 0.02 | |||||||||
| Change in tax rate | (108) | (0.06) | |||||||||
| Operations | 353 | 0.19 | |||||||||
| For the year ended December 31, 2020 | $ | 4,467 | $ | 2.40 | |||||||
| 2020 Reported Net Earnings (Losses) | $ | 4,467 | $ | 2.40 | |||||||
| 2019 Reported Net Earnings (Losses) | $ | (1,293) | $ | (0.70) | |||||||
| % Change | 100%+ | 100%+ | |||||||||
| 2020 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 8,117 | $ | 4.36 | |||||||
2019 Adjusted Net Earnings and Adjusted Diluted EPS (1) | $ | 7,872 | $ | 4.21 | |||||||
| % Change | 3.1 | % | 3.6 | % | |||||||
| (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 | |||
For a discussion of eventsspecial items and other business drivers affecting the comparability of statementstatements of earnings (losses) amounts inand reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.
▪Fewer Shares Outstanding: Fewer shares outstanding during 2020 compared with 2019 were due primarily to the timing of shares repurchased by Altria in 2019 under its share repurchase program.
▪Change in Tax Rate: The change in tax rate (which excludes the following Discussionimpact of tax items shown above) was driven primarily by lower dividends from ABI.
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▪Operations: The increase of $353 million in operations (which excludes the impact of special items shown above) was due primarily to the following:
▪higher income from the smokeable products and Analysis.
partially offset by:
▪higher losses in the all other category (primarily driven by reductions in the estimated residual values of certain assets at PMCC in 2020); ▪higher amortization expense; ▪higher interest and other debt expense, net; and ▪lower income from the wine segment. |
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.below.
Altria’s 2021 full-year adjusted diluted EPS guidance range includes planned investments in support of its Vision, such as (i) marketplace investments to expand the availability and awareness of Altria’s non-combustible products, (ii) costs associated with building an industry-leading consumer engagement platform that enhances data collection and insights in support of adult tobacco consumer conversion to non-combustible products and (iii) increased non-combustible product research and development expense. Altria expects 2021 adjusted diluted EPS growth to come in the last three quarters of the year, primarily due to prior year comparisons, including one fewer shipping day for the smokeable products segment in the first quarter.
This forecasted growth rate excludes the income and expense itemsestimated per share charges in the tablefirst quarter of 2021 of $0.27 for loss on early extinguishment of debt for the February 2021 Tender Offers and Redemption. For further discussion, see Financial Review - Debt and Liquidity - Debt below.
Altria Group, Inc.’s 2018 guidance reflects investments in focus areas for long-term growth, including innovative product development and launches, regulatory science, brand equity, retail fixtures and future retail concepts. Altria Group, Inc. expects its 20182021 full-year adjusted effective tax rate will be in a range of approximately 23%24.5% to 24%25.5%.
| Reconciliation of 2020 Reported Diluted EPS to 2020 Adjusted Diluted EPS | |||||
| 2020 Reported diluted EPS | $ | 2.40 | |||
| Asset impairment, exit, implementation and acquisition-related costs | 0.18 | ||||
| Tobacco and health litigation items | 0.03 | ||||
| Impairment of JUUL equity securities | 1.40 | ||||
| JUUL changes in fair value | (0.05) | ||||
| ABI-related special items | 0.32 | ||||
| Cronos-related special items | 0.03 | ||||
| COVID-19 special items | 0.02 | ||||
| Tax items | 0.03 | ||||
| 2020 Adjusted diluted EPS | $ | 4.36 | |||
For a discussion of certain income and expense items excluded from the forecasted results above, see the Consolidated Operating Results section below.
Altria’s full-year adjusted diluted EPS guidance and full-year forecast for its adjusted effective tax rate exclude the impact of certain income and expense items, including those items noted in the Non-GAAP Financial Measures section below, that management believes are not part of underlying operations. Altria’s management cannot estimate on a forward-looking basis the impact of these items on its reported diluted EPS or its reported effective tax rate because these items, which could be significant, may be unusual or infrequent, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding GAAP measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast.
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Non-GAAP Financial Measures
While Altria reports its financial results in accordance with GAAP, its management also reviews certain financial results, including OCI, OCI margins, net earnings (losses) attributable to Altria and diluted EPS, on an adjusted basis, which excludes 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, COVID-19 special items, equity investment-related special items (including any changes in fair value of 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).
| 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 | ) | |||
Altria’s management believes that adjusted financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to the CODMAltria’s chief operating decision maker (“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 consistentrequired by, or calculated in accordance 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-ownedwholly owned and majority-owned subsidiaries. Investments in equity securities in which Altria Group, Inc. has the ability to exercise significant influence over the operating and financial policies of the investee are accounted for either under the equity method of accounting.accounting or the fair value option. Investments in equity securities that 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.
▪Revenue Recognition: Altria Group, Inc.’sAltria’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 (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
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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.
Goodwill by reporting unit and indefinite-lived intangible assets at December 31, 20172020 were as follows:
| (in millions) | Goodwill | Indefinite-Lived Intangible Assets | |||||||||
| Cigarettes | $ | 22 | $ | 2 | |||||||
| MST and snus products | 5,023 | 8,801 | |||||||||
| Cigars | 77 | 2,640 | |||||||||
| Wine | — | 233 | |||||||||
| Oral nicotine pouches | 55 | — | |||||||||
| Total | $ | 5,177 | $ | 11,676 | |||||||
During 2020, Altria completed its annual impairment test of goodwill and indefinite-lived intangible assets performed as of October 1, 2020 and the results of this testing were as follows:
▪no impairment charges were recorded;
▪the estimated fair values of the cigarettes, cigars and oral nicotine pouches reporting units and the indefinite-lived intangible assets within the cigars reporting unit substantially exceeded their carrying values;
▪the estimated fair values of the MST and snus products reporting unit and the indefinite-lived intangible assets within the reporting unit substantially exceeded their carrying values, with the exception of the Skoal trademark. Skoal continues to be impacted by increased competition as well as adult tobacco consumer movement among tobacco products, including oral nicotine pouch products. At December 31, 2020, the estimated fair value of the Skoal trademark exceeded its carrying value of $3.9 billion by approximately 28%, which is an increase from approximately 18% at December 31, 2019. This increase is due primarily to a decrease in the discount rate resulting from changes in market inputs. Altria believes an increase in the future
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| (in millions) | Goodwill | Indefinite-Lived Intangible Assets | |||||
| Cigarettes | $ | 22 | $ | 172 | |||
| Smokeless products | 5,023 | 8,801 | |||||
| Cigars | 77 | 2,640 | |||||
| Wine | 74 | 287 | |||||
| E-vapor | 111 | 31 | |||||
| Other | — | 194 | |||||
| Total | $ | 5,307 | $ | 12,125 | |||
▪the estimated fair values of the indefinite-lived intangible assets within the wine reporting unit substantially exceeded their carrying values, with the exception of the Patz & Hall trademark, which at December 31, 2020, exceeded its carrying value of $30 million by approximately 6%.
During 2017, 2016 and 2015, Altria Group, Inc. completed its2019, Altria’s quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in $74 million of impairment charges. During 2018, Altria’s quantitative annual impairment test of goodwill and noindefinite-lived intangible assets resulted in $54 million of impairment charges resulted. At December 31, 2017,charges. For further discussion on goodwill, see Note 4. Goodwill and Other Intangible Assets, net to the estimatedconsolidated financial statements in Item 8 (“Note 4”).
In 2020, Altria elected to perform a qualitative assessment for certain of its reporting units and indefinite-lived intangible assets. This qualitative assessment included the review of certain macroeconomic factors and entity-specific qualitative factors to determine if it was more-likely-than-not that the fair values of allits reporting units were below carrying value. For certain of its other reporting units and the indefinite-lived intangible assets, within those reporting units substantially exceeded their carrying values, except forAltria elected to unconditionally bypass the Columbia Crest trademark within the wine reporting unit. At December 31, 2017, the fair value of the Columbia Crest trademark exceeded its book value of $54 million by approximately 9%. Results for Columbia Crest in 2017 were negatively impacted by increased competitive activity qualitative assessment and continued trade inventory reductions.
In performing the 20172020 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;conditions (such as continued uncertainty from the COVID-19 pandemic); federal, state and local regulatory developments; category growth rates; consumer preferences; success of planned new product expansions; competitive activity; and income and tobacco-relatedexcise taxes. For further discussion of these factors, see Operating Results by Business Segment - Tobacco Space - Business Environmentand Operating Results by Business Segment - Wine Segment - 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 at December 31, 2020 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 Equity Securities: Altria reviews its equity investments accounted for under the equity method of accounting 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.
Following Share Conversion in the fourth quarter of 2020, Altria elected to account for its equity investment in JUUL under the fair value option. Under this option, any cash dividends received and any changes in the fair value of the equity investment in JUUL, which is calculated quarterly using level 3 fair value measurements, are included in income (losses) from equity investments in the consolidated statements of earnings (losses). The fair value of the equity investment in JUUL is included in investments in equity securities on the consolidated balance sheet at December 31, 2020. 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.
Prior to Share Conversion, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares did not have a readily determinable fair value, Altria 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. Altria reviewed its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a
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quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicated that Altria’s investment in JUUL may be impaired, a quantitative assessment was performed. If the quantitative assessment indicated the fair value of the investment is less than its carrying value, the investment was written down to its fair value, and the impairment was recognized in the period identified. The impairment charges Altria recorded related to its Investment in JUUL are included in impairment of JUUL equity securities in the consolidated statements of earnings (losses).
Investment in ABI
At December 31, 2020, Altria’s investment in ABI consisted of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. The fair value of Altria’s equity investment in ABI is based on: (i) unadjusted quoted prices in active markets for ABI’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 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, 2020 and 2019 was $13.8 billion (carrying value of $16.7 billion) and $16.1 billion (carrying value of $18.1 billion), respectively, which was less than its carrying value by approximately 17% and 11%, respectively, at December 31, 2020 and 2019. At February 22, 2021, the fair value of Altria’s investment decreased to approximately $12.8 billion. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value and has not recovered. Altria has evaluated the factors related to the fair value decline, including the recent impact on the fair value of ABI’s shares during the COVID-19 pandemic, which has negatively impacted ABI’s business. Altria has evaluated the duration and magnitude of the fair value decline at December 31, 2020, ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded, both at December 31, 2020 and 2019, that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded. This conclusion was based on the following factors:
▪the fair value of Altria’s equity investment in ABI historically exceeding its carrying value since October 2016, when Altria obtained its ownership interest in ABI, with the exception of certain periods starting in September 2018;
▪a history of significant recovery in stock price during 2019, as well as an increase from March 31, 2020 to February 22, 2021, which Altria believes indicates investor confidence in ABI’s ability to implement its business strategies and deleveraging plans;
▪the continued industry disruption and volatility associated with the COVID-19 pandemic, resulting in stock performance among ABI competitors that Altria does not believe are reflective of actual underlying equity values;
▪ABI’s recent proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative, including the following actions since December 31, 2019: (i) ABI’s 50% reduction to its final 2019 dividend paid in the second quarter of 2020 and its decision to forgo its interim 2020 dividend that would have been paid in the fourth quarter of 2020; (ii) ABI’s completion of the sale of its Australia subsidiary in the second quarter of 2020 for $11 billion in cash proceeds; (iii) ABI’s continuation of its refinancing efforts through issuance and redemption activity, specifically front-end maturities into longer dated maturities; and (iv) ABI’s completion of the sale of a minority stake in its U.S.-based metal container plants in the fourth quarter of 2020 for $3 billion in cash proceeds;
▪ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, new product innovations, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and
▪the strategic plans implemented by ABI in response to the adverse impacts of the COVID-19 pandemic, including its ability to leverage learnings from recovering markets and respond quickly to the evolving environment to better position ABI for a robust recovery. This was evidenced by ABI’s performance in the second half of 2020, which represented improvement over the first half of 2020 and reinforced its confidence in the future potential of the beer category and its business. Additionally, as ABI stated in its year-end 2020 earnings report, it expects financial results in 2021 to improve meaningfully versus 2020. Additionally, ABI states its 2021 outlook reflects among other factors, its current assessment of the scale and magnitude of the COVID-19 pandemic, which is subject to change as it continues to monitor ongoing developments.
Altria will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic and subsequent recovery on ABI’s business and market valuation. If Altria were to conclude that the decline in fair value is other than temporary, Altria would determine and recognize, in the period identified, the impairment of its investment, which could result in a material adverse effect on Altria’s consolidated financial position or earnings.
Investment in JUUL
In 2020, Altria recorded a: (i) non-cash pre-tax impairment charge of $2.6 billion for three months ended September 30, 2020 related to its investment in JUUL and (ii) non-cash pre-tax unrealized gain of $100 million for the fourth quarter and year ended December 31,
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2020 as a result of an increase in the fair value of JUUL. The carrying value of Altria’s investment in JUUL was $1.7 billion at December 31, 2020.
In 2019, Altria recorded total non-cash pre-tax impairment charges of $8.6 billion ($4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019) related to its investment in JUUL resulting in a $4.2 billion carrying value of its investment in JUUL at December 31, 2019.
Altria uses 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 are based on a range of scenarios that consider various potential regulatory and market outcomes.
In determining the fair value of its investment in JUUL in 2020 and 2019, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. The discount rates used in performing the valuations ranged from 13.5% to 16.5% at September 30, 2019, 19.5% to 23.0% at December 31, 2019, and 17.0% to 20.5% at September 30, 2020 and December 31, 2020. The perpetual growth rates used in performing each valuation ranged from (0.5%) to 0.0%. Additionally in determining these significant assumptions, Altria made judgments regarding the: (i) likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, (ii) risk created by the number and types of legal cases pending against JUUL, and (iii) expectations for the future state of the e-vapor category including competitive dynamics.
Although Altria’s discounted cash flow analyses were based on assumptions that Altria’s management considered reasonable and were based on the best available information at the time that the analyses were developed, there is significant judgment used in determining future cash flows. If the following factors, in isolation, significantly deviate from current expectations, Altria believes that they have the potential to materially impact Altria’s significant assumptions of sales volume, operating margins, discount rate, and perpetual growth rate, thus potentially materially decreasing Altria’s valuation of its investment in JUUL:
▪adverse developments related to litigation;
▪a successful challenge by the FTC in its administrative complaint against Altria and JUUL;
▪a substantial increase in state and federal e-vapor excise taxes;
▪adverse publicity due to underage use of e-vapor products and other factors;
▪unanticipated adverse impacts on JUUL’s relationships with employees, customers, suppliers and other third parties;
▪unfavorable financial and market performance, including substantial changes in competitive dynamics;
▪disruption in JUUL’s current and future plans or operations in domestic and international markets; and
▪unfavorable regulatory and legislative developments at the international, federal, state and local levels such as the potential removal of certain e-vapor products from the market as a result of FDA enforcement action or the potential denial of new tobacco product applications for e-vapor products.
If the following factors, in isolation, significantly deviate from current expectations, Altria believes that they have the potential to materially impact Altria’s significant assumptions of sales volume, operating margins, discount rate, and perpetual growth rate, thus potentially materially increasing Altria’s valuation of its investment in JUUL:
▪favorable developments related to litigation;
▪favorable financial and market performance, including substantial changes in competitive dynamics;
▪improvement of public perception around JUUL and the e-vapor category; and
▪favorable regulatory and legislative developments at the international, federal, state and local levels such as FDA authorization of future tobacco product applications for JUUL flavored e-vapor products, which are currently not permitted in the market without authorization.
While Altria’s management believes that the recorded value of its investment in JUUL at December 31, 2020 represents its best estimate of the fair value of the investment, 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. Additionally, the value of Altria’s investment in JUUL could be significantly impacted by changes in the discount rate, which could be caused by numerous factors, including changes in market inputs, as well as risks specific to JUUL and its litigation environment.
Investment in Cronos
The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos
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at December 31, 2020 and 2019 was $1.1 billion (carrying value of $1.0 billion) and $1.2 billion (carrying value of $1.0 billion), respectively, which exceeded its carrying value by approximately 8% and 20% at December 31, 2020 and 2019, respectively.
For further discussion of Altria’s investments in ABI, JUUL and Cronos, see Note 6.
▪Marketing Costs: Altria Group, Inc.’sAltria’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 18 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 billion, $4.9$4.5 billion and $4.8$4.5 billion of charges to cost of sales for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, 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 18 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.
For additional information see Note 16 for a sensitivity discussion16. Benefit Plans to the consolidated financial statements in Item 8 (“Note 16”).
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▪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 whendetermines the realizability of deferred tax assets based on the weight of available evidence, that it is more-likely-than-not that some portion or all of athe deferred tax asset will not be realized. In reaching this determination, Altria considers 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.
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, 20162020, 2019 and 20152018 as a result of various tax events, including the impact of the Tax Reform Act (as defined below).
For additional information on income taxes, see Note 14.Income Taxes to the consolidated financial statements in Item 8 (“Note 14”).
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) | 2020 | 2019 | 2018 | ||||||||||||||
| Net Revenues: | |||||||||||||||||
| Smokeable products | $ | 23,089 | $ | 21,996 | $ | 22,297 | |||||||||||
| Oral tobacco products | 2,533 | 2,367 | 2,262 | ||||||||||||||
| Wine | 614 | 689 | 691 | ||||||||||||||
| All other | (83) | 58 | 114 | ||||||||||||||
| Net revenues | $ | 26,153 | $ | 25,110 | $ | 25,364 | |||||||||||
| Excise Taxes on Products: | |||||||||||||||||
| Smokeable products | $ | 5,162 | $ | 5,166 | $ | 5,585 | |||||||||||
| Oral tobacco products | 130 | 127 | 131 | ||||||||||||||
| Wine | 19 | 21 | 21 | ||||||||||||||
| All other | 1 | — | — | ||||||||||||||
| Excise taxes on products | $ | 5,312 | $ | 5,314 | $ | 5,737 | |||||||||||
| Operating Income: | |||||||||||||||||
| Operating companies income (loss): | |||||||||||||||||
| Smokeable products | $ | 9,985 | $ | 9,009 | $ | 8,408 | |||||||||||
| Oral tobacco products | 1,718 | 1,580 | 1,431 | ||||||||||||||
| Wine | (360) | (3) | 50 | ||||||||||||||
| All other | (172) | (16) | (421) | ||||||||||||||
| Amortization of intangibles | (72) | (44) | (38) | ||||||||||||||
| General corporate expenses | (227) | (199) | (315) | ||||||||||||||
| Corporate asset impairment and exit costs | 1 | (1) | — | ||||||||||||||
| Operating income | $ | 10,873 | $ | 10,326 | $ | 9,115 | |||||||||||
As discussed further in Note 15, the CODM reviews operating companies incomeOCI to evaluate the performance of, and allocate resources to, the segments. Operating companies incomeOCI 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.
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The following eventstable provides a reconciliation of adjusted net earnings (losses) attributable to Altria and adjusted diluted EPS attributable to Altria for the years ended December 31:
| (in millions of dollars, except per share data) | Earnings (Losses) before Income Taxes | Provision for Income Taxes | Net Earnings (Losses) | Net Earnings (Losses) Attributable to Altria | Diluted EPS | |||||||||||||||
| 2020 Reported | $ | 6,890 | $ | 2,436 | $ | 4,454 | $ | 4,467 | $ | 2.40 | ||||||||||
| NPM Adjustment Items | 4 | 1 | 3 | 3 | — | |||||||||||||||
| Asset impairment, exit, implementation and acquisition-related costs | 431 | 89 | 342 | 342 | 0.18 | |||||||||||||||
Tobacco and health litigation items | 83 | 21 | 62 | 62 | 0.03 | |||||||||||||||
| Impairment of JUUL equity securities | 2,600 | — | 2,600 | 2,600 | 1.40 | |||||||||||||||
| JUUL changes in fair value | (100) | — | (100) | (100) | (0.05) | |||||||||||||||
| ABI-related special items | 763 | 160 | 603 | 603 | 0.32 | |||||||||||||||
| Cronos-related special items | 51 | (2) | 53 | 53 | 0.03 | |||||||||||||||
| COVID-19 special items | 50 | 13 | 37 | 37 | 0.02 | |||||||||||||||
| Tax items | — | (50) | 50 | 50 | 0.03 | |||||||||||||||
| 2020 Adjusted for Special Items | $ | 10,772 | $ | 2,668 | $ | 8,104 | $ | 8,117 | $ | 4.36 | ||||||||||
| 2019 Reported | $ | 766 | $ | 2,064 | $ | (1,298) | $ | (1,293) | $ | (0.70) | ||||||||||
| Asset impairment, exit, implementation and acquisition-related costs | 331 | 62 | 269 | 269 | 0.15 | |||||||||||||||
| Tobacco and health litigation items | 77 | 19 | 58 | 58 | 0.03 | |||||||||||||||
| Impairment of JUUL equity securities | 8,600 | — | 8,600 | 8,600 | 4.60 | |||||||||||||||
ABI-related special items (1) | (383) | (80) | (303) | (303) | (0.16) | |||||||||||||||
| Cronos-related special items | 928 | 288 | 640 | 640 | 0.34 | |||||||||||||||
| Tax items | — | 99 | (99) | (99) | (0.05) | |||||||||||||||
| 2019 Adjusted for Special Items | $ | 10,319 | $ | 2,452 | $ | 7,867 | $ | 7,872 | $ | 4.21 | ||||||||||
| 2018 Reported | $ | 9,341 | $ | 2,374 | $ | 6,967 | $ | 6,963 | $ | 3.68 | ||||||||||
| NPM Adjustment Items | (145) | (36) | (109) | (109) | (0.06) | |||||||||||||||
| Asset impairment, exit, implementation and acquisition-related costs | 538 | 106 | 432 | 432 | 0.23 | |||||||||||||||
| Tobacco and health litigation items | 131 | 33 | 98 | 98 | 0.05 | |||||||||||||||
ABI-related special items (1) | (16) | (3) | (13) | (13) | — | |||||||||||||||
| Loss on ABI/SABMiller business combination | 33 | 7 | 26 | 26 | 0.01 | |||||||||||||||
| Tax items | — | (197) | 197 | 197 | 0.11 | |||||||||||||||
| 2018 Adjusted for Special Items | $ | 9,882 | $ | 2,284 | $ | 7,598 | $ | 7,594 | $ | 4.02 | ||||||||||
(1)Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that occurred during 2017, 2016were not previously identified as special items and 2015that are now excluded from Altria’s adjusted financial measures.
The following special items affected the comparability of statementstatements of earnings (losses) amounts.
▪Gain on AB InBev/SABMiller Business Combination: For the year ended December 31, 2017, Altria Group, Inc. recorded pre-tax gains of $445 million related to the planned completion of the remaining AB InBev divestitures of certain SABMiller assets and businesses in connection with Legacy AB InBev obtaining necessary regulatory clearances for the 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.
| (in millions) | 2017 | 2016 | 2015 | ||||||||
| Smokeable products segment | $ | (5 | ) | $ | 12 | $ | (97 | ) | |||
| Interest and other debt expense, net | 9 | 6 | 13 | ||||||||
| Total | $ | 4 | $ | 18 | $ | (84 | ) | ||||
▪Tobacco and Health Litigation Items: For the years ended December 31, 2017, 2016 and 2015, pre-tax charges related to certain tobacco and health litigations items were recorded in Altria Group, Inc.’s consolidated statements 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 | |||||
| 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 on asset impairment, exit and implementation costs, including a breakdown of these costs by segment, see Note 4.5.
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For the years ended December 31, 2020 and 2019, Altria also recorded pre-tax acquisition-related costs of $24 million and $115 million, respectively. The 2019 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 announced a cost reduction program (which included workforce and third-party spending reductions across the businesses) that delivered approximately $600 million in annual cost savings in 2020 and 2019. The program was completed in 2019.
In October 2016, and 2015, Altria Group, Inc. completed debt tender offers to purchase for cashannounced the consolidation of certain of its senior unsecured notesoperating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. The consolidation was completed in aggregate principal amountsthe first quarter of $0.9 billion2018 and $0.8 billion, respectively.delivered Altria’s goal of approximately $50 million in annualized cost savings as of December 31, 2018.
▪Impairment of JUUL Equity Securities: For the years ended December 31, 2020 and 2019, Altria recorded non-cash pre-tax losses on early extinguishmentimpairment charges of debt were$2,600 million and $8,600 million, respectively, reported as impairment of JUUL equity securities in its consolidated statements of earnings (losses). A full tax valuation allowance was 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 | ||||
in 2020 and 2019 attributable to the tax benefit associated with the impairment charges. For further discussion, see Note 9. Long-Term Debt6 and Note 14.
▪JUUL Changes in Fair Value: For the year ended December 31, 2020, Altria recorded a non-cash pre-tax unrealized gain of $100 million reported as (income) losses from equity investments in its consolidated statement of earnings (losses) as a result of an increase in fair value of Altria’s investment in JUUL. A corresponding adjustment was made to the JUUL tax valuation allowance. For further discussion, see Note 6 and Note 14.
▪ABI-Related Special Items: Altria’s losses from its equity investment in ABI for the year ended December 31, 2020 included net pre-tax charges of $763 million, consisting primarily of Altria’s share of ABI’s (i) mark-to-market losses on certain ABI financial instruments associated with its share commitments, (ii) completion of the sale of its Australia subsidiary and (iii) goodwill impairment charge associated with its Africa businesses.
Altria’s earnings from its equity investment in ABI for the year ended December 31, 2019 included net pre-tax income of $383 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 and Altria’s share of ABI’s mark-to-market gains on certain ABI financial instruments associated with its share commitments.
Altria’s earnings from its equity investment in ABI for the year ended December 31, 2018 included net pre-tax income of $16 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 certain ABI financial instruments associated with its share commitments.
These amounts include Altria’s share of amounts recorded by ABI, and may also include additional adjustments related to (i) conversion from international financial reporting standards to GAAP and (ii) adjustments to Altria’s investment required under the equity method of accounting.
▪Cronos-Related Special Items: For the years ended December 31, 2020 and 2019, Altria recorded net pre-tax losses of $51 million and $928 million, respectively, consisting of the following:
| (in millions) | 2020 | 2019 | ||||||
Loss on Cronos-related financial instruments (1) | $ | 140 | $ | 1,442 | ||||
(Income) losses from equity investments (2) | (89) | (514) | ||||||
| Total Cronos-related special items - (income) expense | $ | 51 | $ | 928 | ||||
(1) The 2020 amount and substantially all of the 2019 amount are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction.
(2) Amounts primarily include Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.
For further discussion, see Note 6 and Note 7. Financial Instruments to the consolidated financial statements in Item 8 (“Note 9”).8.
▪AB InBev/SABMillerCOVID-19 Special Items: For the year ended December 31, 2020, Altria Group, Inc.’s earnings from its equity investment in AB InBev for 2017 includedrecorded net pre-taxcharges totaling $50 million directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic. These net pre-tax charges included premium pay, personal protective equipment and health screenings, partially offset by certain employment tax credits. The COVID-19 special items do not include the charges associated with the wine business strategic reset, which are included in asset, impairment, exit, implementation and acquisition-related costs discussed above. These implementation costs were due to increased inventory levels, which were further negatively impacted by government restrictions and economic uncertainty surrounding the COVID-19 pandemic.
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▪Tax Items: For the year ended December 31, 2020, Altria recorded net tax expense of Altria Group, Inc.’s share of AB InBev’s Brazilian tax item and Altria Group, Inc.’s share of AB InBev’s mark-to-market losses on AB InBev’s derivative financial instruments used to hedge certain share commitments. Altria Group, Inc.’s earnings from its equity investment in SABMiller for 2016 included net pre-tax income of $89$50 million, due primarily to a pre-tax non-cash gainnet tax expense of $309$27 million reflecting Altria Group, Inc.’s share of SABMiller’s increase to shareholders’ equity,for adjustments resulting from the completion of the SABMiller, The Coca-Cola Companyamended returns and Gutsche Family Investments transaction, combining bottling operations in Africa, partially offset by Altria Group, Inc.’s share of SABMiller’s costsaudit adjustments related to the Transactionprior years, and asset impairment charges. Altria Group, Inc.’s earnings from its equitytax expense of $23 million for a tax basis adjustment to Altria’s investment in SABMiller for 2015 included net pre-tax charges of $126 million, consisting primarily ofABI.
For the year ended December 31, 2019, Altria Group, Inc.’s share of SABMiller’s asset impairment charges.
For the year ended December 31, 2018, Altria recorded net tax expense of $197 million, which included $188 million related to the Tax Reform Act recorded in the
For further discussion, see Note 14.
Net revenues, which include excise taxes billed to customers, increased $310$1,043 million (1.2%(4.2%), due primarily to higher net revenues in the smokeless products, smokeable products and oral tobacco products segments, partially offset by lower net revenues in the all other category (primarily driven by reductions in the estimated residual value of certain assets at PMCC in 2020) and the wine segments.segment.
Cost of sales was essentially unchanged asincreased $733 million (10.3%), due primarily to the inventory-related charges in the wine segment in 2020 (as discussed above), higher per unit settlement charges and NPM Adjustment ItemsCOVID-19 special items in 2015 were offset by lower shipment volume and lower pension and benefit costs in the smokeable products segment.
Marketing, administration and research costs decreased $58$72 million (2.1%(3.2%), due primarily to lower costsspending in the smokeable products segment, (which included lower tobacco and health litigation items), partially offset by higher costsamortization expense and higher spending in the smokeless products segment.all other category.
Operating income increased $401$547 million (4.8%(5.3%), due primarily to higher operating results from the smokeable products and smokelessoral tobacco products segments, (which included asset impairment, exit and implementation costs in connection with the facilities consolidation and productivity initiative in 2016),partially offset by 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.wine segment and the all other category (primarily driven by reductions in the estimated residual value of certain assets at PMCC in 2020) and higher amortization expense.
Interest and other debt expense, net, decreased $70$71 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.
(Income) losses from equity investments decreased $1,836 million (100.0%+), which were negatively impacted by ABI and Cronos special items and the impact of the COVID-19 pandemic on ABI’s ongoing operations, partially offset by a non-cash unrealized gain resulting from an increase in the estimated fair value of Altria’s investment in JUUL in the fourth quarter of 2020.
Altria’s income tax rate decreased 234.1 percentage points to 35.4%, due primarily to changes in valuation allowances attributable to the tax benefits associated with the impairments of JUUL equity securities in 2020 and 2019, and the increase in the estimated fair value of JUUL in the fourth quarter of 2020. For further discussion, see Note 14.
Reported net earnings (losses) attributable to Altria of $4,467 million increased $5,760 million (100.0%+), due primarily to the 2019 impairment of JUUL equity securities, lower loss on the Transaction,Cronos-related financial instruments, higher operating income, and lower interestthe write-off of debt issuance costs in 2019 associated with the JUUL and other debt expense,Cronos transactions, partially offset by athe 2020 impairment of JUUL equity securities, losses from Altria’s equity investments and higher loss on early extinguishment of debt. Dilutedincome taxes. Reported diluted and basic EPS attributable to Altria Group, Inc. of $7.28, each$2.40, increased by
Adjusted net earnings attributable to Altria of $8,117 million increased $245 million (3.1%), due primarily to higher adjusted OCI in the smokeable products and oral tobacco products segments, partially offset by lower adjusted earnings from Altria’s equity investments, higher adjusted losses in the all other category (primarily driven by reductions in the estimated residual value of certain assets at PMCC in 2020), higher income taxes, higher amortization expense, higher interest and other debt expense, net and lower adjusted OCI in the wine segment. Adjusted diluted EPS attributable to Altria of $4.36 increased by 3.6%, due to higher adjusted net earnings attributable to Altria and fewer shares outstanding.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, decreased $254 million (1.0%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the oral tobacco products segment.
Cost of sales decreased $288 million (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 shipment volume.
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Marketing, administration and research costs decreased $530 million (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 JUUL in 2018 and lower tobacco and health litigation items.
Operating income increased $1,211 million (13.3%), due primarily to higher operating results from the smokeable and oral tobacco 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 implementation 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.
(Income) losses from 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 14.
Reported 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. Reported diluted and basic net losses per share attributable to Altria of $0.70, each decreased by 100.0%+, due to lower net earnings attributable to Altria, partially offset by fewer shares outstanding.
Adjusted net earnings attributable to Altria of $7,872 million increased $278 million (3.7%), due primarily to higher adjusted OCI in the smokeable products and oral tobacco products segments, lower spending as a result of Altria’s decision in 2018 to refocus its innovative products efforts and higher adjusted earnings related to Altria’s equity investment in ABI, partially offset by higher interest and other debt expense, net. Adjusted diluted EPS attributable to Altria of $4.21 increased by 4.7%, due to higher adjusted net earnings attributable to Altria 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, Item 1A and Item 3, include:
▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the FSPTCA, and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;
▪additional restrictions on the advertising and promotion of tobacco products;
▪other actual and proposed tobacco-related legislation and regulation; and
▪governmental investigations;
▪the diminishing prevalence of cigarette smoking;
▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products;
▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower pricedlower-priced tobacco products;
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▪the highly competitive nature of all tobacco categories, including, without limitation, competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation and the proliferation of innovative tobacco products, including e-vapor and oral nicotine pouch products;
▪illicit trade in tobacco products;
▪potential adverse changes in prices, availability and quality of tobacco, other raw materials and components; and
▪the COVID-19 pandemic.
In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences pose challenges for Altria 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. Adult smokers continue to convert from cigarettes to exclusive use of non-combustible tobacco product alternatives. Up until the second half of 2019, the e-vapor category had experienced significant growth, and the number of adults who exclusively used e-vapor products also increased during that time which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes and MST. While growth of oral nicotine pouches has continued (including the introduction of unregulated synthetic nicotine pouches), growth in the e-vapor category has been negatively impacted by the legislative and regulatory activities discussed below. The e-vapor category grew rapidly from 2012 through early 2015 off a small base, but then slowed. The growth trend resumed in 2017. Nu Mark believeshas also become increasingly competitive. Altria and its tobacco subsidiaries believe the categoryinnovative tobacco products categories (in particular, e-vapor) 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.
Domestic cigarette industry volume for 2020 was unchanged versus the prior year, which Altria believes was the result of stay-at-home practices due to the COVID-19 pandemic and higher tobacco discretionary spending. Due to the expected continued market volatility as a result of various factors relating to the COVID-19 pandemic and cross-category movement, Altria is not providing a cigarette industry volume forecast at this time. Altria believes the degree of ongoing cross-category movement will be influenced by several factors, including adult consumer perceptions of the relative risks of non-combustible products compared to cigarettes, FDA determinations on product applications and legislative actions.
Economic conditions also impact adult tobacco consumer purchase behavior. Prior economic downturns have resulted in adult tobacco consumers choosing discount products and other lower-priced tobacco products. Although the current economic downturn resulting from the COVID-19 pandemic has not meaningfully increased the growth of discount and lower priced tobacco products, in part due to stimulus payments, adult tobacco consumers may still increasingly choose these products as economic conditions remain unfavorable. See Executive Summary in Item 7 above for further discussion.
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.
FSPTCA and FDA Regulation
▪The Regulatory Framework:The FSPTCA, expressly establishes certainits implementing regulations and its 2016 deeming regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions:
▪impose restrictions and prohibitions on our tobacco businesses and authorizes or requires further FDA action. Under the FSPTCA, the FDA has broad authority to (1) regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of tobacco products; (2) require disclosures of related information;products (see Final Tobacco Marketing Rule below);
▪establish pre-market review pathways for new and (3) enforce the FSPTCA and related regulations. The FSPTCA went into effect in 2009 for cigarettes, cigarette tobacco and smokelessmodified tobacco products (see Pre-Market Review Pathways for Tobacco Products and in August 2016 for
▪equip the FDA will interpretwith a variety of investigatory and enforcement tools, including the requirements for obtaining a “new tobaccoauthority to inspect product marketing order,” although as noted above the FDA has indicated its intention to issue appropriate regulations to clarify the requirements.
The FSPTCA also bans descriptors 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.
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.
(1)“Smokeless tobacco,” as used in this section of this Form 10-K, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
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2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives, but do not include any component or part that is not made or derived from tobacco.
The Final Tobacco Marketing Rule, as amended, among other things:
▪restricts the use of non-tobacco trade and brand names on menthol, which states “that menthol cigarettes pose a public health risk aboveand smokeless tobacco products;
▪prohibits sampling of all tobacco products except that seensampling of smokeless tobacco products is permitted in qualified adult-only facilities;
▪prohibits the sale or distribution of items such as hats and tee shirts with non-menthol cigarettes.” Atcigarette or smokeless tobacco brands or logos;
▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and
▪requires the samedevelopment by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and gives the FDA the authority to require new warnings for any type of tobacco product (see FDA Regulatory Actions - Graphic Warnings below).
Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products and in August 2016 for all other tobacco products.
▪Rulemaking and Guidance: From time to time, the FDA issues proposed rules or guidance, which may be issued in draft or final form, generally involve public comment and may include scientific review. The FDA also issued an ANPRM requestingmay request 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 FDA’s implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by U.S. states, territories and localities of their laws and regulations as well as of the State Settlement Agreements discussed below (see State Settlement Agreements below). Such enforcement efforts may adversely affect the ability of Altria’s tobacco subsidiaries and investees to market and sell regulated tobacco products in those states, territories and localities.
▪FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation: In July 2017, the FDA announced a possible ban) until“Comprehensive Plan for Tobacco and Nicotine Regulation” (“Comprehensive Plan”) designed to strike a balance between regulation and encouraging the completiondevelopment of a full rulemaking process.
▪took actions to restrict youth access to e-vapor products; ▪reconsidered the processes used by the FDA to review certain reports and new product applications; and ▪revisited the timelines (previously extended by the FDA) to submit applications for tobacco products first regulated by the FDA in 2016. ▪Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement: The FSPTCA permits the sale of tobacco products commercially marketed as of February 15, 2007 and not subsequently modified (“Grandfathered Products”) and new or modified products authorized through the PMTA, Substantial Equivalence (“SE”) or SE Exemption pathways. The FDA pre-market authorization enforcement policy varies based on product type and date of availability in the market; specifically: ▪All tobacco products on the market as of February 15, 2007, and not subsequently modified, are Grandfathered Products and exempt from the pre-market authorization requirement; ▪Cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health; and ▪Tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Grandfathered Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020. 33 Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, also can trigger the FDA’s pre-market review process. Provisional Products:Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are Provisional Products. Altria’s subsidiaries timely submitted SE reports for these Provisional Products. PM USA and USSTC have received SE determinations on certain Provisional Products. Those that were found to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent. In addition, the FDA has communicated that it will not review a certain subset of Provisional Product SE reports and that the products that are the subject of those reports can generally continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products. While Altria’s cigarette and smokeless tobacco subsidiaries believe their current Provisional Products meet the statutory requirements of the FSPTCA, they cannot predict how the FDA will ultimately apply law, regulation and guidance to their various SE reports. Should Altria’s cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any SE reports currently pending with the FDA, they believe they can replace the vast majority of their respective product volumes with other FDA authorized products or with Grandfathered Products. Non-Provisional Products: Cigarette and smokeless tobacco products introduced into the market or modified after March 22, 2011 are “Non-Provisional Products” and must receive a marketing order from the FDA prior to being offered for sale. Marketing orders for Non-Provisional Products may be obtained by filing an SE report, PMTA or using another pre-market pathway established by the FDA. Products Regulated in 2016: Manufacturers of products first regulated by the FDA in 2016, including cigars, oral nicotine pouches and e-vapor products, that were on the market as of August 8, 2016 and not subsequently modified must have filed an SE report or PMTA by the filing deadline of September 9, 2020 in order for their products to remain on the market. At the FDA’s discretion, these products can remain on the market during FDA review for up to one year from the date of the application with additional case-by-case discretion to remain on the market after that time, so long as the report or application was timely filed with the FDA. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing the product. Helix submitted PMTAs for on! oral nicotine pouches on May 15, 2020, which are presently under review by the FDA. If the FDA does not authorize one or more on! PMTAs, the FDA may require Helix to remove the affected products from the market which could have a material adverse effect on Helix’s business. Middleton has received market orders or exemptions that cover over 97% of its cigar product volume and filed SE reports for its remaining cigar product volume by the filing deadline. In December 2013, Altria’s subsidiaries entered into a series of agreements with PMI, including an agreement that grants Altria an exclusive right to commercialize certain of PMI’s heated tobacco products in the United States, subject to FDA authorization of the applicable products. PMI submitted a PMTA and a modified risk tobacco product application with the FDA for its electronically heated tobacco products comprising the IQOS Tobacco Heating System. In April 2019, the FDA authorized the PMTA for the IQOS Tobacco Heating System and in July 2020, the FDA authorized the marketing of this system as a modified risk tobacco product with a reduced exposure claim. The IQOS electronic device heats but does not burn tobacco. In December 2020, the FDA authorized the PMTA for IQOS 3, an updated version of the IQOS Tobacco Heating System. The Modified Risk Tobacco Products authorization (“MRTP”) for the original IQOS electronic device currently does not apply to the IQOS 3device. PMI has disclosed that it plans to seek an MRTP for the IQOS 3 electronic device in the future. Post-Market Surveillance: Manufacturers that receive product authorizations through the PMTA process must submit to the FDA post-market records and reports, as detailed in market orders. The FDA may withdraw a market order based on this information if, among other reasons, it determines that the continued marketing of the product is no longer appropriate for the protection of the public health. Effect of Adverse FDA Determinations: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. Failure of manufacturers to submit applications by the applicable deadline, an unfavorable determination on an application or the withdrawal by the FDA of a prior marketing order could result in the removal of products from the market. These manufacturers would have the option of marketing products that have received FDA pre-market authorization or Grandfathered Products. A “not substantially equivalent” determination, a denial of a PMTA or a marketing order withdrawal by the FDA on one or more products could have a material adverse impact on the business and consolidated results of operations of our tobacco subsidiaries and investees, and the cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. 34 ▪FDA Regulatory Actions ▪Graphic Warnings:In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting the negative health consequences of smoking on cigarette packaging and advertising. The final rule requires that the graphic health warnings (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. As a result of a court order related to the COVID-19 pandemic and an additional court ruling in December 2020 resulting from a lawsuit brought by R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and others against the FDA, the final rule will be effective January 14, 2022. PM USA and other cigarette manufacturers have filed lawsuits challenging the final rule on substantive and procedural grounds. In the preamble to the final rule, the FDA stated that it would not exempt HeatSticks,a heated tobacco productused with the IQOS electronic device, as part of the rulemaking, but would consider the HeatSticks marketing order, and other marketing orders, on a case-by-case basis. ▪Underage Access and Use of Certain Tobacco Products:The FDA announced regulatory actions in September 2018 to address underage access and use of e-vapor products. Altria has engaged with the FDA on this topic and has reaffirmed to the FDA its ongoing and long-standing commitment to preventing underage use. For example, during 2019, Altria advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage 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 further proposing restrictions to address youth e-vapor use. This guidance, which the FDA finalized in January 2020, states that the FDA intends to prioritize enforcement action against: ▪cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and ▪all e-vapor products (in any format or flavor): ▪for which a manufacturer has failed or is failing to take adequate measures to prevent access by those under the age of 21 (referred to in the FDA guidance as “minors”); ▪targeted to minors and the marketing for which is likely to promote use of such products by minors; or ▪offered for sale after the court-ordered filing deadline and for which the manufacturer has either not submitted a PMTA or for which an application was timely filed but an adverse decision on the application was issued by the FDA. E-vapor product manufacturers, however, may continue to file PMTAs for flavored tobacco products. FDA enforcement action could result in tobacco products being removed from the market unless and until these products receive pre-market authorization from the FDA. JUUL ceased its sales of all cartridge-based, flavored e-vapor products (other than tobacco and menthol) in 2019. If FDA enforcement action is taken against currently marketed JUUL e-vapor products, and a significant number of those products are removed from the market or if the FDA does not ultimately allow for the reintroduction of flavors other than tobacco and menthol, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings. The January 2020 guidance effectively permits the continued sale (subject to the exceptions discussed above) of certain flavored e-vapor products, including flavored disposable e-vapor products. If, as a result, these flavored e-vapor products are sold in higher volumes than JUUL’s e-vapor products, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings. ▪Potential Product Standards ▪Nicotine in cigarettes and other combustible tobacco products:In March 2018, the FDA issued an ANPRM seeking comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels. Among other issues, the FDA sought comments on (i) whether smokers would compensate by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) whether the proposed rule would create an illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars. Were the FDA to develop and finalize a product standard for nicotine in combustible products, and if the standard was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries. ▪Flavors in tobacco products:As discussed above under FDA’s Comprehensive 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 35 characterizing flavors in all cigars, including Grandfathered Products and those that have received SE determinations from the FDA - an intention reiterated in the FDA’s January 2020 guidance. In March 2018, the FDA issued an ANPRM seeking comments on the role, if any, that flavors (including menthol) in tobacco products may play in attracting youth and in helping some smokers switch to potentially less harmful forms of nicotine delivery. In the context of litigation, the FDA has stated its intention to issue a response by April 29, 2021 to a 2013 citizen petition requesting FDA prohibit menthol as a characterizing flavor in cigarettes. 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. The FDA also may ban characterizing flavors in all other tobacco products, including oral nicotine pouches. If these regulations become final and are appealed and upheld in the courts, it could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. ▪NNN in Smokeless Tobacco:In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. If the proposed rule, in present form, were to become final and was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and USSTC. ▪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. Compliance with any such regulations could result in increased costs, which may have a material adverse effect on the financial position of Altria, its tobacco subsidiaries and its investees, including adversely affecting the value of Altria’s investment in JUUL. ▪Impact on Our Business; Compliance Costs and User Fees: FDA regulatory actions under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries in various ways. For example, actions by the FDA could: ▪impact the consumer acceptability of tobacco products; ▪delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products; ▪limit adult tobacco consumer choices; ▪impose restrictions on communications with adult tobacco consumers; ▪create a competitive advantage or disadvantage for certain tobacco companies; ▪impose additional manufacturing, labeling or packaging requirements; ▪impose additional restrictions at retail; ▪result in increased illicit trade in tobacco products; and/or ▪otherwise significantly increase the cost of doing business. The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including inflation, market share and industry volume. For a discussion of the impact of the FDA user fee payments on Altria, see Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below. In addition, compliance with the FSPTCA’s regulatory requirements has resulted, and will continue to result, in additional costs for Altria’s tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter or year to date period but could become material, either individually or in the aggregate, to one or more of Altria’s tobacco subsidiaries. ▪Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. Investigations or enforcement actions could result in significant costs or otherwise have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. 36 |
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., including as a result of the COVID-19 pandemic as a way for governments to address potential budget shortfalls. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies.
Federal, state and local cigarette excise taxes have increased substantially over the past 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, 2018,22, 2021, the weighted-average state and certain local cigarette excise taxestax increased from $0.36 to $1.75$1.87 per pack. During
A majority of states currently tax smokeless tobacco productsMST 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 tobaccoMST 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, 2018,22, 2021, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for smokeless tobacco.MST.
An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As of February 22, 2021, 28 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, 10 states and the District of Columbia have enacted legislation to tax oral nicotine pouches. Tax increases could have an adverse impact on the sales of these products.
Tax increases are expected to continue to have an adverse impact on sales of cigarettes and MST products of Altria’s tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments, or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of cigarettes and MST products of Altria’s tobacco subsidiaries.
International Treaty on Tobacco Control
The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of February 23, 2018, 18022, 2021, 181 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
State Settlement Agreements
As discussed in Note 18, during 1997 and 1998, PM USA and other major domestic tobacco productcigarette manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. For a discussion of the impact of the State Settlement Agreements on Altria, Group, Inc., seeFinancial Review - Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below and Note 18. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions areThe State Settlement Agreements also placedplace restrictions on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also placeproducts and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and 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.
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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 innovativecigarettes, smokeless tobacco, cigars, e-vapor products such as e-vapor products)and oral nicotine pouches), such as legislation that (1) prohibits the sale of certaintobacco product categories, such as e-vapor, (2) prohibits the sale of tobacco products with certain characterizing flavors, includingsuch as menthol cigarettes, (2)(3) requires the disclosure of health information separate from or in addition to federally-mandatedfederally mandated health warnings and (3)(4) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales). 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.
Restrictions on e-vapor products also have been instituted or proposed internationally. For example, India and Singapore have instituted bans on e-vapor products.
Altria’s tobacco subsidiaries have challenged and will continue to challenge certain federal, state and local legislation and other governmental action, including through litigation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products: 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 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. In 2019, there were public health advisories concerning vaping-related lung injuries and deaths and, more recently, there have been health concerns raised about potential increased risks associated with COVID-19 among smokers and vapers. Altria 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 legislation and 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, amid the COVID-19 pandemic, state and local governments have required additional health and safety requirements of all businesses, including tobacco manufacturing and other facilities. State and local governments also have mandated the temporary closure of some businesses. It is possible that tobacco manufacturing and other facilities could be subject to these government-mandated temporary closures. Additionally, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards (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
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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.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 (“CID”) 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; (ii) the U.S. Securities and Exchange Commission (“SEC”) commenced an investigation relating to Altria’s acquisition, disclosures and accountingcontrols in connection with the JUUL investment; and (iii) the New York State Office of the Attorney General issued a subpoena to Altria seeking documents relating to Altria’s investment in and provision of services to JUUL. Additionally, JUUL is currently under investigation by various federal and state agencies, including the SEC, the FDA and the FTC, and state attorneys general. Such investigations vary in scope but at least some appear to include JUUL’s marketing practices; particularly as such practices relate to youth, and Altria may be commenced.asked in the context of those investigations to provide information concerning its investment in JUUL or relating to its marketing of Nu Mark LLC e-vapor products.
Private Sector Activity on E-Vapor
A number of retailers, including national chains, have discontinued the sale of e-vapor products. Reasons for the discontinuation include reported illnesses related to e-vapor product use and the uncertain regulatory environment. It is possible that this private sector activity could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on the businesses of Altria, 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.
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. As with other agriculture 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, leafother raw materials or other agricultural productscomponent parts used to manufacture our products could restrict our subsidiaries’ ability to continue marketing existing products or impact adult consumer product acceptability and adversely affectingaffect our subsidiaries’ profitability and businesses.
With respect to tobacco, as with other agricultural commodities, crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Additionally, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand. Economic conditions, including the economic effects of the COVID-19 pandemic, are unpredictable, which, among other economic factors, may result in changes in the patterns of demand for agricultural products and the cost of tobacco production which could impact tobacco leaf prices and tobacco supply. Tobacco production in certain countries also is
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subject to a variety of controls, including government-mandated prices and production control programs. Moreover, certain types of tobacco are only available in limited geographies, including geographies experiencing political instability or government prohibitions on the import or export of tobacco, and loss of their availability could impair our subsidiaries’ ability to continue marketing existing products or impact adult tobacco consumer product acceptability.
The COVID-19 pandemic also may limit access to and increase the cost of raw materials, component parts and personal protective equipment as U.S. and global suppliers temporarily shut down facilities in order to address exposure to the virus or as a result of a government mandate.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Operating Results
Smokeable Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the smokeable products segment:
| Operating Results | |||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| (in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Net revenues | $ | 23,089 | $ | 21,996 | $ | 22,297 | |||||||||||
| Excise taxes | (5,162) | (5,166) | (5,585) | ||||||||||||||
| Revenues net of excise taxes | $ | 17,927 | $ | 16,830 | $ | 16,712 | |||||||||||
| Reported OCI | $ | 9,985 | $ | 9,009 | $ | 8,408 | |||||||||||
| NPM adjustment items | 4 | — | (145) | ||||||||||||||
| Asset impairment, exit and implementation costs | 2 | 92 | 83 | ||||||||||||||
| Tobacco and health litigation items | 79 | 72 | 103 | ||||||||||||||
| COVID-19 special items | 41 | — | — | ||||||||||||||
| Adjusted OCI | $ | 10,111 | $ | 9,173 | $ | 8,449 | |||||||||||
Reported OCI margins (1) | 55.7 | % | 53.5 | % | 50.3 | % | |||||||||||
Adjusted OCI margins (1) | 56.4 | % | 54.5 | % | 50.6 | % | |||||||||||
(1) Reported and smokeless products segments:adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
| For the Years Ended December 31, | |||||||||||||||||||||||
| Net Revenues | Operating Companies Income | ||||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||
| Smokeable products | $ | 22,636 | $ | 22,851 | $ | 22,792 | $ | 8,408 | $ | 7,768 | $ | 7,569 | |||||||||||
| Smokeless products | 2,155 | 2,051 | 1,879 | 1,300 | 1,177 | 1,108 | |||||||||||||||||
| Total smokeable and smokeless products | $ | 24,791 | $ | 24,902 | $ | 24,671 | $ | 9,708 | $ | 8,945 | $ | 8,677 | |||||||||||
Reported OCI increased $976 million (10.8%), due primarily to higher pricing ($1,134 million), which includes higher promotional investments, lower costs ($153 million) and lower asset impairment, exit and implementation costs ($90 million), partially offset by higher per unit settlement charges, COVID-19 special items ($41 million) and lower shipment volume ($35 million).
Adjusted OCI increased $938 million (10.2%), due primarily to higher pricing, which includes higher promotional investments, and lower costs, partially offset by higher per unit settlement charges and lower shipment volume. Shipment
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 18 and Item 3. For the years ended December 31, 2020 2019 and 2018, product liability defense costs for PM USA were $110 million, $151 million and $179 million, respectively. The COVID-19 pandemic resulted in fewer trials in 2020, which is the primary factor for the reduced costs in 2020 compared to prior years. While this trend may continue in 2021, PM USA expects product liability defense costs to return to amounts similar to 2019 and 2018 once regular trial activity resumes.
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2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, decreased $301 million (1.3%), due primarily to lower shipment volume ($1,780 million), partially offset by higher pricing ($1,497 million), which includes lower promotional investments.
Reported OCI increased $601 million (7.1%), due primarily to higher pricing, which includes lower promotional investments, and lower costs ($420 million), partially offset by lower shipment volume ($996 million), 2018 NPM Adjustment Items ($145 million) and higher per unit settlement charges.
Adjusted OCI increased $724 million (8.6%), due primarily to higher pricing, which includes lower promotional investments, and lower costs ($389 million), partially offset by lower shipment volume and retail share were negatively impacted in 2017 by a large cigarette excise tax increase in California.higher per unit settlement charges.
Shipment Volume and Retail Share Results
The following table summarizes the smokeable products segment shipment volume performance:
| Shipment Volume | |||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| (sticks in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Cigarettes: | |||||||||||||||||
| Marlboro | 88,858 | 88,473 | 94,770 | ||||||||||||||
| Other premium | 4,566 | 4,869 | 5,552 | ||||||||||||||
| Discount | 8,001 | 8,457 | 9,469 | ||||||||||||||
| Total cigarettes | 101,425 | 101,799 | 109,791 | ||||||||||||||
| Cigars: | |||||||||||||||||
| Black & Mild | 1,790 | 1,641 | 1,590 | ||||||||||||||
| Other | 10 | 10 | 11 | ||||||||||||||
| Total cigars | 1,800 | 1,651 | 1,601 | ||||||||||||||
| Total smokeable products | 103,225 | 103,450 | 111,392 | ||||||||||||||
| Shipment Volume | ||||||||
| For the Years Ended December 31, | ||||||||
| (sticks in millions) | 2017 | 2016 | 2015 | |||||
| Cigarettes: | ||||||||
| Marlboro | 99,974 | 105,297 | 108,113 | |||||
| Other premium | 5,967 | 6,382 | 6,753 | |||||
| Discount | 10,665 | 11,251 | 11,152 | |||||
| Total cigarettes | 116,606 | 122,930 | 126,018 | |||||
| Cigars: | ||||||||
| Black & Mild | 1,527 | 1,379 | 1,295 | |||||
| Other | 15 | 24 | 30 | |||||
| Total cigars | 1,542 | 1,403 | 1,325 | |||||
| Total smokeable products | 118,148 | 124,333 | 127,343 | |||||
Note: Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament, and Benson & Hedges and 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 | 2020 | 2019 | 2018 | ||||||||||||||||||||
| Cigarettes: | Cigarettes: | ||||||||||||||||||||||||
| Marlboro | 43.3 | % | 43.7 | % | 43.8 | % | Marlboro | 43.0 | % | 43.3 | % | 43.4 | % | ||||||||||||
| Other premium | 2.7 | 2.8 | 2.8 | Other premium | 2.3 | 2.5 | 2.6 | ||||||||||||||||||
| Discount | 4.7 | 4.6 | 4.5 | Discount | 3.9 | 4.0 | 4.3 | ||||||||||||||||||
| Total cigarettes | 50.7 | % | 51.1 | % | 51.1 | % | Total cigarettes | 49.2 | % | 49.8 | % | 50.3 | % | ||||||||||||
Note: Retail share results for cigarettes are based on data from IRI/Management Science AssociateAssociates, 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.
2020 Compared with 2019
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 0.4%, driven primarily by retail share losses and other factors, partially offset by trade inventory movements and calendar differences. When adjusted for trade inventory movements and calendar differences, the smokeable products segment’s domestic cigarettes shipment volume decreased by an estimated 2%. When adjusted for trade inventory movements, calendar differences and other factors, total estimated domestic cigarette industry volumes were
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unchanged versus the prior year.
Shipments of premium cigarettes accounted for 92.1% of the smokeable products segment’s reported domestic cigarettes shipment volume for 2020, versus 91.7% for 2019.
Total cigarettes industry discount category retail share increased 0.3 share points to 24.5% in 2020 versus 2019.
Reported cigar shipment volume increased 9.0%.
2019 Compared with 2018
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 7.3%, driven primarily by the industry’s rate of decline, retail share losses, 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 the smokeable products segment’s 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.
Reported cigar shipment volume increased 3.1%.
Pricing Actions
PM USA and Middleton executed the following pricing and promotional allowance actions during 2017, 20162020, 2019 and 2015:2018:
▪Effective September 24, 2017,November 1, 2020 PM USA increased the list price on all of its cigarette brands by $0.10$0.13 per pack.
▪Effective MayJune 21, 2017,2020, PM USA increased the list price on all of its cigarette brands by $0.11 per pack.
▪Effective February 16, 2020, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.
▪Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.10$0.08 per five-pack.
▪Effective March 19, 2017,October 20, 2019, PM USA increased the list price on Parliamentall of its cigarette brands by $0.12$0.08 per pack.
▪Effective August 4, 2019, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.04 per five-pack.
▪Effective June 16, 2019, PM USA increased the list price on all of its cigarette brands by $0.06 per pack, except for L&M, which had no list price change.
▪Effective February 24, 2019, PM USA increased the list price on Marlboro and L&M by $0.11 per pack and Parliament and Virginia Slims by $0.16 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.08$0.31 per pack.
▪Effective November 13, 2016,September 23, 2018, PM USA reduced its wholesale promotional allowanceincreased the list price on Marlboro and L&M by $0.02$0.10 per pack and L&MParliament and Virginia Slims by $0.08$0.15 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$0.50 per pack, except for L&M, which had no list price change.pack.
▪Effective May 15, 2016,6, 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 $0.07$0.09 per pack.
In addition:
▪Effective November 15, 2015,January 24, 2021 PM USA increased the list price on all of its cigarette brands by $0.07$0.14 per pack.
▪Effective May 17, 2015, PM USAJanuary 10, 2021, Middleton increased thevarious list price onprices across substantially all of its cigarettecigar brands byresulting in a weighted-average increase of approximately $0.07 per pack.five-pack.
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Oral Tobacco Products Segment
Financial Results
The following discussion comparestable summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the smokeableoral tobacco products segment for the year ended December 31, 2017segment:
| Operating Results | |||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| (in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Net revenues | $ | 2,533 | $ | 2,367 | $ | 2,262 | |||||||||||
| Excise taxes | (130) | (127) | (131) | ||||||||||||||
| Revenues net of excise taxes | $ | 2,403 | $ | 2,240 | $ | 2,131 | |||||||||||
| Reported OCI | $ | 1,718 | $ | 1,580 | $ | 1,431 | |||||||||||
| Asset impairment, exit, implementation and acquisition-related costs | (3) | 26 | 23 | ||||||||||||||
| Tobacco and health litigation items | — | — | 10 | ||||||||||||||
| COVID-19 special items | 9 | — | — | ||||||||||||||
| Adjusted OCI | $ | 1,724 | $ | 1,606 | $ | 1,464 | |||||||||||
Reported OCI margins (1) | 71.5 | % | 70.5 | % | 67.2 | % | |||||||||||
Adjusted OCI margins (1) | 71.7 | % | 71.7 | % | 68.7 | % | |||||||||||
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
2020 Compared with the year ended December 31, 2016.2019
Net revenues, which include excise taxes billed to customers, increased $59$166 million (0.3%(7.0%), due primarily to higher pricing ($128 million), which includes higher promotional investments (including investments in on!), and higher shipment volume ($33 million).
Reported OCI increased $138 million (8.7%), due primarily to higher pricing, which includes higher promotional investments, higher shipment volume ($22 million) and 2019 asset impairment, exit, implementation and acquisition-related costs ($26 million), partially offset by lower shipment volume ($577 million)higher costs (including investments in on!).
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, increased $105 million (4.6%), due primarily to higher pricing ($197 million), which includes lower pension and benefit costs) and lower tobacco and health litigation items ($39 million). These factors werepromotional investments, partially offset by lower shipment volume ($29898 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).
Adjusted OCI increased $142 million (9.7%), due primarily to higher pricing, which includes lower promotional investments, and lower costs, partially offset by lower shipment volume.
Oral tobacco products manufactured at its Franklin Park, Illinois facility due to a product tampering incident (the “Recall”). USSTC has concludedsegment’s shipment volumes and estimated industry shipment volumes for the Recallcurrent and trade inventories have been replenished. USSTC estimates that the Recall reduced smokeless products segment operating companies income by approximately $60 million in 2017.
comparable periods include MST, snus and oral nicotine pouch products. The following table summarizes smokelessoral tobacco products segment shipment volume performance:
| Shipment Volume | |||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| (cans and packs in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Copenhagen | 522.4 | 522.2 | 531.7 | ||||||||||||||
| Skoal | 208.5 | 217.8 | 231.1 | ||||||||||||||
Other (includes Red Seal and on!) | 88.7 | 69.7 | 69.8 | ||||||||||||||
| Total oral tobacco products | 819.6 | 809.7 | 832.6 | ||||||||||||||
Shipment Volume For the Years Ended December 31, | ||||||||
| (cans and packs in millions) | 2017 | 2016 | 2015 | |||||
| Copenhagen | 531.6 | 525.1 | 474.7 | |||||
| Skoal | 241.9 | 260.9 | 267.9 | |||||
Copenhagen and Skoal | 773.5 | 786.0 | 742.6 | |||||
| Other | 67.8 | 67.5 | 70.9 | |||||
| Total smokeless products | 841.3 | 853.5 | 813.5 | |||||
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currently not material to the smokelessoral tobacco products segment. New types of smokelessoral tobacco products, as well as new packaging configurations of existing smokelessoral tobacco products,
may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.
In the first quarter of 2020, Altria’s smokeless products segment was renamed the oral tobacco products segment. Prior to 2020, the smokeless products segment retail share performance and category industry volume estimates included MST and snus products, but excluded oral nicotine pouch products. Altria has restated prior period retail share performance data and estimated category industry volume to reflect the inclusion of oral nicotine pouch products. The following table summarizes smokelessoral tobacco products segment retail share performance (excluding international volume):
Retail Share For the Years Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Copenhagen | 33.7 | % | 33.2 | % | 31.0 | % | ||
| Skoal | 16.7 | 18.1 | 19.4 | |||||
Copenhagen and Skoal | 50.4 | 51.3 | 50.4 | |||||
| Other | 3.3 | 3.4 | 3.7 | |||||
| Total smokeless products | 53.7 | % | 54.7 | % | 54.1 | % | ||
| Retail Share | |||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Copenhagen | 31.9 | % | 33.9 | % | 34.4 | % | |||||||||||
| Skoal | 13.8 | 15.0 | 15.9 | ||||||||||||||
Other (includes Red Seal and on!) | 4.1 | 3.6 | 3.4 | ||||||||||||||
| Total oral tobacco products | 49.8 | % | 52.5 | % | 53.7 | % | |||||||||||
Note: Retail share results for smokelessoral tobacco products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. SmokelessOral tobacco products is defined by IRI as moist smokelessMST, snus and spit-free tobacco products.oral nicotine pouches. New types of smokelessoral tobacco products, as well as new packaging configurations of existing smokelessoral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.
2020 Compared with 2019
The oral tobacco products segment’s reported domestic shipment volume increased 1.2%, driven primarily by the industry’s growth rate, calendar differences and other factors, partially offset by retail share losses (primarily due to the growth of oral nicotine pouches) and trade inventory movements. When adjusted for calendar differences, trade inventory movements and other factors, the oral tobacco products segment’s reported domestic shipment volume increased by an estimated 1%.
The oral tobacco products category industry volume increased an estimated 6% over the six months ended December 31, 2020, primarily driven by growth in oral nicotine pouches.
The oral tobacco products segment’s retail share was 49.8% for 2020, and Copenhagen continued to be the leading oral tobacco brand with retail share of 31.9% for 2020. Share losses for both the segment and Copenhagen were due to the growth of oral nicotine pouches.
on! is now available in approximately 78,000 stores as of the end of 2020, which is more than five times the store count from the end of 2019. In stores with distribution, on! achieved a retail share of 2.4 percentage points of the oral tobacco category for full-year 2020. Helix expects unconstrained on! manufacturing capacity for the U.S. market by mid-year 2021.
2019 Compared with 2018
The oral tobacco products segment’s reported domestic shipment volume declined 2.8%, driven primarily by retail share losses, calendar differences, and other factors, partially offset by industry growth and trade inventory movements. When adjusted for trade inventory movements and calendar differences, the oral tobacco products segment’s domestic shipment volume declined 2.5%.
The oral tobacco products category industry volume increased an estimated 3% over the six months ended December 31, 2019, primarily driven by growth in oral nicotine pouches.
Pricing Actions
USSTC executed the following pricing actions during 2017, 20162020, 2019 and 2015:2018:
▪Effective September 26, 2017,October 20, 2020, USSTC increased the list price on Copenhagen its Skoal Blend products by $0.15 per can. USSTC also increased the list price on its Husky and Red Seal brands and its Copenhagen and Skoal popular price products by $0.08 per can. In addition, USSTC increased the list price on the balance of its Copenhagen and Skoal products by $0.07 per can.
▪Effective July 21, 2020, USSTC increased the list price on its Skoal Blend products by $0.15 per can. USSTC also increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.07 per can.
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▪Effective February 18, 2020, USSTC increased the list price on its Skoal X-TRA products by $0.56 per can. USSTC also increased the list price on its Skoal Blend products by $0.16 cents per can and increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.07 per can.
▪Effective October 22, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.09 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.04 per can.
▪Effective July 23, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.08 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.03 per can.
▪Effective April 30, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.17 per can. USSTC also increased the list price on its Husky and Red Seal brands and its Copenhagen and Skoal popular price products by $0.12 per can. In addition, USSTC increased the list price on allthe balance of its brands, except for Copenhagen and Skoal popular price products by $0.07 per can.
▪Effective April 25, 2017,November 20, 2018, 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 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 on all its brands by $0.07 per can.
In addition:
▪Effective December 6, 2016,March 2, 2021, USSTC increased the list price on Copenhagen and its Skoal popular price Blend products by $0.12$0.16 per can. In addition, USSTC also increased the list price on allits Husky, Red Seal and Copenhagen brands and the balance of its brands, except for Copenhagen and Skoal popular price products by $0.07$0.08 per can.
Wine Segment
Business Environment
Ste. Michelle is a producer and supplier of premium varietal and blended table wines and of sparkling wines. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, 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 wine and Villa Maria Estate wines and Champagne Nicolas Feuillatte products 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 shopsMichelle works to meet evolving adult consumer preferences over time by developing, marketing and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.distributing products through innovation.
Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors.
Adult consumer preferences among alcohol categories and within the wine category can shift due to a variety of factors, including changes in taste preferences, demographics or social trends, and changes in leisure, dining and beverage consumption patterns and economic conditions. Evolving adult consumer preferences pose strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increases in inventory levels in recent periods. Ste. Michelle has been experiencing product volume demand uncertainty, which was further negatively impacted in 2020 by the COVID-19 pandemic (including economic uncertainty and government actions that restrict direct-to-consumer sales and on-premise sales).
As a result of wine inventory levels significantly exceeding forecasted demand in 2020, Ste. Michelle recorded pre-tax charges of $411 million in 2020. The charges primarily included (i) a $292 million inventory write off in the first quarter of 2020, (ii) estimated losses of $100 million on future non-cancelable grape purchase commitments recorded in the first quarter of 2020 and (iii) inventory disposal costs and other charges of $19 million in 2020. For further discussion see Asset Impairment, Exit and Implementation Costs in Note 5. Evolving adult consumer preferences, the current economic downturn, an extended disruption in on-premise sales or facility shutdowns, either voluntary or government-mandated, could result in a further slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business, the consolidated results of operations, cash flows or financial position of Ste. Michelle.
As with other agricultural commodities, grape quality and availability can be influenced by plant disease and infestation, as well as by variations in weather patterns, such as fires and smoke damage from fires, including those caused by climate change. For example, in 2019, freezing temperatures reduced grape production and resulted in fewer grapes being available to Ste. Michelle. Additionally, Ste. Michelle experienced some impact from the fires in the western United States during 2020.
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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
The following table summarizes operating results, includes reported and adjusted OCI margins and provides a reconciliation of reported OCI to adjusted OCI for the wine segment:
| For the Years Ended December 31, | |||||||||||
| (in millions) | 2017 | 2016 | 2015 | ||||||||
| Net revenues | $ | 698 | $ | 746 | $ | 692 | |||||
| Operating companies income | $ | 147 | $ | 164 | $ | 152 | |||||
| Operating Results | |||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| (in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Net revenues | $ | 614 | $ | 689 | $ | 691 | |||||||||||
| Excise taxes | (19) | (21) | (21) | ||||||||||||||
| Revenues net of excise taxes | $ | 595 | $ | 668 | $ | 670 | |||||||||||
| Reported OCI (Loss) | $ | (360) | $ | (3) | $ | 50 | |||||||||||
| Asset impairment, exit and implementation costs | 411 | 76 | 54 | ||||||||||||||
| Adjusted OCI | $ | 51 | $ | 73 | $ | 104 | |||||||||||
Reported OCI margins (1) | (60.5) | % | (0.4) | % | 7.5 | % | |||||||||||
Adjusted OCI margins (1) | 8.6 | % | 10.9 | % | 15.5 | % | |||||||||||
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Net revenues, which include excise taxes billed to customers, decreased $48$75 million (6.4%(10.9%), due primarily to lower shipment volume, partially offset by improved premium mix.higher pricing, which includes lower promotional investments.
Adjusted OCI decreased $22 million (30.1%), due primarily to lower shipment volume.volume, partially offset by higher pricing, which includes lower promotional investments.
For 2017,2020, Ste. Michelle’s reported wine shipment volume of 8,5307,300 thousand cases decreased 8.6%12.0%.
Net revenues, which include excise taxes billed to customers, increased $54were essentially unchanged as higher promotional investments were mostly offset by higher shipment volume and favorable premium mix.
Reported OCI (Loss) decreased $53 million (7.8%(100.0%+), due primarily to the 2019 impairment of the wine segment goodwill ($74 million), higher costs and higher promotional investments, partially offset by the 2018 impairment of the Columbia Crest trademark ($54 million).
Adjusted OCI decreased $31 million (29.8%), due primarily to higher shipment volume. Operating companies income increased $12 million (7.9%), due primarily tocosts and higher shipment volume and improved premium mix, partially offset by higher costs.promotional investments.
For 2016,2019, Ste. Michelle’s reported wine shipment volume of 9,3338,294 thousand cases grew 5.3%, driven primarily by growth among its core premium brands.increased 0.6%.
Financial Review
During 2017,2020, net cash provided by operating activities was $4.9$8.4 billion compared with $3.8$7.8 billion during 2016.2019. This increase was due primarily to the following:
▪higher net revenues in the smokeable products and oral tobacco products segments;
▪lower payments as a result of savings from the cost reduction program announced in December 2018; and
▪lower payments for tobacco and health litigation items;
partially offset by:
▪higher income tax payments;
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▪higher long-term debt interest payments; and
▪lower dividends received from ABI in 2020.
During 2016,2019, net cash provided by operating activities was $3.8$7.8 billion compared with $5.8$8.4 billion during 2015.2018. This decrease was due primarily to the following:
▪lower payments of settlement charges in 2018;
▪lower dividends received from ABI; and
▪higher payments of interest on long-term debt in 2019;
partially offset by:
▪lower costs as a result of the cost reduction program announced in December 2018, net of cash paid under this program in 2019; and
▪lower federal income tax payments in 2019.
Altria Group, Inc. had a working capital deficit at December 31, 20172020 and 2016. Altria Group, Inc.’s2019. Altria’s management believes that itAltria has the ability to fund these working capital deficits with cash provided by operating activities and/or short-termand borrowings underthrough its commercial paper programaccess to credit and capital markets, as discussed in the Debt and Liquidity section below.
During 2017,2020, net cash used in investing activities was $0.5$0.1 billion compared with $2.4 billion during 2019. This decrease was due primarily to the investment in Cronos in 2019 and Helix’s 2019 acquisition of the Burger Group.
During 2019, net cash provided byused in investing activities of $3.7was $2.4 billion compared with $13.0 billion during 2016.2018. This changedecrease was due primarily to the following:
▪Altria’s $12.8 billion investment in JUUL in 2018;
partially offset by:
▪Helix’s acquisition of $15 million during 2015. This change was due primarily to the following:Burger Group in 2019.
Capital expenditures for 2017 increased 5.3%2020 decreased 6.1% 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.$231 million. Capital expenditures for 20182021 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.
During 2017,2020, net cash used in financing activities was $7.8$5.4 billion compared with $5.3$4.7 billion during 2016.2019. This increase was due primarily to the following:
▪proceeds of $16.3 billion from the issuance of long-term senior unsecured notes in 2019; and
▪higher dividends paid in 2020;
partially offset by:
▪repayments of $12.8 billion of short-term borrowings in 2019;
▪proceeds of $2.0 billion from the issuance of long-term senior unsecured notes in 2020;
▪repurchases of common stock in 2019; and
▪lower repayments of long-term debt at maturity in 2020.
During 2016,2019, net cash used in financing activities was $5.3$4.7 billion compared with $6.8net cash provided by financing activities of $4.7 billion during 2015.2018. This decreasechange was due primarily to the following:
▪proceeds of $12.8 billion from short-term borrowings in 2018;
▪repayments of $12.8 billion of short-term borrowings in 2019;
▪higher dividends paid during 2019; and
▪higher repayments of long-term debt at maturity in 2019;
partially offset by:
▪proceeds of $16.3 billion from the issuance of long-term senior unsecured notes during 2019; and
▪lower repurchases of common stock during 2019.
Debt and Liquidity
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Credit Ratings - Altria’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under Altria Group, Inc.’s credit agreementAltria’s Credit Agreement is discussed below. Seein Note 8. Short-Term Borrowings and Borrowing Arrangements to the discussionconsolidated financial statements in Item 1A regarding the potential adverse impact of certain events on Altria Group, Inc.’s credit ratings.8 (“Note 8”).
At December 31, 2017,2020, 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 | P-2 | A3 | Stable(1) | ||||||||||||||
| Standard & Poor’s Ratings Services (“Standard & Poor’s”) | Stable | ||||||||||||||||
Fitch Ratings Ltd. (“Fitch”) | F2 | Stable | |||||||||||||||
(1) On May 1, On April 3, 2017, Fitch raised2020, Moody’s changed the long-term debt credit ratingoutlook for Altria Group, Inc. to A-Stable from BBB+.Negative.
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, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated2020, 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. 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
For further details 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.short-term borrowings, see Note 8.
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA asUSA. For further discussed indiscussion, see Supplemental Guarantor Financial Information below and Note 19. Condensed Consolidating Financial Information9. Long-Term Debt to the consolidated financial statements in Item 8 (“Note 19”9”).
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.
Investment in ABI - In 2020, ABI’s proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative included a 50% reduction to its final 2019 dividend paid in the second quarter of 2020 and a decision to forgo its interim 2020 dividend that would have been paid in the fourth quarter of 2020. Altria Group, Inc. believesdoes not expect changes in cash dividends it receives from ABI to have a material impact on its consolidated financial position, liquidity or earnings.
COVID-19 Pandemic - Due to the lendersuncertainty surrounding the COVID-19 pandemic, including its duration, severity and ultimate overall impact on the global and U.S. economies and the businesses of Altria’s operating companies, Altria maintained a higher than normal cash balance during 2020 to preserve its financial flexibility. Altria took the following actions to increase its cash position:
▪issued $2.0 billion of long-term senior unsecured notes in its bank group will be willingMay 2020; and able
▪did not repurchase any shares during 2020 (in April 2020, the Board of Directors rescinded the $500 million remaining in the $1.0 billion share repurchase program).
In January 2021, the Board of Directors authorized a new $2.0 billion share repurchase program, which Altria expects to advance funds in accordance with their legal obligations. See Item
Debt - At December 31, 20172020 and 2016, Altria Group, Inc.’s2019, Altria’s total debt was $13.9$29.5 billion for each period.and $28.0 billion, respectively. The increase in debt was primarily due to Altria’s May 2020 issuance of long-term senior unsecured notes in the aggregate principal amount of $2.0 billion and the changes in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate, partially offset by the repayment in full of $1.0 billion of senior unsecured notes at scheduled maturity in January 2020.
All of Altria Group, Inc.’sAltria’s long-term debt was fixed-rate debtoutstanding at December 31, 20172020 and 2016.2019 was fixed-rate debt. The weighted-average coupon interest rate on total long-term debt was approximately 4.9%4.1% and 4.2% at December 31, 20172020 and 2016. 2019, respectively.
On February 1, 2021, Altria commenced a series of debt-related transactions to reduce the near-term maturity towers and extend the weighted average maturity of its debt. The transactions are described in further detail below.
▪Tender Offers - On February 1, 2021, Altria commenced cash tender offers (the “Tender Offers”) for an aggregate purchase price of up to $3.65 billion in respect of certain of its outstanding long-term senior unsecured notes (the “Tender Notes”). On February 16, 2021, the Tender Offers were amended to increase the aggregate purchase price. The Tender Offers will expire on March 1, 2021, unless extended or earlier terminated. The results of the Tender Offers are discussed below.
On February 18, 2021, Altria paid approximately $4.6 billion to purchase the Tender Notes (aggregate principal amount of approximately $4.0 billion) validly tendered and not validly withdrawn at or prior to February 12, 2021 that it had accepted for purchase in the Tender Offers. Altria does not intend to accept any additional Tender Notes for purchase in the Tender Offers.
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The principal amounts of Tender Notes purchased by Altria were:
| (in millions) | Principal Amount of Tender Notes Purchased | |||||||||||||
| 2.850% Notes due 2022 | $ | 795 | ||||||||||||
| 2.950% Notes due 2023 | 132 | |||||||||||||
| 4.000% Notes due 2024 | 624 | |||||||||||||
| 3.800% Notes due 2024 | 655 | |||||||||||||
| 4.400% Notes due 2026 | 430 | |||||||||||||
| 4.800% Notes due 2029 | 1,094 | |||||||||||||
| 9.950% Notes due 2038 | 65 | |||||||||||||
| 10.200% Notes due 2039 | 18 | |||||||||||||
| 6.200% Notes due 2059 | 229 | |||||||||||||
| $ | 4,042 | |||||||||||||
▪Issuance of New Notes - On February 4, 2021, Altria issued long-term senior unsecured notes in the aggregate principal amount of $5.5 billion (the “Notes”). The net proceeds from the issuance of the Notes were used (i) to fund the purchase of the Tender Notes accepted for purchase in the Tender Offers and the payment of related fees and expenses, (ii) to fund the Redemption described below and (iii) for other general corporate purposes.
Altria’s obligations under the Notes are fully and unconditionally guaranteed by PM USA. The Notes contain the following terms:
▪$1.75 billion at 2.450%, due 2032, interest payable semiannually beginning August 4, 2021;
▪$1.50 billion at 3.400%, due 2041, interest payable semiannually beginning August 4, 2021;
▪$1.25 billion at 3.700%, due 2051, interest payable semiannually beginning August 4, 2021; and
▪$1.00 billion at 4.000%, due 2061, interest payable semiannually beginning August 4, 2021.
▪Redemption of Notes - On February 4, 2021, Altria exercised its optional redemption rights to redeem all of its outstanding 3.490% Notes due 2022 in an aggregate principal amount of $1.0 billion (the “Redemption”). Altria paid the Redemption on February 19, 2021.
Altria will record a one-time, pre-tax charge against reported earnings in the first quarter of 2021 of approximately $645 million, or an estimated $0.27 per share, reflecting the loss on early extinguishment of debt related to the Tender Offers and the Redemption, which includes estimated premiums and fees, and write-off of unamortized debt discounts and debt issue costs.
For further details on long-term debt, see Note 9.
In October 2017,2020, 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, 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, 2017.2020. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated entities. In addition, as discussed below in Supplemental Guarantor Financial Information and in Note 19,9, PM USA has issued guarantees relating to Altria Group, Inc.’sAltria’s obligations under its outstanding debt securities, borrowings under the Credit Agreement and amounts outstanding under itsthe commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’sAltria’s liquidity. For further discussion regarding Altria’s liquidity, see the Debt and Liquidity section above.
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Aggregate Contractual Obligations - The following table summarizes Altria Group, Inc.’sAltria’s contractual obligations at December 31, 2017:2020:
| Payments Due | |||||||||||||||||||||||||||||
| (in millions) | Total | 2021 | 2022 - 2023 | 2024 - 2025 | 2026 and Thereafter | ||||||||||||||||||||||||
Long-term debt (1) | $ | 29,701 | $ | 1,500 | $ | 4,777 | $ | 4,066 | $ | 19,358 | |||||||||||||||||||
Interest on borrowings (2) | 17,774 | 1,191 | 2,200 | 1,932 | 12,451 | ||||||||||||||||||||||||
Operating leases (3) | 182 | 45 | 56 | 20 | 61 | ||||||||||||||||||||||||
Purchase obligations: (4) | |||||||||||||||||||||||||||||
| Inventory and production costs | 3,997 | 1,095 | 1,363 | 650 | 889 | ||||||||||||||||||||||||
| Other | 665 | 538 | 127 | — | — | ||||||||||||||||||||||||
| 4,662 | 1,633 | 1,490 | 650 | 889 | |||||||||||||||||||||||||
Other long-term liabilities (5) | 2,047 | 79 | 150 | 168 | 1,650 | ||||||||||||||||||||||||
| $ | 54,366 | $ | 4,448 | $ | 8,673 | $ | 6,836 | $ | 34,409 | ||||||||||||||||||||
| 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.debt and exclude changes resulting from the debt transactions in February 2021 discussed above.
(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, 2017,2020, 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.earnings (losses) and changes resulting from the debt transactions in February 2021 discussed above.
(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 20182021 through 2022.2025. Contributions beyond 20222025 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, 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, 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, PM USA and Nat Sherman havehas entered into State Settlement Agreements with the states and territories of the United States that call for certain payments. In addition, PM USA, Middleton Nat Sherman and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. 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 billion, $4.9$4.5 billion and $4.8$4.5 billion of charges to cost of sales for each of the years ended December 31, 2017, 20162020, 2019 and 2015,2018, 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 Adjustmentadjustment provision under the MSA, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18.
Based on current agreements, 20172020 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 2018 and each year thereafter.for the next three years. These amounts exclude the potential impact of theany NPM Adjustment provision applicable under the MSA and the revised NPM Adjustment provisions applicable under the resolutions of the NPM Adjustment disputes.Items.
The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.
Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of December 31, 2017,2020, PM USA had posted various forms of securityappeal bonds totaling approximately $61 million, the majority of which have been collateralized with restricted cash deposits. These cash deposits arethat is 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
50
fully disclosed in Note 18, 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. Stock Plans to the consolidated financial statements in Item 8, during 20172020 Altria Group, Inc. granted an aggregate of 0.61.2 million restricted stock units and 0.20.3 million performance stock units to eligible employees.
At December 31, 2017,2020, the number of shares to be issued upon vesting of restricted stock units and performance stock units was not significant.
Dividends paid in 20172020 and 20162019 were approximately $4.8$6.3 billion and $4.5$6.1 billion, respectively, an increase of 6.5%3.6%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria Group, Inc.in 2019 under its share repurchase program.programs.
See Note 2for a discussion of recently issued accounting guidance applicable to, but not yet adopted by, Altria Group, Inc.
Contingencies
See Note 18 and Item 3 for a discussion of contingencies.
Supplemental Guarantor Financial Information
PM USA (the “Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (the “Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor.
Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees:
▪received less than reasonably equivalent value or fair consideration therefor; and
▪either:
▪was insolvent or rendered insolvent by reason of such occurrence;
▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or
▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if:
▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation;
▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
51
▪it could not pay its debts as they become due.
To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent.
The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor;
▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of the Parent’s long-term senior unsecured debt by Standard & Poor’s of A or higher.
The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP.
Summarized Balance Sheets
(in millions of dollars)
| December 31, 2020 | |||||||||||||||||
| Parent | Guarantor | ||||||||||||||||
| Assets | |||||||||||||||||
| Due from Non-Guarantor Subsidiaries | $ | 112 | $ | 199 | |||||||||||||
| Other current assets | 4,896 | 734 | |||||||||||||||
| Total current assets | $ | 5,008 | $ | 933 | |||||||||||||
| Due from Non-Guarantor Subsidiaries | $ | 4,790 | $ | — | |||||||||||||
| Other assets | 16,883 | 1,983 | |||||||||||||||
| Total non-current assets | $ | 21,673 | $ | 1,983 | |||||||||||||
| Liabilities | |||||||||||||||||
| Due to Non-Guarantor Subsidiaries | $ | 1,169 | $ | 656 | |||||||||||||
| Other current liabilities | 3,688 | 4,539 | |||||||||||||||
| Total current liabilities | $ | 4,857 | $ | 5,195 | |||||||||||||
| Total non-current liabilities | $ | 30,958 | $ | 1,268 | |||||||||||||
52
Summarized Statements of Earnings (Losses)
(in millions of dollars)
| For the Year Ended December 31, 2020 | |||||||||||||||||
Parent (1) | Guarantor | ||||||||||||||||
| Net revenues | $ | — | $ | 22,094 | |||||||||||||
| Gross profit | — | 10,693 | |||||||||||||||
| Net earnings (losses) | (1,061) | 6,947 | |||||||||||||||
(1) For the year ended December 31, 2020, net earnings (losses) includes $228 million of intercompany interest income from non-guarantor subsidiaries.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk.
The fair value of Altria Group, Inc.’sAltria’s long-term debt, all of which is fixed-rate debt, is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at December 31, 2017 and 2016 would decreaseThe following table provides the fair value of Altria Group, Inc.’s totalAltria’s long-term debt by approximately $1.2 billion for each period. Aand the change in fair value based on a 1% increase or decrease in market interest rates at December 31, 20172020 and 2016 would increase the fair value of Altria Group, Inc.’s total debt by approximately $1.3 billion and $1.4 billion, respectively.2019:
| (in billions) | December 31, 2020 | December 31, 2019 | ||||||||||||
| Fair value | $ | 34.7 | $ | 30.7 | ||||||||||
| Decrease in fair value from a 1% increase in market interest rates | 2.7 | 2.4 | ||||||||||||
| Increase in fair value from a 1% decrease in market interest rates | 3.1 | 2.7 | ||||||||||||
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, 20172020 for borrowings under the Credit Agreement was 1.125%1.0%. At December 31, 2017,2020 and 2019, 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.
The following table provides (i) fair values of the Fixed-price Preemptive Rights and Cronos warrants and (ii) the change in fair value based on a 10% increase or decrease in the quoted market price of Cronos shares at December 31, 2020 and 2019:
| December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
| (in millions) | Fixed-price Preemptive Rights | Cronos Warrant | ||||||||||||||||||||||||
| Fair values | $ | 24 | $ | 69 | $ | 139 | $ | 234 | ||||||||||||||||||
| Change in fair value based on a 10% increase/decrease in the quoted market price of Cronos shares | 6 | 13 | 28 | 37 | ||||||||||||||||||||||
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Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
| at December 31, | 2020 | 2019 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 4,945 | $ | 2,117 | |||||||
| Receivables | 137 | 152 | |||||||||
| Inventories: | |||||||||||
| Leaf tobacco | 844 | 874 | |||||||||
| Other raw materials | 200 | 192 | |||||||||
| Work in process | 502 | 696 | |||||||||
| Finished product | 420 | 531 | |||||||||
| 1,966 | 2,293 | ||||||||||
| Other current assets | 69 | 262 | |||||||||
| Total current assets | 7,117 | 4,824 | |||||||||
| Property, plant and equipment, at cost: | |||||||||||
| Land and land improvements | 348 | 353 | |||||||||
| Buildings and building equipment | 1,480 | 1,461 | |||||||||
| Machinery and equipment | 3,010 | 2,998 | |||||||||
| Construction in progress | 312 | 262 | |||||||||
| 5,150 | 5,074 | ||||||||||
| Less accumulated depreciation | 3,138 | 3,075 | |||||||||
| 2,012 | 1,999 | ||||||||||
| Goodwill | 5,177 | 5,177 | |||||||||
| Other intangible assets, net | 12,615 | 12,687 | |||||||||
| Investments in equity securities ($1,868 million and $303 million at December 31, 2020 and 2019, respectively, measured at fair value) | 19,529 | 23,581 | |||||||||
| Other assets | 964 | 1,003 | |||||||||
| Total Assets | $ | 47,414 | $ | 49,271 | |||||||
| at December 31, | 2017 | 2016 | |||||
| Assets | |||||||
| Cash and cash equivalents | $ | 1,253 | $ | 4,569 | |||
| Receivables | 142 | 151 | |||||
| Inventories: | |||||||
| Leaf tobacco | 941 | 892 | |||||
| Other raw materials | 170 | 164 | |||||
| Work in process | 560 | 512 | |||||
| Finished product | 554 | 483 | |||||
| 2,225 | 2,051 | ||||||
| Income taxes | 461 | 269 | |||||
| Other current assets | 263 | 220 | |||||
| Total current assets | 4,344 | 7,260 | |||||
| Property, plant and equipment, at cost: | |||||||
| Land and land improvements | 302 | 316 | |||||
| Buildings and building equipment | 1,437 | 1,481 | |||||
| Machinery and equipment | 2,975 | 2,917 | |||||
| Construction in progress | 165 | 121 | |||||
| 4,879 | 4,835 | ||||||
| Less accumulated depreciation | 2,965 | 2,877 | |||||
| 1,914 | 1,958 | ||||||
| Goodwill | 5,307 | 5,285 | |||||
| Other intangible assets, net | 12,400 | 12,036 | |||||
| Investment in AB InBev | 17,952 | 17,852 | |||||
| Finance assets, net | 899 | 1,028 | |||||
| Other assets | 386 | 513 | |||||
| Total Assets | $ | 43,202 | $ | 45,932 | |||
See notes to consolidated financial statements.
54
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
| at December 31, | 2017 | 2016 | at December 31, | 2020 | 2019 | |||||||||||||
| Liabilities | Liabilities | |||||||||||||||||
| Current portion of long-term debt | $ | 864 | $ | — | Current portion of long-term debt | $ | 1,500 | $ | 1,000 | |||||||||
| Accounts payable | 374 | 425 | Accounts payable | 380 | 325 | |||||||||||||
| Accrued liabilities: | Accrued liabilities: | |||||||||||||||||
| Marketing | 695 | 747 | Marketing | 523 | 393 | |||||||||||||
| Employment costs | 188 | 289 | ||||||||||||||||
| Settlement charges | 2,442 | 3,701 | Settlement charges | 3,564 | 3,346 | |||||||||||||
| Other | 971 | 1,025 | Other | 1,494 | 1,545 | |||||||||||||
| Dividends payable | 1,258 | 1,188 | Dividends payable | 1,602 | 1,565 | |||||||||||||
| Total current liabilities | 6,792 | 7,375 | Total current liabilities | 9,063 | 8,174 | |||||||||||||
| Long-term debt | 13,030 | 13,881 | Long-term debt | 27,971 | 27,042 | |||||||||||||
| Deferred income taxes | 5,247 | 8,416 | Deferred income taxes | 4,532 | 5,083 | |||||||||||||
| Accrued pension costs | 445 | 805 | Accrued pension costs | 551 | 473 | |||||||||||||
| Accrued postretirement health care costs | 1,987 | 2,217 | Accrued postretirement health care costs | 1,951 | 1,797 | |||||||||||||
| Other liabilities | 283 | 427 | Other liabilities | 381 | 345 | |||||||||||||
| Total liabilities | 27,784 | 33,121 | Total liabilities | 44,449 | 42,914 | |||||||||||||
| Contingencies (Note 18) | Contingencies (Note 18) | 0 | 0 | |||||||||||||||
| Redeemable noncontrolling interest | 38 | 38 | Redeemable noncontrolling interest | 40 | 38 | |||||||||||||
| Stockholders’ Equity | Stockholders’ Equity | |||||||||||||||||
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) | 935 | 935 | 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 | Additional paid-in capital | 5,910 | 5,970 | |||||||||||||
| Earnings reinvested in the business | 42,251 | 36,906 | Earnings reinvested in the business | 34,679 | 36,539 | |||||||||||||
| Accumulated other comprehensive losses | (1,897 | ) | (2,052 | ) | Accumulated other comprehensive losses | (4,341) | (2,864) | |||||||||||
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 | ||||||||||||||||
Cost of repurchased stock (947,542,152 shares at December 31, 2020 and 947,979,763 shares at December 31, 2019) | Cost of repurchased stock (947,542,152 shares at December 31, 2020 and 947,979,763 shares at December 31, 2019) | (34,344) | (34,358) | |||||||||||||||
| Total stockholders’ equity attributable to Altria | Total stockholders’ equity attributable to Altria | 2,839 | 6,222 | |||||||||||||||
| Noncontrolling interests | 3 | 3 | Noncontrolling interests | 86 | 97 | |||||||||||||
| Total stockholders’ equity | 15,380 | 12,773 | Total stockholders’ equity | 2,925 | 6,319 | |||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 43,202 | $ | 45,932 | Total Liabilities and Stockholders’ Equity | $ | 47,414 | $ | 49,271 | |||||||||
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, | 2020 | 2019 | 2018 | ||||||||||||||
| Net revenues | $ | 26,153 | $ | 25,110 | $ | 25,364 | |||||||||||
| Cost of sales | 7,818 | 7,085 | 7,373 | ||||||||||||||
| Excise taxes on products | 5,312 | 5,314 | 5,737 | ||||||||||||||
| Gross profit | 13,023 | 12,711 | 12,254 | ||||||||||||||
| Marketing, administration and research costs | 2,154 | 2,226 | 2,756 | ||||||||||||||
| Asset impairment and exit costs | (4) | 159 | 383 | ||||||||||||||
| Operating income | 10,873 | 10,326 | 9,115 | ||||||||||||||
| Interest and other debt expense, net | 1,209 | 1,280 | 665 | ||||||||||||||
| Net periodic benefit income, excluding service cost | (77) | (37) | (34) | ||||||||||||||
| (Income) losses from equity investments | 111 | (1,725) | (890) | ||||||||||||||
| Impairment of JUUL equity securities | 2,600 | 8,600 | 0 | ||||||||||||||
| Loss on Cronos-related financial instruments | 140 | 1,442 | 0 | ||||||||||||||
| Loss on ABI/SABMiller business combination | 0 | 0 | 33 | ||||||||||||||
| Earnings before income taxes | 6,890 | 766 | 9,341 | ||||||||||||||
| Provision for income taxes | 2,436 | 2,064 | 2,374 | ||||||||||||||
| Net earnings (losses) | 4,454 | (1,298) | 6,967 | ||||||||||||||
| Net (earnings) losses attributable to noncontrolling interests | 13 | 5 | (4) | ||||||||||||||
| Net earnings (losses) attributable to Altria | $ | 4,467 | $ | (1,293) | $ | 6,963 | |||||||||||
| Per share data: | |||||||||||||||||
| Basic earnings (losses) per share attributable to Altria | $ | 2.40 | $ | (0.70) | $ | 3.69 | |||||||||||
| Diluted earnings (losses) per share attributable to Altria | $ | 2.40 | $ | (0.70) | $ | 3.68 | |||||||||||
| for the years ended December 31, | 2017 | 2016 | 2015 | ||||||||
| Net revenues | $ | 25,576 | $ | 25,744 | $ | 25,434 | |||||
| Cost of sales | 7,543 | 7,746 | 7,740 | ||||||||
| Excise taxes on products | 6,082 | 6,407 | 6,580 | ||||||||
| Gross profit | 11,951 | 11,591 | 11,114 | ||||||||
| Marketing, administration and research costs | 2,362 | 2,650 | 2,708 | ||||||||
| Reduction of PMI tax-related receivable | — | — | 41 | ||||||||
| Asset impairment and exit costs | 33 | 179 | 4 | ||||||||
| 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 | ||||||||
| (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 | |||||
| Per share data: | |||||||||||
| Basic and diluted earnings per share attributable to Altria Group, Inc. | $ | 5.31 | $ | 7.28 | $ | 2.67 | |||||
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, | 2020 | 2019 | 2018 | |||||||||||||||||
| Net earnings (losses) | $ | 4,454 | $ | (1,298) | $ | 6,967 | ||||||||||||||
| Other comprehensive earnings (losses), net of deferred income taxes: | ||||||||||||||||||||
| Benefit plans | (228) | (24) | 68 | |||||||||||||||||
| ABI | (1,245) | (319) | (309) | |||||||||||||||||
| Currency translation adjustments and other | (4) | 26 | (1) | |||||||||||||||||
| Other comprehensive earnings (losses), net of deferred income taxes | (1,477) | (317) | (242) | |||||||||||||||||
| Comprehensive earnings (losses) | 2,977 | (1,615) | 6,725 | |||||||||||||||||
| Comprehensive (earnings) losses attributable to noncontrolling interests | 13 | 5 | (4) | |||||||||||||||||
| Comprehensive earnings (losses) attributable to Altria | $ | 2,990 | $ | (1,610) | $ | 6,721 | ||||||||||||||
| 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 | ||||||
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, | 2020 | 2019 | 2018 | ||||||||||||||||||||
| Cash Provided by (Used in) Operating Activities | |||||||||||||||||||||||
| Net earnings (losses) | $ | 4,454 | $ | (1,298) | $ | 6,967 | |||||||||||||||||
| Adjustments to reconcile net earnings (losses) to operating cash flows: | |||||||||||||||||||||||
| Depreciation and amortization | 257 | 226 | 227 | ||||||||||||||||||||
| Deferred income tax benefit | (164) | (95) | (57) | ||||||||||||||||||||
| (Income) losses from equity investments | 111 | (1,725) | (890) | ||||||||||||||||||||
| Loss on ABI/SABMiller business combination | 0 | 0 | 33 | ||||||||||||||||||||
| Dividends from ABI | 108 | 396 | 657 | ||||||||||||||||||||
| Loss on Cronos-related financial instruments | 140 | 1,442 | 0 | ||||||||||||||||||||
| Impairment of JUUL equity securities | 2,600 | 8,600 | 0 | ||||||||||||||||||||
| Asset impairment and exit costs, net of cash paid | (51) | 41 | 354 | ||||||||||||||||||||
| Cash effects of changes: | |||||||||||||||||||||||
| Receivables | 20 | (8) | 0 | ||||||||||||||||||||
| Inventories | 2 | 42 | (129) | ||||||||||||||||||||
| Accounts payable | 53 | (79) | 27 | ||||||||||||||||||||
| Income taxes | (29) | 89 | 218 | ||||||||||||||||||||
| Accrued liabilities and other current assets | (15) | 11 | (21) | ||||||||||||||||||||
| Accrued settlement charges | 218 | (108) | 980 | ||||||||||||||||||||
| Pension plan contributions | (33) | (56) | (41) | ||||||||||||||||||||
| Pension provisions and postretirement, net | (49) | (52) | (13) | ||||||||||||||||||||
Other, net (1) | 763 | 411 | 79 | ||||||||||||||||||||
| Net cash provided by (used in) operating activities | 8,385 | 7,837 | 8,391 | ||||||||||||||||||||
| Cash Provided by (Used in) Investing Activities | |||||||||||||||||||||||
| Capital expenditures | (231) | (246) | (238) | ||||||||||||||||||||
| Acquisitions of businesses and assets | 0 | (421) | (15) | ||||||||||||||||||||
| Investment in JUUL | 0 | (5) | (12,800) | ||||||||||||||||||||
| Investment in Cronos | 0 | (1,899) | 0 | ||||||||||||||||||||
| Other, net | 88 | 173 | 65 | ||||||||||||||||||||
| Net cash provided by (used in) investing activities | (143) | (2,398) | (12,988) | ||||||||||||||||||||
| 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 | |||||||
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, | 2020 | 2019 | 2018 | ||||||||||||||||||||
| Cash Provided by (Used in) Financing Activities | |||||||||||||||||||||||
| Proceeds from short-term borrowings | $ | 3,000 | $ | 0 | $ | 12,800 | |||||||||||||||||
| Repayment of short-term borrowings | (3,000) | (12,800) | 0 | ||||||||||||||||||||
| Long-term debt issued | 1,993 | 16,265 | 0 | ||||||||||||||||||||
| Long-term debt repaid | (1,000) | (1,144) | (864) | ||||||||||||||||||||
| Repurchases of common stock | 0 | (845) | (1,673) | ||||||||||||||||||||
| Dividends paid on common stock | (6,290) | (6,069) | (5,415) | ||||||||||||||||||||
| Other, net | (99) | (119) | (132) | ||||||||||||||||||||
| Net cash provided by (used in) financing activities | (5,396) | (4,712) | 4,716 | ||||||||||||||||||||
| Cash, cash equivalents and restricted cash: | |||||||||||||||||||||||
| Increase (decrease) | 2,846 | 727 | 119 | ||||||||||||||||||||
| Balance at beginning of year | 2,160 | 1,433 | 1,314 | ||||||||||||||||||||
| Balance at end of year | $ | 5,006 | $ | 2,160 | $ | 1,433 | |||||||||||||||||
| Cash paid: | Interest | $ | 1,246 | $ | 991 | $ | 704 | ||||||||||||||||
| Income taxes | $ | 2,616 | $ | 1,977 | $ | 2,307 | |||||||||||||||||
| 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, | 2020 | 2019 | 2018 | ||||||||||||||||||||
| Cash and cash equivalents | $ | 4,945 | $ | 2,117 | $ | 1,333 | |||||||||||||||||
Restricted cash included in other current assets (1) | 1 | 0 | 57 | ||||||||||||||||||||
Restricted cash included in other assets (1) | 60 | 43 | 43 | ||||||||||||||||||||
| Cash, cash equivalents and restricted cash | $ | 5,006 | $ | 2,160 | $ | 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 18. Contingencies.
See notes to consolidated financial statements.
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Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
| 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 | |||||||||||||||||||||||||||||||||||
| Balances, December 31, 2017 | $ | 935 | $ | 5,952 | $ | 42,251 | $ | (1,897) | $ | (31,864) | $ | 3 | $ | 15,380 | |||||||||||||||||||||||||||
Reclassification due to adoption of ASU 2018-02 (1) | — | — | 408 | (408) | — | — | — | ||||||||||||||||||||||||||||||||||
Net earnings (losses) (2) | — | — | 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) (2) | — | — | (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 | ||||||||||||||||||||||||||||||||||
Net earnings (losses) (2) | — | — | 4,467 | — | — | (16) | 4,451 | ||||||||||||||||||||||||||||||||||
| Other comprehensive earnings (losses), net of deferred income taxes | — | — | — | (1,477) | — | — | (1,477) | ||||||||||||||||||||||||||||||||||
| Stock award activity | — | 13 | — | — | 14 | — | 27 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared ($3.40 per share) | — | — | (6,327) | — | — | — | (6,327) | ||||||||||||||||||||||||||||||||||
| Other | — | (73) | — | — | — | 5 | (68) | ||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | $ | 935 | $ | 5,910 | $ | 34,679 | $ | (4,341) | $ | (34,344) | $ | 86 | $ | 2,925 | |||||||||||||||||||||||||||
(1) 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”), and 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.
| Attributable to Altria Group, Inc. | |||||||||||||||||||||||||||
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 | ||||||||||
Net earnings (losses) (1) | — | — | 5,241 | — | — | (3 | ) | 5,238 | |||||||||||||||||||
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 | ||||||||||||||||||||
| Stock award activity | — | 59 | — | — | (35 | ) | — | 24 | |||||||||||||||||||
| Cash dividends declared ($2.54 per share) | — | — | (4,877 | ) | — | — | — | (4,877 | ) | ||||||||||||||||||
| Repurchases of common stock | — | — | — | — | (2,917 | ) | — | (2,917 | ) | ||||||||||||||||||
| Balances, December 31, 2017 | $ | 935 | $ | 5,952 | $ | 42,251 | $ | (1,897 | ) | $ | (31,864 | ) | $ | 3 | $ | 15,380 | |||||||||||
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Background and Basis of Presentation
When used in these notes, the term “Altria” refers to Altria Group, Inc. and its subsidiaries, unless the context requires otherwise.
▪Background: At December 31, 2017,2020, Altria Group, Inc.’s wholly-owned(“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;States (including super premium cigarettes previously manufactured and sold by Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”); John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-ownedwholly 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-ownedwholly 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 moist smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”MST”), a wholly-owned subsidiary that is engaged in the manufacturesnus products 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, at December 31, 2020, Altria owned an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of oral nicotine pouches. Other Altria Group, Inc. wholly-ownedwholly 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-ownedwholly 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-owned2020, Altria’s significant wholly owned subsidiaries were not limited by long-term debt or other agreementscontractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests.
In 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 owned an 80% interest in Helix, for which Altria paid $353 million in 2019. The purchase price allocation has been completed, and there were no changes subsequent to the acquisition date.
At September 30, 2016, Altria Group, Inc. had an approximate 27% ownershipDecember 31, 2020, Altria’s investments in equity securities consisted 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”ABI”) completed its business combination with SABMiller, and Altria, Cronos Group Inc. received cash(“Cronos”) and shares representing a 9.6% ownershipJUUL Labs, Inc. (“JUUL”). Altria accounts for its investments 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 forABI and Cronos 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.’saccounts for its equity investment in AB InBev were recorded forJUUL under the year
fair value option.In December 2018, Altria made an investment in JUUL by purchasing shares of non-voting convertible common stock of JUUL representing a 35% ownership interest. JUUL is engaged in the manufacture and sale of e-vapor products in the U.S. and certain international markets. In November 2020, Altria exercised its rights to convert its non-voting shares to voting shares. Altria does not currently intend to exercise its additional governance rights obtained upon share conversion, including the right to elect directors to JUUL’s board, or to vote its JUUL shares other than as a passive investor, pending the outcome of the U.S. Federal Trade Commission (“FTC”) administrative complaint. At December 31, 2020, Altria had a 35% ownership interest in JUUL.
In March 2019, Altria acquired a 45% ownership interest in Cronos, a global cannabinoid company headquartered in Toronto, Canada. At December 31, 2020, Altria had a 43.5% ownership interest in Cronos.
For further discussion of Altria’s investments in equity securities, see Note 6. InvestmentInvestments in AB InBev/SABMillerEquity Securities.
▪Basis of Presentation: The consolidated financial statements include Altria, Group, Inc., as well as its wholly-ownedwholly owned and majority-owned subsidiaries. Investments in equity securities 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.accounting or the fair value option. Investments in equity securities that 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 and fair value 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.
In the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment.
Certain immaterial prior year amounts have been reclassifiedadjusted to conform with the current year’s presentation due primarily topresentation.
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During the second quarter of 2020, Altria Group, Inc.’s 2017 adoption ofbegan complying early with U.S. Securities and Exchange Commission (“SEC”) Regulation S-X Rules 13-01 and 13-02 regarding the financial disclosure requirements for registered debt securities with guarantees. In October 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-09, Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements33-10762, to Employee Share-Based Paymentreflect changes made to its disclosure rules on registered debt securities with guarantees. The new rules replace the previously required condensed consolidating financial information with summarized financial information of the issuer and the guarantor and, among other things, require expanded qualitative disclosures. Altria has elected to provide this information in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in its Annual Report on Form 10-K as permitted by the new rules.
During the fourth quarter of 2020, Altria began complying early with the SEC’s amendments to the financialdisclosures rules regarding acquired and disposed businesses. Among other changes, the amendments impact SEC rules relating to the definition of “significant” subsidiaries and the requirements related to the provision of financial statements for “significant” acquisitions.
On January 1, 2020, Altria adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments and all related ASU amendments(collectively “ASU No. 2016-13”). This 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 adoption of ASU No. 2016-13 did not have a material impact on Altria’s consolidated financial statements.
Additionally, on January 1, 2020, Altria adopted ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU No. 2016-09”2018-15”). For further discussion, see Note 11. Stock PlansThis 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 adoption of ASU No. 2018-15 did not have a material impact on Altria’s consolidated financial statements.
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 and Impairment Testing and Asset Valuation:Testing: 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. 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. Altria has the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. If necessary, Altria will perform a single step quantitative impairment test. Additionally, Altria has the option to unconditionally bypass the qualitative assessment and perform a single step quantitative assessment. 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.
▪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.
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
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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 statementsstatement 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 sheetsheets 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,
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. 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 1Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2Observable 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 3Unobservable inputs that are supported by little or no market activity and that are significant |
▪Guarantees: Altria Group, Inc. recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 18. 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
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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. The cost of approximately 59% and 56% of inventories at December 31, 2020 and 2019, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.6 billion lower than the current cost of inventories at December 31, 2020 and 2019.
▪Investments in Equity Securities: Investments in equity securities in which Altria 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 or the fair value option. The election of the fair value option is irrevocable and is made on an investment by investment basis.
Altria elected to account for its investments in ABI and Cronos under the equity method of accounting. Altria’s share of equity earnings (losses) and other adjustments associated with these equity investments are included in income (losses) from equity investments in the consolidated statements of earnings (losses). The carrying value for each of Altria’s equity investments in ABI and Cronos is reported in investments in equity securities on the consolidated balance sheets. Equity method investments accounted for under the equity method of accounting are reported at cost and adjusted each period for Altria’s share of income (loss) and dividends paid, if any. Altria reports its share of ABI’s and Cronos’s results using a one-quarter lag because results are not available in time for Altria to record them in the concurrent period. Altria reviews its equity investments accounted for under the equity method of accounting 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.
Following Share Conversion (as defined in Note 6. Investments in Equity Securities) in the fourth quarter of 2020, Altria elected to account for its equity investment in JUUL under the fair value option. Under this option, any cash dividends received and any changes in the fair value of the equity investment in JUUL, which is calculated quarterly using level 3 fair value measurements, are included in income (losses) from equity investments in the consolidated statements of earnings (losses). The fair value of the equity investment in JUUL is included in investments in equity securities on the consolidated balance sheet at December 31, 2020. Prior to Altria exercising its right to convert its non-voting shares to voting shares, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares did not have a readily determinable fair value, Altria 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.
▪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 18. 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’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 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
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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.
▪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.
Altria:
| Standards | Description | Effective Date for Public Entity | Effect on Financial Statements | ||||||||
ASU 2019-12 Simplifying the Accounting for | |||||||||||
| The guidance | The guidance is effective for | ||||||||||
ASU | The guidance | The guidance is effective for | |||||||||
ASU | The guidance | The guidance is effective for | Altria | ||||||||
Note 3. Revenues from Contracts with Customers
Altria disaggregates net revenues based on product type. For further discussion, see Note 15. 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. Cash discounts at December 31, 2020 and 2019, were de minimis 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 $301 million and $362 million at December 31, 2020 and 2019, 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, 2020 and 2019, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.
Receivables were $137 million and $152 million at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, 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 MST and snus 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 | (in millions) | December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
| Smokeable products | $ | 99 | $ | 77 | $ | 3,054 | $ | 2,901 | Smokeable products | $ | 99 | $ | 99 | $ | 3,044 | $ | 3,071 | |||||||||||||||||||||
| Smokeless products | 5,023 | 5,023 | 8,827 | 8,829 | ||||||||||||||||||||||||||||||||||
| Oral tobacco products | Oral tobacco products | 5,078 | 5,078 | 9,164 | 9,196 | |||||||||||||||||||||||||||||||||
| Wine | 74 | 74 | 294 | 295 | Wine | 0 | 0 | 237 | 238 | |||||||||||||||||||||||||||||
| Other | 111 | 111 | 225 | 11 | Other | 0 | 0 | 170 | 182 | |||||||||||||||||||||||||||||
| Total | $ | 5,307 | $ | 5,285 | $ | 12,400 | $ | 12,036 | Total | $ | 5,177 | $ | 5,177 | $ | 12,615 | $ | 12,687 | |||||||||||||||||||||
Other intangible assets consisted of the following:
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Indefinite-lived intangible assets | $ | 11,676 | $ | — | $ | 11,676 | $ | — | |||||||||||||||
| Definite-lived intangible assets | 1,275 | 336 | 1,275 | 264 | |||||||||||||||||||
| Total other intangible assets | $ | 12,951 | $ | 336 | $ | 12,951 | $ | 264 | |||||||||||||||
| 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 | |||||||
additional transactions occur that require the amortization of intangible assets.
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The changes in goodwill and net carrying amount of intangible assets were as follows:
| 2020 | 2019 | ||||||||||||||||||||||
| (in millions) | Goodwill | Other Intangible Assets, net | Goodwill | Other Intangible Assets, net | |||||||||||||||||||
| Balance at January 1 | $ | 5,177 | $ | 12,687 | $ | 5,196 | $ | 12,279 | |||||||||||||||
| Changes due to: | |||||||||||||||||||||||
Acquisitions (1) | 0 | 0 | 55 | 451 | |||||||||||||||||||
| Asset impairment | 0 | 0 | (74) | 0 | |||||||||||||||||||
| Amortization | — | (72) | — | (43) | |||||||||||||||||||
| Balance at December 31 | $ | 5,177 | $ | 12,615 | $ | 5,177 | $ | 12,687 | |||||||||||||||
(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 2017, 2016 and 2015, Altria Group, Inc. completed its quantitative2020, Altria’s annual impairment test of goodwill and indefinite-lived intangible assets and noresulted in 0 impairment charges resulted.charges.
During 2018, Altria Group, Inc. and Subsidiaries
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.
Note 4.5. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs (income) consisted of the following:
| (in millions) | (in millions) | Asset Impairment and Exit Costs | Implementation Costs | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | 2020 | 2019 | 2018 | 2020 (1) | 2019 (2) | 2018 (1) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Smokeable products | Smokeable products | $ | 2 | $ | 59 | $ | 79 | $ | 0 | $ | 33 | $ | 1 | $ | 2 | $ | 92 | $ | 80 | |||||||||||||||||||||||||||||||||||||||||||||
| Oral tobacco products | Oral tobacco products | (5) | 9 | 20 | 0 | 5 | 3 | (5) | 14 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Wine (3) | Wine (3) | 0 | 76 | 54 | 411 | 0 | 0 | 411 | 76 | 54 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All other | All other | 0 | 14 | 227 | 0 | (10) | 63 | 0 | 4 | 290 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General corporate | General corporate | (1) | 1 | 3 | 0 | 0 | 0 | (1) | 1 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Asset Impairment and Exit Costs | Implementation Costs (1) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Smokeable products | $ | 5 | $ | 17 | $ | 22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Smokeless products | 28 | 28 | 56 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 33 | $ | 45 | $ | 78 | Total | (4) | 159 | 383 | 411 | 28 | 67 | 407 | 187 | 450 | ||||||||||||||||||||||||||||||||||||||||||||||||
Plus amounts included in net periodic benefit (income) cost, excluding service cost(4) | Plus amounts included in net periodic benefit (income) cost, excluding service cost(4) | 0 | 29 | 3 | 0 | 0 | 0 | 0 | 29 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Total | $ | (4) | $ | 188 | $ | 386 | $ | 411 | $ | 28 | $ | 67 | $ | 407 | $ | 216 | $ | 453 | |||||||||||||||||||||||||||||||||||||||||||||
(1) The pre-tax implementation costs were included Included in cost of sales in Altria Group, Inc.’sAltria’s consolidated statements of earnings (losses).
(2) Included in cost of sales ($2 million) and marketing, administration and research costs ($26 million) in Altria’s consolidated statement 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 | |||||
Implementation costs for 2020 were related to Ste. Michelle’s strategic reset, as discussed below.
The 2019 pre-tax asset impairment, exit and implementation costs for 2017 arewere related to the facilities consolidationcost 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 for 2016 arewere related to both the facilities consolidationrefocus of innovative product efforts and the productivity initiativecost reduction program discussed below.below, and the impairment of the Columbia Crest trademark.
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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, 20172020 and 20162019 was as follows:
| (in millions) | |||||||||||||||||
| Balances at December 31, 2018 | $ | 155 | |||||||||||||||
| Charges | 59 | ||||||||||||||||
| Cash spent | (147) | ||||||||||||||||
| Balances at December 31, 2019 | 67 | ||||||||||||||||
| Cost reversals, net | (4) | ||||||||||||||||
| Cash spent | (47) | ||||||||||||||||
| Balances at December 31, 2020 | $ | 16 | |||||||||||||||
| (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 | |
▪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. Middleton isWine Business Strategic Reset: Evolving adult consumer preferences have posed strategic challenges for Ste. Michelle, which has seen slowing growth in the processwine category and increased inventory levels in recent periods. Against a backdrop of transferring its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”). USSTC is in the process of transferring its Franklin Park, Illinois operations to its Nashville, Tennessee facilityproduct volume demand uncertainty and the Richmond Manufacturing Center. Separation benefits are being paid to non-relocating employees. The consolidation is expected to be substantially completedlong-term, non-cancelable grape purchase commitments, which have been further negatively impacted by the end of the first quarter of 2018.COVID-19 pandemic (including economic uncertainty and government actions that restrict direct-to-consumer sales and on-premise sales), Ste. Michelle experienced additional increases in inventory levels that, in 2020, significantly exceeded long-term forecasted demand.
Given such uncertainty in economic conditions and product volume demand, as well as long-term supply-side contractual challenges, Altria and Ste. Michelle undertook a review of the wine business. As a result, Altria and Ste. Michelle implemented a strategic reset in order to maximize Ste. Michelle’s profitability and achieve improved long-term cash-flow generation. This strategic reset includes: (i) an updated approach to forecasting demand; (ii) supply chain optimization; (iii) SKU rationalization to reduce the number of products and eliminate underperforming brands; and (iv) streamlining operations by reducing future capital expenditures, working capital requirements and ongoing operating costs.
▪Refocus of Innovative Product Efforts: During the fourth quarter of 2018, Altria refocused its companies’ innovative product efforts, which included the discontinuation of production and distribution of alle-vapor products. During the year ended December 31, 2019, Altria incurred pre-tax charges of $9 million, consisting of asset impairment, exit and implementation costs. During 2018, Altria incurred pre-tax charges of $272 million, consisting of asset impairment and exit costs of $209 million primarily related to the impairment of goodwill and other intangible assets and other charges of $63 million related to inventory write-offs and accelerated depreciation. The pre-tax charges related to the refocus of innovative product efforts have been completed. The majority of the charges related to these efforts did not result in cash payments.
▪Cost Reduction Program: In December 2018, Altria announced a cost reduction program that included 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 $250 million, which included employee benefit-related curtailment and settlement costs. Of this amount, Altria recorded net pre-tax cost reversals of $4 million in 2020 and pre-tax charges of $133 million in 2019 and $121 million in 2018. The total charges, the majority of which resulted in cash expenditures, related primarily to employee separation costs of $198 million and other costs of $52 million. The pre-tax charges related to this cost reduction program have been completed. Cash payments related to the consolidationthis cost reduction program of $58$44 million and $136 million were made during the yearyears ended December 31, 2017,2020 and 2019, respectively, for total cash payments of $63$180 million since inception.
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Note 6. Investments in Equity Securities
Altria’s investments at December 31, 2020 and cost competitiveness through reduced spending on certain selling, general and administrative infrastructure and a leaner organizational structure. As a result2019 consisted of the initiative, during 2016, Altria Group, Inc. incurred total pre-
| Carrying Amount | ||||||||||||||
| (in millions) | December 31, 2020 | December 31, 2019 | ||||||||||||
| ABI | $ | 16,651 | $ | 18,071 | ||||||||||
| JUUL | 1,705 | 4,205 | ||||||||||||
Cronos (1) | 1,173 | 1,305 | ||||||||||||
| Total | $ | 19,529 | $ | 23,581 | ||||||||||
(1) December 31, 2020 included Altria’s equity method investment in Cronos ($1,010 million), the Cronos warrant ($139 million) and the Fixed-price Preemptive Rights ($24 million), (collectively, “Investment in Cronos”). The Investment in Cronos at December 31, 2019 included Altria’s equity method investment in Cronos ($1,002 million), the Cronos warrant ($234 million) and the Fixed-price Preemptive Rights ($69 million). See below for further discussion.
| (in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
ABI (1) | $ | (223) | $ | 1,229 | $ | 890 | ||||||||||||||
| Cronos | 12 | 496 | 0 | |||||||||||||||||
| Income (losses) from investments under equity method of accounting | (211) | 1,725 | 890 | |||||||||||||||||
| JUUL | 100 | 0 | 0 | |||||||||||||||||
| Income (losses) from equity investments | $ | (111) | $ | 1,725 | $ | 890 | ||||||||||||||
(1) During 2020, ABI amounts recorded by Altria included pre-tax assetlosses associated with its share of ABI’s (i) mark-to-market losses on certain ABI financial instruments associated with its share commitments, (ii) completion of the sale of its Australia subsidiary and (iii) goodwill impairment charge associated with its Africa businesses. These amounts included Altria’s share of amounts recorded by ABI, 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.
At December 31, 2017,2020, Altria Group, Inc. had an approximate 10.2%a 10.0% ownership of AB InBev,interest in ABI, consisting of approximately 185 million restricted shares of AB InBevABI (the “Restricted Shares”) and approximately 12 million ordinary shares of AB InBev. ABI. Altria’s ownership percentage decreased from 10.1% at December 31, 2019 due to the issuance of additional shares by 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 ABI on a one-for-one basis after the end of this five-year lock-up period;
▪rank equally with ordinary shares of ABI with regards to dividends and voting rights; and
▪have director nomination rights with respect to ABI.
Altria Group, Inc. accounts for its investment in AB InBevABI under the equity method of accounting because Altria Group, Inc. has the ability to exercise significant influence over the operating and financial policies of AB InBev,ABI, including having active representation on AB InBev’s BoardABI’s board of Directors (“AB InBev Board”)directors and certain AB InBev Board Committees.ABI board committees. Through this representation, Altria Group, Inc. participates in AB InBevABI policy making processes.
Altria Group, Inc. reports its share of AB InBev’sABI’s results using a one-quarter lag because AB InBev’sABI’s results are not available in time for Altria Group, Inc. to record them in the concurrent period.
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Summary financial data of AB InBevABI is as follows:
| For Altria’s Year Ended December 31, | ||||||||||||||||||||
| (in millions) | For Altria Group, Inc.’s Year Ended December 31, 2017 (1) | (in millions) | 2020 (1) | 2019 (1) | 2018 (1) | |||||||||||||||
| Net revenues | $ | 56,004 | Net revenues | $ | 48,294 | $ | 54,187 | $ | 55,500 | |||||||||||
| Gross profit | $ | 34,376 | Gross profit | $ | 28,438 | $ | 33,735 | $ | 34,986 | |||||||||||
| Earnings from continuing operations | $ | 6,769 | Earnings from continuing operations | $ | 4,265 | $ | 10,530 | $ | 9,020 | |||||||||||
| Net earnings | $ | 6,845 | Net earnings | $ | 4,266 | $ | 10,530 | $ | 9,020 | |||||||||||
| Net earnings attributable to AB InBev | $ | 5,473 | ||||||||||||||||||
| Net earnings attributable to ABI | Net earnings attributable to ABI | $ | 3,323 | $ | 9,189 | $ | 7,641 | |||||||||||||
| At September 30, | |||||||||||
| (in millions) | 2020 (1) | 2019 (1) | |||||||||
| Current assets | $ | 28,672 | $ | 27,353 | |||||||
| Long-term assets | $ | 185,106 | $ | 199,591 | |||||||
| Current liabilities | $ | 34,884 | $ | 36,819 | |||||||
| Long-term liabilities | $ | 117,400 | $ | 119,025 | |||||||
| Noncontrolling interests | $ | 8,459 | $ | 8,765 | |||||||
| (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 Reflects 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.lag.
At December 31, 2017, Altria Group, Inc.’s2020, Altria’s carrying amountvalue of its equity investment in AB InBevABI exceeded its share of AB InBev’sABI’s net assets attributable to equity holders of AB InBevABI by approximately $11.7$11.3 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.’sAltria’s equity investment in AB InBevABI is based on: (i) unadjusted quoted prices in active markets for AB InBev’sABI’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 eventIf 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.’sAltria’s equity investment in AB InBevABI at December 31, 20172020 and 20162019 was $22.1$13.8 billion (carrying value of $16.7 billion) and $20.9$16.1 billion (carrying value of $18.1 billion), respectively, compared
In December 2020, ABI completed the issuance of a minority stake in its U.S.-based metal container plants for $3 billion in cash proceeds. Consistent with the one-quarter lag for reporting ABI’s results in Altria’s financial results, in the first quarter of 2021, Altria will record the financial statement impact, which has not yet been determined but may be material, related to this transaction.
Investment in JUUL
In December 2018, Altria made an investment in JUUL for $12.8 billion. In exchange for the investment, Altria received a 35% economic interest in JUUL through non-voting shares, which were convertible at Altria’s election into voting shares (“Share Conversion”), and $17.9 billion, respectively.for no additional payment, a security convertible into additional non-voting or voting shares, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”).
Altria received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain its ownership percentage and is subject to a standstill restriction under which it 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.
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In January 2020, Altria and JUUL amended certain JUUL Transaction agreements and entered into a new cooperation agreement, which included the following provisions:
▪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 discontinued all other services as of March 31, 2020.
▪Altria will have the option to be released from its non-compete obligation (i) in the 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 cooperation agreement, with statutes of limitation being tolled during the one-year period.
•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.
•In the event of Share Conversion and if Altria chooses to exercise its governance rights (which it has not currently elected to do, as discussed below), JUUL will:
▪restructure JUUL’s current 7-member board of directors to a 9-member board that will 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 JUUL Chief Executive Officer; and
▪create a Litigation Oversight Committee, which will include 2 Altria designated directors (1 of whom 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 limitations, the Litigation Oversight Committee will recommend to JUUL changes to outside counsel and litigation strategy by majority vote, with disagreements by JUUL’s management being resolved by majority vote of JUUL’s board of directors.
On April 1, 2020, the FTC issued an administrative complaint challenging Altria’s investment in JUUL. For further discussion on the FTC litigation, see Note 18. Contingencies - Antitrust Litigation.
In November 2020, Altria exercised its rights to convert its non-voting JUUL shares to voting shares. Altria does not currently intend to exercise its additional governance rights obtained upon Share Conversion, including the right to elect directors to JUUL’s board or to vote its JUUL shares other than as a passive investor, pending the outcome of the FTC administrative complaint. At December 31, 2020, Altria had a 35% ownership interest in JUUL, consisting of 42 million voting shares.
Following Share Conversion in the fourth quarter of 2020, Altria elected to account for its equity method investment in JUUL under the fair value option. Under this option, Altria’s consolidated statements of earnings (losses) include any cash dividends received from its investment in JUUL and any changes in the fair value of its investment, which is 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.
The following table provides a reconciliation of the beginning and ending balance of the JUUL investment, which is classified in Level 3 of the fair value hierarchy:
| (in millions) | ||||||||
| Balance at December 31, 2019 | $ | 0 | ||||||
| Transfers into Level 3 fair value | 1,605 | |||||||
| Unrealized gains included with income / (losses) from equity investments | 100 | |||||||
| Balance at December 31, 2020 | $ | 1,705 | ||||||
Prior to Share Conversion, Altria accounted for its investment in JUUL as an investment in an equity security. Since the completionJUUL shares do not have a readily determinable fair value, Altria 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. There were 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 the date of Share Conversion. In addition, Altria reviewed its
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investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on October 10, 2016, a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicated that Altria’s investment in JUUL may be impaired, a quantitative assessment was performed. If the quantitative assessment indicated the fair value of the investment was less than its carrying value, the investment was written down to its fair value.
2020 Financial Activity
▪Altria Group, Inc. heldrecorded a non-cash pre-tax unrealized gain of $100 million for the fourth quarter and year ended December 31, 2020 as a result of an approximate 27%increase in the fair value of JUUL. The increase in fair value was primarily driven by the effect of passage of time on the projected cash flows, as there were no material changes in the significant assumptions.
▪JUUL announced a strategic update in September 2020, which included its plans for a significant global workforce reduction, its evaluation of its resource allocation and the possibility of exiting various international markets. As part of the preparation of Altria’s financial statements for the period ended September 30, 2020, Altria performed a qualitative assessment of impairment indicators for its investment in JUUL and determined that JUUL’s strategic update was an indicator of impairment at September 30, 2020, given the significant deterioration in JUUL’s business prospects.
▪Given the existence of this impairment indicator, Altria performed a quantitative valuation of its investment in JUUL during the third quarter of 2020 and recorded a non-cash pre-tax charge of $2.6 billion for the year ended December 31, 2020, reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). The impairment charge was driven by Altria’s projections of lower JUUL revenues over time due to lower pricing assumptions and delays in JUUL achieving previously forecasted operating margin performance. These drivers were the result of: (i) JUUL’s revised international expansion plans and (ii) the evolving U.S. e-vapor category and associated competitive dynamics.
2019 Financial Activity
▪In 2019, Altria recorded total non-cash pre-tax impairment charges of $8.6 billion ($4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019) related to its investment in JUUL resulting in a $4.2 billion carrying value of its investment in JUUL at December 31, 2019.
▪In the third quarter of 2019, Altria performed a qualitative assessment for impairment indicators and concluded that impairment indicators existed. These indicators included 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 (“FDA”) 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. Altria determined that the third-quarter 2019 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, which resulted in a non-cash pre-tax charge of $4.5 billion.
•In the fourth quarter of 2019, Altria determined that a significant increase in the number of legal cases pending against JUUL in the fourth quarter of 2019, which included a variety of class action lawsuits and personal injury claims, as well as cases brought by state attorneys general and local governments, resulted in an additional indicator of impairment. Altria determined that the fourth-quarter 2019 impairment charge resulted substantially from increased discount rates applied to future cash flow projections, due to the significant risk created by the increase in the number of legal cases pending against JUUL and the expectation that the number of legal cases against JUUL will continue to increase, which resulted in an additional non-cash pre-tax charge of $4.1 billion.
Altria uses 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 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, in 2020 and 2019, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. Additionally in determining these significant assumptions, Altria made judgments regarding the: (i) likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, (ii) risk created by the number and types of legal cases pending against JUUL, and (iii) expectations for the future state of the e-vapor category including competitive dynamics.
As disclosed in Note 8. Short-term Borrowings and Borrowing Arrangements, Altria financed the JUUL Transaction and the Investment in Cronos (defined below) through a senior unsecured term loan agreement (the “Term Loan Agreement”). Costs incurred to effect the
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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 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 SABMiller thatthe 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, 2020, Altria estimates the Fixed-price Preemptive Rights allows Altria to purchase up to an additional approximately 30 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 80 million common shares at December 31, 2020) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.
The total purchase price for the Acquired Common Shares, Fixed-price Preemptive Rights and warrant was accountedCAD $2.4 billion (U.S. dollar (“USD”) $1.8 billion).
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 7. Financial Instruments. In addition, a deferred tax liability related to the Fixed-price Preemptive Rights and warrant was recorded. The residual of the purchase price was allocated to the Acquired Common Shares. Accordingly, the CAD $2.4 billion (USD $1.8 billion) purchase price was recorded in USD 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.
If exercised in full, the exercise prices for the warrant and Fixed-price Preemptive Rights are approximately CAD $1.5 billion and CAD $0.5 billion (approximately USD $1.2 billion and $0.4 billion, respectively, based on the CAD to USD exchange rate on January 25, 2021). At December 31, 2020, upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own approximately 54% of the outstanding common shares of Cronos.
For a discussion of derivatives related to the Investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 7. Financial Instruments.
At December 31, 2020, Altria had a 43.5% ownership interest in Cronos, consisting of 156.6 million shares, which Altria accounts for under the equity method of accounting. Altria’s ownership percentage decreased from 45% at December 31, 2019 due to the issuance of additional shares by Cronos for which Altria did not exercise its Fixed-price Preemptive Rights. 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.
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Summary financial data of Cronos is as follows:
| For Altria’s Year Ended December 31, | ||||||||
| (in millions) | 2020 (1) | 2019 (1) | ||||||
| Net revenues | $ | 37 | $ | 21 | ||||
| Gross profit | $ | (31) | $ | 10 | ||||
| Earnings from continuing operations | $ | 99 | $ | 1,117 | ||||
| Net earnings | $ | 98 | $ | 1,117 | ||||
| Net earnings attributable to Cronos | $ | 100 | $ | 1,117 | ||||
| At September 30, | ||||||||
| (in millions) | 2020 (1) | 2019 (1) | ||||||
| Current assets | $ | 1,394 | $ | 1,575 | ||||
| Long-term assets | $ | 525 | $ | 511 | ||||
| Current liabilities | $ | 143 | $ | 457 | ||||
| Long-term liabilities | $ | 12 | $ | 7 | ||||
| Noncontrolling interests | $ | (3) | $ | 0 | ||||
(1) Reflects the one-quarter lag. Summary financial data of Cronos’s results for the years ended December 31, 2016 and 2015, respectively. Altria Group, Inc.’s earnings from its equity investment in SABMiller for theAltria’s year ended December 31, 2016 included a pre-tax non-cash gain2019 include Cronos’s results for the period March 8, 2019 through September 30, 2019.
At December 31, 2020, Altria’s carrying value of $309 million, reflecting Altria Group, Inc.’s share 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. As a result of the timing of the completion of the Transaction, Altria Group, Inc.’s pre-tax earnings from its equity method investment in SABMiller for the year ended December 31, 2016 includedCronos exceeded its share of Cronos’s net assets attributable to equity holders of Cronos by approximately nine months$0.2 billion. Substantially all of SABMiller’s earnings.this difference is comprised of definite-lived intangible assets (consisting of licenses, distribution agreements and developed technology).
| 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 | |||
Note 7. Financial Instruments
Altria Group, Inc. elected the PSA.
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 ABI.
The following table provides (i) the GBP to the United States dollar, in relation to the pre-tax cash consideration that 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. Theaggregate notional amounts of foreign currency contracts and (ii) the November 2015aggregate carrying value and August 2016 options were $2,467 million (1,625 million GBP)fair value of foreign currency denominated debt:
| (in millions) | December 31, 2020 | December 31, 2019 | |||||||||
| Foreign currency contracts (notional amounts) | $ | 1,066 | $ | 2,246 | |||||||
| Foreign currency denominated debt | |||||||||||
| Carrying value | 5,171 | 4,741 | |||||||||
| Fair value | 5,687 | 5,057 | |||||||||
Altria’s estimates of the fair 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 $480 million (378 million GBP), respectively. The options did not qualifytherefore are classified in Level 2 of the fair value hierarchy. An adjustment for hedge accounting; therefore, changescredit risk and nonperformance risk is included in the fair values of the options were recorded as gains or losses in Altria Group, Inc.’s consolidated statements of earnings in the periods in which the changes occurred. For the year ended December 31, 2016, Altria Group, Inc. recorded pre-tax gains associated with the November 2015 and August
foreign currency contracts.
The following table provides the aggregate carrying value and fair value of Altria’s total long-term debt:
| (in millions) | December 31, 2020 | December 31, 2019 | |||||||||
| Carrying value | $ | 29,471 | $ | 28,042 | |||||||
| Fair value | 34,682 | 30,710 | |||||||||
The Fixed-price Preemptive Rights and Cronos warrant, which are further discussed in Note 7. Finance Assets, net
| December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Fixed-price Preemptive Rights | Cronos Warrant | |||||||||||||||||||||||||
Share price (1) | C$8.84 | C$9.97 | C$8.84 | C$9.97 | ||||||||||||||||||||||
Expected life (2) | 1.05 years | 1.67 years | 2.18 years | 3.18 years | ||||||||||||||||||||||
Expected volatility (3) | 80.68% | 81.61% | 80.68% | 81.61% | ||||||||||||||||||||||
Risk-free interest rate (4)(5) | 0.13% | 1.71% | 0.21% | 1.69% | ||||||||||||||||||||||
Expected dividend yield (6) | 0% | 0% | 0% | 0% | ||||||||||||||||||||||
(1) Based on the closing market price for Cronos common stock on the Toronto Stock Exchange on the date indicated.
(2) Based on the weighted-average expected life of the Fixed-price Preemptive Rights (with a range from approximately 0.25 year to 5 years at December 31, 20172020 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 | ||||
(3) Based on a blend of historical volatility levels of the underlying equity security and manufacturing (10%). There were no investments located outsidepeer companies.
(4) Based on the United Statesimplied yield currently available on Canadian Treasury zero coupon issues (with a range from approximately 0.06% to 0.39% at December 31, 20172020 and 2016.
(5) Based on the implied yield currently available on Canadian Treasury zero coupon issues and the expected life of the Cronos warrant.
(6) 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 Cronos warrant, which are classified in Level 3 of the fair value hierarchy:
| (in millions) | 2020 | 2019 | |||||||||
| Balance at January 1 | $ | 303 | $ | 0 | |||||||
| Initial investment in Fixed-price Preemptive Rights and warrant | 0 | 1,736 | |||||||||
| Exercise of Fixed-price Preemptive Rights | 0 | (22) | |||||||||
| Pre-tax earnings (losses) recognized in net earnings | (140) | (1,411) | |||||||||
| Balance at December 31 | $ | 163 | $ | 303 | |||||||
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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 as follows:
| Fair Value of Assets | Fair Value of Liabilities | |||||||||||||||||||||||||||||||
| (in millions) | Balance Sheet Classification | December 31, 2020 | December 31, 2019 | Balance Sheet Classification | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 0 | $ | 46 | Other accrued liabilities | $ | 87 | $ | 7 | ||||||||||||||||||||||
| Foreign currency contracts | Other assets | 0 | 0 | Other liabilities | 0 | 21 | ||||||||||||||||||||||||||
| Total | $ | 0 | $ | 46 | $ | 87 | $ | 28 | ||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Cronos warrant | Investments in equity securities | $ | 139 | $ | 234 | |||||||||||||||||||||||||||
| Fixed-price Preemptive Rights | Investments in equity securities | 24 | 69 | |||||||||||||||||||||||||||||
| Total | $ | 163 | $ | 303 | ||||||||||||||||||||||||||||
| Total derivatives | $ | 163 | $ | 349 | $ | 87 | $ | 28 | ||||||||||||||||||||||||
| (in millions) | |||
| 2018 | $ | 96 | |
| 2019 | 173 | ||
| 2020 | 116 | ||
| 2021 | 96 | ||
| 2022 | 142 | ||
| Thereafter | 73 | ||
| Total | $ | 696 | |
| For the Years Ended December 31, | |||||||||||
| (in millions) | 2020 | 2019 | |||||||||
| Fixed-price Preemptive Rights | $ | (45) | $ | (434) | |||||||
| Cronos warrant | (95) | (977) | |||||||||
| Total | $ | (140) | $ | (1,411) | |||||||
Additionally, in January and February 2019, Altria entered into derivative financial instruments in the form of forward contracts, which were settled in March 2019, to hedge Altria’s exposure to CAD to USD foreign currency exchange rate movements, in relation to the CAD $2.4 billion purchase price for the year endedInvestment in Cronos. 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 (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 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, 2015. These
2020 and December 31, 2019.
| Gain (Loss) Recognized in Accumulated Other Comprehensive Losses | Gain (Loss) Recognized in Net Earnings (Losses)(1) | |||||||||||||||||||||||||||||||||||||||||||||||||
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | (79) | $ | 23 | $ | 40 | $ | 36 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency denominated debt | (424) | 35 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | (503) | $ | 58 | $ | 40 | $ | 36 | ||||||||||||||||||||||||||||||||||||||||||
(1) Related 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 changeamounts excluded from effectiveness testing.
The changes in the future.
| (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 | |||||
| (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. Short-Term Borrowings and Borrowing Arrangements
At December 31, 20172020 and December 31, 2016,2019, Altria Group, Inc. had no0 short-term borrowings. The credit line available to Altria Group, Inc. at December 31, 2017 under the Credit Agreement (as defined below) was $3.0 billion.
At December 31, 2017,2020, Altria Group, Inc. had in place a senior unsecured 5-year revolving credit agreement (the(as amended, the “Credit Agreement”). The Credit Agreement that provides for borrowings up to an aggregate principal amount of $3.0 billion andbillion. The Credit Agreement, which is used for general corporate purposes, 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, 20172020 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.
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.
In March 2020, due to the uncertainty at that time in the global capital markets, including the commercial paper markets, resulting from the COVID-19 pandemic, Altria elected to borrow the full $3.0 billion available under the Credit Agreement as a precautionary measure to increase its cash position and preserve financial flexibility. In June 2020, Altria repaid the full amount outstanding under the Credit Agreement using the net proceeds from the issuance of long-term senior unsecured notes issued in May 2020 and available cash.
At December 31, 2020 and 2019, Altria had 0 borrowings under the Credit Agreement. The credit line available to Altria at December 31, 2020 under the Credit Agreement was $3.0 billion.
At December 31, 2018, Altria had aggregate short-term borrowings of $12.8 billion under the Term Loan Agreement that was set to mature in December 2019. In February 2019, Altria repaid all of the outstanding $12.8 billion using the net proceeds from the issuance of long-term senior unsecured notes. Upon repayment, the Term Loan Agreement terminated in 2019, and 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).
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. Condensed Consolidating Financial Information.9. Long-Term Debt.
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Note 9. Long-Term Debt
At December 31, 20172020 and 2016, Altria Group, Inc.’s2019, Altria’s long-term debt consisted of the following:
| (in millions) | 2020 | 2019 | |||||||||
USD notes, 2.350% to 10.20%, interest payable semi-annually, due through 2059 (1) | $ | 24,258 | $ | 23,259 | |||||||
| 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) | 5,171 | 4,741 | |||||||||
| 29,471 | 28,042 | ||||||||||
| Less current portion of long-term debt | 1,500 | 1,000 | |||||||||
| $ | 27,971 | $ | 27,042 | ||||||||
| (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, 20172020 and 2016.2019.
(2) Weighted-average coupon interest rate of 2.0% at December 31, 2020 and 2019.
At December 31, 2017,2020, aggregate maturities of Altria Group, Inc.’sAltria’s long-term debt were as follows:
| (in millions) | ||||||||||||||||||||
| 2021 | $ | 1,500 | ||||||||||||||||||
| 2022 | 2,900 | |||||||||||||||||||
| 2023 | 1,877 | |||||||||||||||||||
| 2024 | 2,400 | |||||||||||||||||||
| 2025 | 1,666 | |||||||||||||||||||
| Thereafter | 19,358 | |||||||||||||||||||
| 29,701 | ||||||||||||||||||||
| Less: | debt issuance costs | 151 | ||||||||||||||||||
| debt discounts | 79 | |||||||||||||||||||
| $ | 29,471 | |||||||||||||||||||
| (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 estimateSenior Notes: In May 2020, Altria issued USD denominated long-term senior unsecured notes in the aggregate principal amount of $2.0 billion. The net proceeds from the notes were used for general corporate purposes, which included repayment of the fair valueborrowings in March 2020 under the Credit Agreement. The Notes contain the following terms:
▪$0.750 billion at 2.350%, due 2025, interest payable semiannually beginning November 6, 2020;
▪$0.750 billion at 3.400%, due 2030, interest payable semiannually beginning November 6, 2020; and
▪$0.500 billion at 4.450%, due 2050, interest payable semiannually beginning November 6, 2020.
All 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 Group, Inc.’s total long-term debt at December 31, 2017 and 2016, was $15.3 billion and $15.1 billion, respectively, as compared with its carrying value of $13.9 billion for each period.
PM USA (the “Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (the “Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the notesguaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor.
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The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are guaranteednot guarantors of the Obligations are limited by PM USA as further discussed in Note 19. Condensed Consolidating Financial Information.contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.
| (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. Capital Stock
At December 31, 2017,2020, 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, 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 | ||||
| Shares Issued | Shares Repurchased | Shares Outstanding | |||||||||||||||
| 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 | ||||||||||||||
| Stock award activity | — | 437,611 | 437,611 | ||||||||||||||
| Balances, December 31, 2020 | 2,805,961,317 | (947,542,152) | 1,858,419,165 | ||||||||||||||
At December 31, 2017, 41,688,6662020, Altria had 28,357,980 shares of common stock were reserved for stock-based awards under Altria Group, Inc.’sAltria’s stock plans, andplans.
At December 31, 2020, 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.’s2020, Altria’s Board of Directors (the “Board of Directors”) approved an 8.2%a 2.4% increase in the quarterly dividend rate to $0.66$0.86 per share of Altria Group, Inc. common stock versus the previous rate of $0.61$0.84 per share. The current annualized dividend rate is $2.64$3.44 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 2019, the Board of Directors authorized a $1.0 billion share repurchase program (the “July 2019 share repurchase program”). In April 2020, the Board of Directors rescinded the $500 million remaining in this program as part of Altria’s efforts to enhance its liquidity position in response to the COVID-19 pandemic.
In January 2018,2021, the Board of Directors authorized a new $1.0$2.0 billion 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.
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Altria did 0t repurchase any shares in 2020. For the years ended December 31, 2017, 20162019 and 2015, Altria Group, Inc.’s2018, Altria’s total share repurchase activity was as follows:
| July 2019 Share Repurchase Program | January 2018 Share Repurchase Program | July 2015 Share Repurchase Program (1) | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per share data) | 2019 | 2019 | 2018 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||
| Total number of shares repurchased | 10.1 | 6.4 | 27.6 | 0.3 | 16.5 | 27.9 | ||||||||||||||||||||||||||||||||||||||||||||
| Aggregate cost of shares repurchased | $ | 500 | $ | 345 | $ | 1,655 | $ | 18 | $ | 845 | $ | 1,673 | ||||||||||||||||||||||||||||||||||||||
| Average price per share of shares repurchased | $ | 49.29 | $ | 54.36 | $ | 59.89 | $ | 71.68 | $ | 51.24 | $ | 60.00 | ||||||||||||||||||||||||||||||||||||||
| 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. Stock Plans
Shares available to be granted under the 20152020 Plan and the Directors Plan at December 31, 2017,2020, were 38,161,24224,827,160 and 920,942,759,234, respectively.
▪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 sharesRSUs include nonforfeitable rights to dividends or dividend equivalents and may not be sold, assigned, pledged or otherwise encumbered. Such sharesRSUs 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, 2017, 20162020, 2019 and 20152018 of $49$31 million, $44$28 million and $51$39 million, respectively. The deferred tax benefit recorded related to this compensation expense was $18$8 million, $17$7 million and $20$9 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and restricted stock unitsRSUs was $54 million at December 31, 20172020 and is expected to be recognized over a weighted-average period of approximately two years.
| 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, 2019 | Balance at December 31, 2019 | 1,909,642 | $ | 61.46 | |||||||||||||
| Granted | 641,263 | $ | 71.05 | Granted | 1,162,118 | $ | 42.59 | ||||||||||
| Vested | (1,321,620 | ) | $ | 36.40 | Vested | (542,331) | $ | 66.22 | |||||||||
| Forfeited | (180,676 | ) | $ | 59.11 | Forfeited | (290,050) | $ | 51.91 | |||||||||
| Balance at December 31, 2017 | 2,384,501 | $ | 60.40 | ||||||||||||||
| Balance at December 31, 2020 | Balance at December 31, 2020 | 2,239,379 | $ | 51.76 | |||||||||||||
The weighted-average grant date fair value of Altria Group, Inc. restricted stock and restricted stock unitsRSUs granted during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $46$49 million, $56$37 million and $65$60 million, respectively, or $71.05, $59.38$42.59, $52.03 and $54.54$67.17 per restricted stock or restricted stock unit,RSU, respectively. The total vesting date fair value of Altria Group, Inc. restricted stock and restricted stock unitsRSUs that vested during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $95$25 million, $78$30 million and $85$65 million, respectively.
▪PSUs: Altria Group, Inc. and Subsidiaries
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2019 and 2018 grants, the performance measures consist of Altria’s adjusted diluted earnings per share compounded annual growth rate and Altria’s TSR 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, 2017,2020, Altria Group, Inc. had 170,755 performance stock units remaining,409,392 PSUs outstanding, with a weighted-average grant date fair value of $70.39$49.63 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, 20172020, 2019 and 2018 of $6 million.$4 million, $4 million and $7 million, respectively. The unamortized compensation expense related to Altria Group, Inc.’s performance stock unitsPSUs was $7$9 million at December 31, 2017. Altria Group, Inc. did not grant any performance stock units during 2016 and 2015.
2020.Note 12. 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) | 2020 | 2019 | 2018 | ||||||||||||||
| Net earnings (losses) attributable to Altria | $ | 4,467 | $ | (1,293) | $ | 6,963 | |||||||||||
| Less: Distributed and undistributed earnings attributable to share-based awards | (8) | (7) | (8) | ||||||||||||||
| Earnings (losses) for basic and diluted EPS | $ | 4,459 | $ | (1,300) | $ | 6,955 | |||||||||||
| Weighted-average shares for basic EPS | 1,858 | 1,869 | 1,887 | ||||||||||||||
| Plus: contingently issuable PSUs | 1 | 0 | 1 | ||||||||||||||
| Weighted-average shares for diluted EPS | 1,859 | 1,869 | 1,888 | ||||||||||||||
| 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 | ||||||||
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Note 13. 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, 2017 | $ | (1,839) | $ | (54) | $ | (4) | $ | (1,897) | ||||||||||||||||||
Adoption of ASU No. 2018-02 (1) | (397) | (11) | 0 | (408) | ||||||||||||||||||||||
| Other comprehensive earnings (losses) before reclassifications | (151) | (323) | (1) | (475) | ||||||||||||||||||||||
| Deferred income taxes | 39 | 64 | 0 | 103 | ||||||||||||||||||||||
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | (112) | (259) | (1) | (372) | ||||||||||||||||||||||
| Amounts reclassified to net earnings (losses) | 241 | (64) | 0 | 177 | ||||||||||||||||||||||
| Deferred income taxes | (61) | 14 | 0 | (47) | ||||||||||||||||||||||
Amounts reclassified to net earnings (losses), net of deferred income taxes | 180 | (50) | 0 | 130 | ||||||||||||||||||||||
| Other comprehensive earnings (losses), net of deferred income taxes | 68 | (309) | (2) | (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 | 0 | 126 | ||||||||||||||||||||||
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | (153) | (292) | 26 | (419) | ||||||||||||||||||||||
| Amounts reclassified to net earnings (losses) | 173 | (34) | 0 | 139 | ||||||||||||||||||||||
| Deferred income taxes | (44) | 7 | 0 | (37) | ||||||||||||||||||||||
Amounts reclassified to net earnings (losses), net of deferred income taxes | 129 | (27) | 0 | 102 | ||||||||||||||||||||||
| Other comprehensive earnings (losses), net of deferred income taxes | (24) | (319) | (2) | 26 | (317) | |||||||||||||||||||||
| Balances, December 31, 2019 | (2,192) | (693) | 21 | (2,864) | ||||||||||||||||||||||
| Other comprehensive earnings (losses) before reclassifications | (454) | (1,613) | (4) | (2,071) | ||||||||||||||||||||||
| Deferred income taxes | 115 | 352 | 0 | 467 | ||||||||||||||||||||||
| Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | (339) | (1,261) | (4) | (1,604) | ||||||||||||||||||||||
| Amounts reclassified to net earnings (losses) | 148 | 21 | 0 | 169 | ||||||||||||||||||||||
| Deferred income taxes | (37) | (5) | 0 | (42) | ||||||||||||||||||||||
Amounts reclassified to net earnings (losses), net of deferred income taxes | 111 | 16 | 0 | 127 | ||||||||||||||||||||||
| Other comprehensive earnings (losses), net of deferred income taxes | (228) | (1,245) | (2) | (4) | (1,477) | |||||||||||||||||||||
| Balances, December 31, 2020 | $ | (2,420) | $ | (1,938) | $ | 17 | $ | (4,341) | ||||||||||||||||||
| (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 | ) | ||||
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, | ||||||||||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
Benefit Plans: (1) | ||||||||||||||||||||||||||||||||
| Net loss | $ | 173 | $ | 200 | $ | 276 | ||||||||||||||||||||||||||
| Prior service cost/credit | (25) | (27) | (35) | |||||||||||||||||||||||||||||
| 148 | 173 | 241 | ||||||||||||||||||||||||||||||
ABI (2) | 21 | (34) | (64) | |||||||||||||||||||||||||||||
| Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings (losses) | $ | 169 | $ | 139 | $ | 177 | ||||||||||||||||||||||||||
| For the Years Ended December 31, | ||||||||||||
| (in millions) | 2017 | 2016 | 2015 | |||||||||
Benefit Plans: (1) | ||||||||||||
| Net loss | $ | 325 | $ | 223 | $ | 304 | ||||||
| Prior service cost/credit | (34 | ) | (45 | ) | (32 | ) | ||||||
| 291 | 178 | 272 | ||||||||||
AB InBev/SABMiller (2) | 8 | 1,160 | 21 | |||||||||
| Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings | $ | 299 | $ | 1,338 | $ | 293 | ||||||
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 16. Benefit Plans.
(2) For the years ended December 31, 2017 and 2015, amounts Amounts are primarily included in earningsincome (losses) 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. InvestmentInvestments in AB InBev/SABMiller.Equity Securities.
Note 14. Income Taxes
Earnings (losses) before income taxes and (benefit) provision for income taxes consisted of the following for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| (in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Earnings (losses) before income taxes: | |||||||||||||||||
| United States | $ | 6,842 | $ | 266 | $ | 9,441 | |||||||||||
| Outside United States | 48 | 500 | (100) | ||||||||||||||
| Total | $ | 6,890 | $ | 766 | $ | 9,341 | |||||||||||
| Provision (benefit) for income taxes: | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 2,025 | $ | 1,686 | $ | 1,911 | |||||||||||
| State and local | 553 | 470 | 519 | ||||||||||||||
| Outside United States | 22 | 3 | 1 | ||||||||||||||
| 2,600 | 2,159 | 2,431 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (130) | (78) | (18) | ||||||||||||||
| State and local | (34) | (19) | (42) | ||||||||||||||
| Outside United States | 0 | 2 | 3 | ||||||||||||||
| (164) | (95) | (57) | |||||||||||||||
| Total provision for income taxes | $ | 2,436 | $ | 2,064 | $ | 2,374 | |||||||||||
| (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 | ||||
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 20162020, 2019 and 20152018 was as follows:
| (in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Balance at beginning of year | $ | 64 | $ | 85 | $ | 66 | |||||||||||
| Additions for tax positions of prior years | 12 | 32 | 22 | ||||||||||||||
| Reductions for tax positions of prior years | (2) | (16) | (1) | ||||||||||||||
| Tax settlements | 0 | (37) | (2) | ||||||||||||||
| Balance at end of year | $ | 74 | $ | 64 | $ | 85 | |||||||||||
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| (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, 20172020 and 20162019 were as follows:
| (in millions) | 2017 | 2016 | (in millions) | 2020 | 2019 | |||||||||||||
| Unrecognized tax benefits | $ | 66 | $ | 169 | Unrecognized tax benefits | $ | 74 | $ | 64 | |||||||||
| Accrued interest and penalties | 9 | 23 | Accrued interest and penalties | 15 | 11 | |||||||||||||
| Tax credits and other indirect benefits | (1 | ) | (6 | ) | Tax credits and other indirect benefits | (1) | (1) | |||||||||||
| Liability for tax contingencies | $ | 74 | $ | 186 | Liability for tax contingencies | $ | 88 | $ | 74 | |||||||||
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 20172020 was $43$47 million, along with $23$27 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 20162019 was $67$40 million, along with $102$24 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, 2017, 20162020, 2019 and 2015,2018, Altria Group, Inc. recognized in its consolidated statements of earnings $(13)(losses) $4 million, $9$6 million and $(36)$5 million, respectively, of gross interest (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$8 million.
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| (dollars in millions) | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| U.S. federal statutory rate | $ | 1,447 | 21.0 | % | $ | 161 | 21.0 | % | $ | 1,962 | 21.0 | % | ||||||||||||||||||||||||||
| Increase (decrease) resulting from: | ||||||||||||||||||||||||||||||||||||||
| State and local income taxes, net of federal tax benefit | 410 | 6.0 | 356 | 46.5 | 377 | 4.0 | ||||||||||||||||||||||||||||||||
| Tax basis in foreign investments | 23 | 0.3 | 84 | 11.0 | 140 | 1.5 | ||||||||||||||||||||||||||||||||
| Deemed repatriation tax | 0 | 0 | 0 | 0 | 14 | 0.1 | ||||||||||||||||||||||||||||||||
| Uncertain tax positions | 9 | 0.1 | (40) | (5.2) | 8 | 0.1 | ||||||||||||||||||||||||||||||||
| Investment in ABI | (16) | (0.2) | (210) | (27.4) | (104) | (1.1) | ||||||||||||||||||||||||||||||||
| Investment in JUUL | 537 | 7.8 | 1,808 | 236.0 | 15 | 0.2 | ||||||||||||||||||||||||||||||||
| Investment in Cronos | 20 | 0.3 | (66) | (8.6) | 0 | 0 | ||||||||||||||||||||||||||||||||
Other (1) | 6 | 0.1 | (29) | (3.8) | (38) | (0.4) | ||||||||||||||||||||||||||||||||
| Effective tax rate | $ | 2,436 | 35.4 | % | $ | 2,064 | 269.5 | % | $ | 2,374 | 25.4 | % | ||||||||||||||||||||||||||
| 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 provision in 2020 included tax expense of $612 million for a valuation allowance on a deferred tax asset related to Altria’s impairment of its investment in JUUL in the third quarter of 2020, partially offset by a $24 million tax benefit reflecting the release of a portion of the valuation allowance related to a reduction of a deferred tax asset associated with an increase in the estimated fair value of JUUL in the fourth quarter of 2020.
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, tax expense of $84 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017 includedand 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 benefitsbenefit of $3,367$79 million related to Altria’s 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 recorded in the fourth quarter of 2017 as follows: (i) tax expense of $140 million resulting from a tax benefitpartial reversal 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 adjustmentbenefit associated with the deemed repatriation tax partially offset byrecorded in 2017; (ii) tax expense of $413$34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the deemedprovisional estimates recorded in 2017; and (iii) tax expense of $14 million for an adjustment to the provisional estimates for the repatriation tax.tax recorded in 2017.
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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 to be received from AB InBev,ABI, including information regarding AB InBev’sABI’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. This additional guidance and information could resultThe accounting for the repatriation tax was completed in increases or decreases2018; therefore, no further adjustments 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 effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 20172020 and 2016:2019:
| (in millions) | 2017 | 2016 | (in millions) | 2020 | 2019 | |||||||||||||
| Deferred income tax assets: | Deferred income tax assets: | |||||||||||||||||
| Accrued postretirement and postemployment benefits | $ | 539 | $ | 952 | Accrued postretirement and postemployment benefits | $ | 524 | $ | 491 | |||||||||
| Settlement charges | 614 | 1,446 | Settlement charges | 888 | 833 | |||||||||||||
| Accrued pension costs | 136 | 330 | Accrued pension costs | 148 | 131 | |||||||||||||
| Investment in JUUL | Investment in JUUL | 2,642 | 2,047 | |||||||||||||||
| Investment in Cronos | Investment in Cronos | 128 | 197 | |||||||||||||||
| Net operating losses and tax credit carryforwards | 18 | 288 | Net operating losses and tax credit carryforwards | 81 | 92 | |||||||||||||
| Total deferred income tax assets | 1,307 | 3,016 | Total deferred income tax assets | 4,411 | 3,791 | |||||||||||||
| Deferred income tax liabilities: | Deferred income tax liabilities: | |||||||||||||||||
| Property, plant and equipment | (261 | ) | (429 | ) | Property, plant and equipment | (273) | (255) | |||||||||||
| Intangible assets | (2,674 | ) | (4,032 | ) | Intangible assets | (2,806) | (2,758) | |||||||||||
| Investment in AB InBev | (2,859 | ) | (5,546 | ) | ||||||||||||||
| Investment in ABI | Investment in ABI | (2,819) | (3,115) | |||||||||||||||
| Finance assets, net | (404 | ) | (708 | ) | Finance assets, net | (117) | (204) | |||||||||||
| Other | (121 | ) | (125 | ) | Other | (12) | (158) | |||||||||||
| Total deferred income tax liabilities | (6,319 | ) | (10,840 | ) | Total deferred income tax liabilities | (6,027) | (6,490) | |||||||||||
| Valuation allowances | — | (240 | ) | Valuation allowances | (2,817) | (2,324) | ||||||||||||
| Net deferred income tax liabilities | $ | (5,012 | ) | $ | (8,064 | ) | Net deferred income tax liabilities | $ | (4,433) | $ | (5,023) | |||||||
At December 31, 2017,2020, Altria Group, Inc. had estimated gross state tax net operating losses of $569$808 million that, if unused, will expire in 2021 through 2040.
A reconciliation of the beginning and ending valuation allowances for the years ended December 31, 2020, 2019 and 2018 through 2037.was as follows:
| (in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Balance at beginning of year | $ | 2,324 | $ | 71 | $ | 0 | ||||||||||||||
| Additions to valuation allowance related to Altria’s initial Investment in Cronos | 0 | 352 | 0 | |||||||||||||||||
| Additions to valuation allowance charged to income tax expense | 692 | 2,063 | 71 | |||||||||||||||||
| Reductions to valuation allowance credited to income tax benefit | (200) | (159) | 0 | |||||||||||||||||
| Foreign currency translation | 1 | (3) | 0 | |||||||||||||||||
| Balance at end of year | $ | 2,817 | $ | 2,324 | $ | 71 | ||||||||||||||
Altria determines the realizability of deferred tax assets based on the weight of available evidence, that it is more-likely-than-not that the deferred tax asset will not be realized. In reaching this determination, Altria considers 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.
The 2020 valuation allowance was primarily attributable to deferred tax assets recorded in connection with the impairments of Altria’s investment in JUUL of $2,610 million, and its Investment in Cronos of $121 million.
The 2019 valuation allowance was primarily attributable to the deferred tax asset recorded in connection with the impairment of Altria’s investment in JUUL. Altria recorded a full valuation allowance of $2,024 million against this deferred tax asset. For a discussion regarding the impairment of Altria’s investment in JUUL, see Note 6. Investments in Equity Securities.
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.
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Note 15. Segment Reporting
In the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment.
The products of Altria Group, Inc.’sAltria’s subsidiaries include smokeable tobacco products, consisting of combustible cigarettes manufactured and sold by PM USA (including super premium cigarettes previously manufactured and sold by Nat Sherman,Sherman), machine-made large cigars and pipe tobacco manufactured and sold by MiddletonMiddleton; oral tobacco products, consisting of MST and premium cigars sold by Nat Sherman; smokeless tobaccosnus products manufactured and sold by USSTC;USSTC, and oral nicotine pouches manufactured and 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, oral tobacco products (formerly smokeless productsproducts) and wine. The financial services and the innovative tobacco products businesses are included in all other.
Segment data were as follows:
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | (in millions) | 2020 | 2019 | 2018 | |||||||||||||||||||||
| Net revenues: | Net revenues: | |||||||||||||||||||||||||||
| Smokeable products | $ | 22,636 | $ | 22,851 | $ | 22,792 | Smokeable products | $ | 23,089 | $ | 21,996 | $ | 22,297 | |||||||||||||||
| Smokeless products | 2,155 | 2,051 | 1,879 | |||||||||||||||||||||||||
| Oral tobacco products | Oral tobacco products | 2,533 | 2,367 | 2,262 | ||||||||||||||||||||||||
| Wine | 698 | 746 | 692 | Wine | 614 | 689 | 691 | |||||||||||||||||||||
| All other | 87 | 96 | 71 | All other | (83) | 58 | 114 | |||||||||||||||||||||
| Net revenues | $ | 25,576 | $ | 25,744 | $ | 25,434 | Net revenues | $ | 26,153 | $ | 25,110 | $ | 25,364 | |||||||||||||||
| Earnings before income taxes: | Earnings before income taxes: | |||||||||||||||||||||||||||
Operating companies income (loss): | Operating companies income (loss): | |||||||||||||||||||||||||||
| Smokeable products | $ | 8,408 | $ | 7,768 | $ | 7,569 | Smokeable products | $ | 9,985 | $ | 9,009 | $ | 8,408 | |||||||||||||||
| Smokeless products | 1,300 | 1,177 | 1,108 | |||||||||||||||||||||||||
| Oral tobacco products | Oral tobacco products | 1,718 | 1,580 | 1,431 | ||||||||||||||||||||||||
| Wine | 147 | 164 | 152 | Wine | (360) | (3) | 50 | |||||||||||||||||||||
| All other | (51 | ) | (99 | ) | (169 | ) | All other | (172) | (16) | (421) | ||||||||||||||||||
| Amortization of intangibles | (21 | ) | (21 | ) | (21 | ) | Amortization of intangibles | (72) | (44) | (38) | ||||||||||||||||||
| General corporate expenses | (227 | ) | (222 | ) | (237 | ) | General corporate expenses | (227) | (199) | (315) | ||||||||||||||||||
| Reduction of PMI tax-related receivable | — | — | (41 | ) | ||||||||||||||||||||||||
| Corporate asset impairment and exit costs | — | (5 | ) | — | Corporate asset impairment and exit costs | 1 | (1) | 0 | ||||||||||||||||||||
| Operating income | 9,556 | 8,762 | 8,361 | Operating income | 10,873 | 10,326 | 9,115 | |||||||||||||||||||||
| Interest and other debt expense, net | (705 | ) | (747 | ) | (817 | ) | Interest and other debt expense, net | (1,209) | (1,280) | (665) | ||||||||||||||||||
| 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 | |||||||||||||||||||||||||
| Net periodic benefit income, excluding service cost | Net periodic benefit income, excluding service cost | 77 | 37 | 34 | ||||||||||||||||||||||||
| Income (losses) from equity investments | Income (losses) from equity investments | (111) | 1,725 | 890 | ||||||||||||||||||||||||
| Impairment of JUUL equity securities | Impairment of JUUL equity securities | (2,600) | (8,600) | 0 | ||||||||||||||||||||||||
| Loss on Cronos-related financial instruments | Loss on Cronos-related financial instruments | (140) | (1,442) | 0 | ||||||||||||||||||||||||
| Loss on ABI/SABMiller business combination | Loss on ABI/SABMiller business combination | 0 | 0 | (33) | ||||||||||||||||||||||||
| Earnings before income taxes | $ | 9,828 | $ | 21,852 | $ | 8,078 | Earnings before income taxes | $ | 6,890 | $ | 766 | $ | 9,341 | |||||||||||||||
The smokeable products segment included net revenues of $21,900$22,135 million, $22,199$21,158 million and $22,193$21,506 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, related to cigarettes and net revenues of $736$954 million, $652$838 million and $599$791 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, 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, 2020, 2019 and 2018. PM USA, USSTC, MiddletonHelix and Nat Sherman’sMiddleton’s largest customer, McLane Company, Inc., accounted for approximately 26%, 25% and 26%27% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. In addition, Core-Mark Holding Company, Inc. accounted for approximately 14%17%, 15% and 14% and 10% of Altria Group, Inc.’sAltria’s consolidated net revenues for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. Substantially all of these net revenues were reported in the smokeable products and smokeless
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oral tobacco products segments. Sales to threetwo distributors accounted for approximately 67%68%, 69%67% and 66%64% of net revenues for the wine segment for the years ended December 31, 2017, 20162020, 2019 and 2015,2018 respectively.
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 | (in millions) | 2020 | 2019 | 2018 | |||||||||||||||||||||
| Depreciation expense: | Depreciation expense: | |||||||||||||||||||||||||||
| Smokeable products | $ | 93 | $ | 93 | $ | 117 | Smokeable products | $ | 81 | $ | 88 | $ | 90 | |||||||||||||||
| Smokeless products | 29 | 26 | 27 | |||||||||||||||||||||||||
| Oral tobacco products | Oral tobacco products | 32 | 27 | 28 | ||||||||||||||||||||||||
| Wine | 40 | 36 | 32 | Wine | 40 | 41 | 40 | |||||||||||||||||||||
| General corporate and other | 26 | 28 | 28 | General corporate and other | 32 | 26 | 31 | |||||||||||||||||||||
| Total depreciation expense | $ | 188 | $ | 183 | $ | 204 | Total depreciation expense | $ | 185 | $ | 182 | $ | 189 | |||||||||||||||
| Capital expenditures: | Capital expenditures: | |||||||||||||||||||||||||||
| Smokeable products | $ | 39 | $ | 55 | $ | 56 | Smokeable products | $ | 49 | $ | 61 | $ | 81 | |||||||||||||||
| Smokeless products | 61 | 52 | 113 | |||||||||||||||||||||||||
| Oral tobacco products | Oral tobacco products | 67 | 44 | 73 | ||||||||||||||||||||||||
| Wine | 53 | 59 | 42 | Wine | 31 | 63 | 40 | |||||||||||||||||||||
| General corporate and other | 46 | 23 | 18 | General corporate and other | 84 | 78 | 44 | |||||||||||||||||||||
| Total capital expenditures | $ | 199 | $ | 189 | $ | 229 | Total capital expenditures | $ | 231 | $ | 246 | $ | 238 | |||||||||||||||
The comparability of operating companies incomeOCI for the reportable segments and the all other category was affected by the following:
▪Non-Participating Manufacturer (“NPM”) Adjustment Items: For the years ended December 31, 2017, 20162020 and 2015,2018, pre-tax expense (income) for NPM adjustment items of $4 million and $(145) million, respectively, was recorded to cost of sales in Altria Group, Inc.’s consolidated statements 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 smokeable products segment. NaN NPM adjustment items were recorded for 2019. 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. The amounts shown in the table above for the smokeable products segment were recorded by PM USA as increases (reductions) to cost of sales, which decreased (increased) operating companies income in the smokeable products segment.