UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number 1-08940
Altria Group, Inc.
(Exact name of registrant as specified in its charter)
Virginia13-3260245
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer

Identification No.)
6601 West Broad Street,Richmond,Virginia23230
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code (804) (804) 274-2200 
 Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
               Title of each class               Trading SymbolsName of each exchange on which registered
Common Stock, $0.33 1/3 par valueMONew York Stock Exchange
1.000% Notes due 2023MO23ANew York Stock Exchange
1.700% Notes due 2025MO25New York Stock Exchange
2.200% Notes due 2027MO27New York Stock Exchange
3.125% Notes due 2031MO31New York Stock Exchange
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.     Yes   þ     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).     Yes   þ    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 an 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 filerþAccelerated filer☐
Large accelerated filerþAccelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐  No   þ
At AprilOctober 21, 2020, there were 1,858,368,0581,858,419,165 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.

Table of Contents    



ALTRIA GROUP, INC.
TABLE OF CONTENTS
 
Page No.
Page No.
PART I -FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
March 31,September 30, 2020 and December 31, 2019
3
Condensed Consolidated Statements of Earnings for the
Nine and Three Months Ended March 31,September 30, 2020 and 2019
5
Condensed Consolidated Statements of Comprehensive Earnings for the
Nine and Three Months Ended March 31,September 30, 2020 and 2019
6
Condensed Consolidated Statements of Stockholders’ Equity for the
Nine Months Ended September 30, 2020 and 2019
7
Three Months Ended March 31,September 30, 2020 and 2019
78
Condensed Consolidated Statements of Cash Flows for the
ThreeNine Months Ended March 31,September 30, 2020 and 2019
89
Notes to Condensed Consolidated Financial Statements
1011
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4945
Item 3.
8284
Item 4.
8284
PART II -OTHER INFORMATION
Item 1.
8284
Item 1A.
8284
Item 2.
85
Item 6.
86
Signature
87

2
Table of Contents    

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 March 31, 2020 December 31, 2019September 30, 2020December 31, 2019
Assets    Assets
Cash and cash equivalents $5,616
 $2,117
Cash and cash equivalents$4,123 $2,117 
Receivables 147
 152
Receivables151 152 
Inventories: 
 
Inventories:
Leaf tobacco 895
 874
Leaf tobacco754 874 
Other raw materials 193
 192
Other raw materials206 192 
Work in process 467
 696
Work in process450 696 
Finished product 451
 531
Finished product452 531 
 2,006
 2,293
1,862 2,293 
Other current assets 166
 262
Other current assets263 262 
Total current assets 7,935
 4,824
Total current assets6,399 4,824 
Property, plant and equipment, at cost 5,103
 5,074
Property, plant and equipment, at cost5,173 5,074 
Less accumulated depreciation 3,106
 3,075
Less accumulated depreciation3,164 3,075 
 1,997
 1,999
2,009 1,999 
Goodwill 5,177
 5,177
Goodwill5,177 5,177 
Other intangible assets, net 12,668
 12,687
Other intangible assets, net12,633 12,687 
Investments in equity securities 23,861
 23,581
Investments in equity securities19,408 23,581 
Other assets 980
 1,003
Other assets1,025 1,003 
Total Assets $52,618
 $49,271
Total Assets$46,651 $49,271 
 
See notes to condensed consolidated financial statements.
3
Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)
 
 March 31, 2020 December 31, 2019September 30, 2020December 31, 2019
Liabilities    Liabilities
Short-term borrowings $3,000
 $—
Current portion of long-term debt —
 1,000
Current portion of long-term debt$1,500 $1,000 
Accounts payable 278
 325
Accounts payable348 325 
Accrued liabilities:    Accrued liabilities:
Marketing 467
 393
Marketing521 393 
Settlement charges 4,419
 3,346
Settlement charges3,206 3,346 
Other 1,032
 1,533
Other1,113 1,545 
Income taxes 393
 12
Dividends payable 1,565
 1,565
Dividends payable1,602 1,565 
Total current liabilities 11,154
 8,174
Total current liabilities8,290 8,174 
Long-term debt 26,971
 27,042
Long-term debt27,755 27,042 
Deferred income taxes 5,191
 5,083
Deferred income taxes4,724 5,083 
Accrued pension costs 427
 473
Accrued pension costs404 473 
Accrued postretirement health care costs 1,798
 1,797
Accrued postretirement health care costs1,798 1,797 
Other liabilities 402
 345
Other liabilities409 345 
Total liabilities 45,943
 42,914
Total liabilities43,380 42,914 
Contingencies (Note 11) 

 

Contingencies (Note 12)Contingencies (Note 12)
Redeemable noncontrolling interest 38
 38
Redeemable noncontrolling interest39 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 5,959
 5,970
Additional paid-in capital5,973 5,970 
Earnings reinvested in the business 36,528
 36,539
Earnings reinvested in the business34,356 36,539 
Accumulated other comprehensive losses (2,533) (2,864)Accumulated other comprehensive losses(3,781)(2,864)
Cost of repurchased stock
(947,593,259 shares at March 31, 2020 and
947,979,763 shares at December 31, 2019)
 (34,346) (34,358)
Cost of repurchased stock
(947,542,152 shares at September 30, 2020 and
947,979,763 shares at December 31, 2019)
Cost of repurchased stock
(947,542,152 shares at September 30, 2020 and
947,979,763 shares at December 31, 2019)
(34,344)(34,358)
Total stockholders’ equity attributable to Altria 6,543
 6,222
Total stockholders’ equity attributable to Altria3,139 6,222 
Noncontrolling interests 94
 97
Noncontrolling interests93 97 
Total stockholders’ equity 6,637
 6,319
Total stockholders’ equity3,232 6,319 
Total Liabilities and Stockholders’ Equity $52,618
 $49,271
Total Liabilities and Stockholders’ Equity$46,651 $49,271 
See notes to condensed consolidated financial statements.

4
Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
 2020 20192020201920202019
Net revenues $6,359
 $5,628
Net revenues$19,849 $19,103 $7,123 $6,856 
Cost of sales 2,173
 1,578
Cost of sales5,909 5,367 1,961 1,915 
Excise taxes on products 1,313
 1,239
Excise taxes on products4,063 4,109 1,445 1,444 
Gross profit 2,873
 2,811
Gross profit9,877 9,627 3,717 3,497 
Marketing, administration and research costs 537
 533
Marketing, administration and research costs1,585 1,654 557 552 
Asset impairment and exit costs —
 40
Asset impairment and exit costs0 74 0 1 
Operating income 2,336
 2,238
Operating income8,292 7,899 3,160 2,944 
Interest and other debt expense, net 275
 384
Interest and other debt expense, net893 989 310 293 
Net periodic benefit income, excluding service cost (27) (1)Net periodic benefit income, excluding service cost(58)(40)(3)(24)
Earnings from equity investments (157) (86)
(Earnings) losses from equity investments(Earnings) losses from equity investments306 (866)472 (333)
Impairment of JUUL equity securitiesImpairment of JUUL equity securities2,600 4,500 2,600 4,500 
Loss on Cronos-related financial instruments 137
 425
Loss on Cronos-related financial instruments202 1,327 105 636 
Earnings before income taxes 2,108
 1,516
Earnings (losses) before income taxesEarnings (losses) before income taxes4,349 1,989 (324)(2,128)
Provision for income taxes 558
 395
Provision for income taxes1,817 1,473 632 474 
Net earnings 1,550
 1,121
Net earnings (losses)Net earnings (losses)2,532 516 (956)(2,602)
Net (earnings) losses attributable to noncontrolling interests 2
 (1)Net (earnings) losses attributable to noncontrolling interests11 0 4 2 
Net earnings attributable to Altria $1,552
 $1,120
Net earnings (losses) attributable to AltriaNet earnings (losses) attributable to Altria$2,543 $516 $(952)$(2,600)
Per share data:    Per share data:
Basic and diluted earnings per share attributable to Altria $0.83
 $0.60
Basic earnings (losses) per share attributable to AltriaBasic earnings (losses) per share attributable to Altria$1.37 $0.27 $(0.51)$(1.39)
Diluted earnings (losses) per share attributable to AltriaDiluted earnings (losses) per share attributable to Altria$1.36 $0.27 $(0.51)$(1.39)
See notes to condensed consolidated financial statements.

5
Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)

For the Nine Months Ended September 30,For the Three Months Ended September 30,
 For the Three Months Ended March 31,2020201920202019
 2020 2019
Net earnings $1,550
 $1,121
Net earnings (losses)Net earnings (losses)$2,532 $516 $(956)$(2,602)
Other comprehensive earnings (losses), net of deferred income taxes:    Other comprehensive earnings (losses), net of deferred income taxes:
Benefit plans 21
 29
Benefit plans27 84 (15)26 
ABI 298
 (199)ABI(928)53 (15)221 
Currency translation adjustments and other 12
 —
Currency translation adjustments and other(16)8 23 (3)
Other comprehensive earnings (losses), net of deferred
income taxes
 331
 (170)
Other comprehensive earnings (losses), net of deferred
income taxes
(917)145 (7)244 
    
Comprehensive earnings 1,881
 951
Comprehensive earnings (losses)Comprehensive earnings (losses)1,615 661 (963)(2,358)
Comprehensive (earnings) losses attributable to noncontrolling interests 2
 (1)Comprehensive (earnings) losses attributable to noncontrolling interests11 0 4 2 
Comprehensive earnings attributable to Altria $1,883
 $950
Comprehensive earnings (losses) attributable to AltriaComprehensive earnings (losses) attributable to Altria$1,626 $661 $(959)$(2,356)
See notes to condensed consolidated financial statements.
6
Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the ThreeNine Months Ended March 31,September 30, 2020 and 2019
(in millions of dollars, except per share data)
(Unaudited)
 

 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, 2019$935 $5,970 $36,539 $(2,864)$(34,358)$97 $6,319 
Net earnings (losses) (1)
— — 2,543 — — (13)2,530 
Other comprehensive earnings (losses), net of deferred income taxes— — — (917)— — (917)
Stock award activity— 3 — — 14 — 17 
Cash dividends declared ($2.54 per share)— — (4,726)— — — (4,726)
Other— — — — — 9 9 
Balances, September 30, 2020$935 $5,973 $34,356 $(3,781)$(34,344)$93 $3,232 

  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, 2019 $935
 $5,970
 $36,539
 $(2,864) $(34,358) $97
 $6,319
Net earnings (1)
 —
 —
 1,552
 —
 —
 (3) 1,549
Other comprehensive earnings (losses), net of deferred income taxes —
 —
 —
 331
 —
 —
 331
Stock award activity —
 (11) —
 —
 12
 —
 1
Cash dividends declared ($0.84 per share) —
 —
 (1,563) —
 —
 —
 (1,563)
Balances, March 31, 2020 $935
 $5,959
 $36,528
 $(2,533) $(34,346) $94
 $6,637


 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, 2018$935 $5,961 $43,962 $(2,547)$(33,524)$2 $14,789 
Net earnings (losses) (1)
— — 516 — — (3)513 
Other comprehensive earnings (losses), net of deferred income taxes— — — 145 — — 145 
Stock award activity— (1)— — 12 — 11 
Cash dividends declared ($2.44 per share)— — (4,568)— — — (4,568)
Repurchases of common stock— — — — (346)— (346)
Issuance of noncontrolling interest in Helix— — — — — 88 88 
Other— — — — — 5 5 
Balances, September 30, 2019$935 $5,960 $39,910 $(2,402)$(33,858)$92 $10,637 

  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, 2018 $935
 $5,961
 $43,962
 $(2,547) $(33,524) $2
 $14,789
Net earnings (1)
 —
 —
 1,120
 —
 —
 —
 1,120
Other comprehensive earnings (losses), net of deferred income taxes —
 —
 —
 (170) —
 —
 (170)
Stock award activity —
 (18) —
 —
 11
 —
 (7)
Cash dividends declared ($0.80 per share) —
 —
 (1,500) —
 —
 —
 (1,500)
Repurchases of common stock —
 —
 —
 —
 (151) —
 (151)
Balances, March 31, 2019 $935
 $5,943
 $43,582
 $(2,717) $(33,664) $2
 $14,081
(1)Amounts attributable to noncontrolling interests for the nine months ended September 30, 2020 and 2019 exclude net earnings of $2 million and $3 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the condensed consolidated balance sheets.

(1)
Amounts attributable to noncontrolling interests for the three months ended March 31, 2020 and 2019 exclude net earnings of $1 million due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the condensed consolidated balance sheets.

See notes to condensed consolidated financial statements.


7
Table of Contents    
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Three Months Ended September 30, 2020 and 2019
(in millions of dollars, except per share data)
(Unaudited)
 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, June 30, 2020$935 $5,964 $36,908 $(3,774)$(34,345)$98 $5,786 
Net earnings (losses) (1)
— — (952)— — (5)(957)
Other comprehensive earnings (losses), net of deferred income taxes— — — (7)— — (7)
Stock award activity— 9 — — 1 — 10 
Cash dividends declared ($0.86 per share)— — (1,600)— — — (1,600)
Balances, September 30, 2020$935 $5,973 $34,356 $(3,781)$(34,344)$93 $3,232 


 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, June 30, 2019$935 $5,953 $44,081 $(2,646)$(33,859)$2 $14,466 
Net earnings (losses) (1)
— — (2,600)— — (3)(2,603)
Other comprehensive earnings (losses), net of deferred income taxes— — — 244 — — 244 
Stock award activity— 7 — — 1 — 8 
Cash dividends declared ($0.84 per share)— — (1,571)— — — (1,571)
Issuance of noncontrolling interest in Helix— — — — — 88 88 
Other— — — — — 5 5 
Balances, September 30, 2019$935 $5,960 $39,910 $(2,402)$(33,858)$92 $10,637 

(1) Amounts attributable to noncontrolling interests for the three months ended September 30, 2020 and 2019 exclude net earnings of $1 million due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the condensed consolidated balance sheets.

See notes to condensed consolidated financial statements.


8
Table of Contents
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)

 For the Nine Months Ended September 30,
 20202019
Cash Provided by (Used in) Operating Activities
Net earnings (losses)$2,532 $516 
Adjustments to reconcile net earnings (losses) to operating cash flows:
Depreciation and amortization192 163 
Deferred income tax provision (benefit)(111)(261)
(Earnings) losses from equity investments306 (866)
Dividends from ABI108 221 
Loss on Cronos-related financial instruments202 1,327 
Impairment of JUUL equity securities2,600 4,500 
Asset impairment and exit costs, net of cash paid(42)(33)
Cash effects of changes:
Receivables1 (21)
Inventories136 147 
Accounts payable24 (157)
Income taxes0 174 
Accrued liabilities and other current assets(504)(359)
Accrued settlement charges(140)(360)
Pension plan contributions(16)(51)
Pension provisions and postretirement, net(35)(42)
Other, net591 376 
Net cash provided by (used in) operating activities5,844 5,274 
Cash Provided by (Used in) Investing Activities
Capital expenditures(162)(160)
Investment in Cronos0 (1,863)
Acquisitions of businesses and assets0 (421)
Other, net55 32 
Net cash provided by (used in) investing activities$(107)$(2,412)
  For the Three Months Ended
March 31,
  2020 2019
Cash Provided by (Used in) Operating Activities    
Net earnings $1,550
 $1,121
Adjustments to reconcile net earnings to operating cash flows:    
Depreciation and amortization 65
 53
Deferred income tax provision (benefit) 26
 (72)
Earnings from equity investments (157) (86)
Loss on Cronos-related financial instruments 137
 425
Asset impairment and exit costs, net of cash paid (23) 17
Cash effects of changes:    
Receivables 5
 (16)
Inventories (5) (25)
Accounts payable (45) (189)
Income taxes 495
 471
Accrued liabilities and other current assets (421) (513)
Accrued settlement charges 1,073
 913
Pension plan contributions (4) (3)
Pension provisions and postretirement, net (20) (8)
Other, net 453
 201
Net cash provided by (used in) operating activities 3,129
 2,289
Cash Provided by (Used in) Investing Activities    
Capital expenditures (52) (38)
Investment in Cronos —
 (1,831)
Other, net —
 (81)
Net cash provided by (used in) investing activities $(52) $(1,950)

See notes to condensed consolidated financial statements.

9
Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)

 For the Nine Months Ended
September 30,
 20202019
Cash Provided by (Used in) Financing Activities
Proceeds from short-term borrowings$3,000 $0 
Repayment of short-term borrowings(3,000)(12,800)
Long-term debt issued1,993 16,265 
Long-term debt repaid(1,000)(1,144)
Repurchases of common stock0 (346)
Dividends paid on common stock(4,690)(4,498)
Other, net(16)(127)
Net cash provided by (used in) financing activities(3,713)(2,650)
Cash, cash equivalents and restricted cash:
Increase (decrease)2,024 212 
Balance at beginning of period2,160 1,433 
Balance at end of period$4,184 $1,645 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s condensed consolidated balance sheets:
At September 30, 2020At December 31, 2019
Cash and cash equivalents$4,123 $2,117 
Restricted cash included in other current assets (1)
1 0 
Restricted cash included in other assets (1)
60 43 
Cash, cash equivalents and restricted cash$4,184 $2,160 
(1)Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 12. Contingencies.
  For the Three Months Ended
March 31,
  2020 2019
Cash Provided by (Used in) Financing Activities    
Proceeds from short-term borrowings $3,000
 $—
Repayment of short-term borrowings —
 (12,800)
Long-term debt issued —
 16,265
Long-term debt repaid (1,000) —
Repurchases of common stock —
 (151)
Dividends paid on common stock (1,563) (1,502)
Other, net (10) (129)
Net cash provided by (used in) financing activities 427
 1,683
Cash, cash equivalents and restricted cash:    
Increase (decrease) 3,504
 2,022
Balance at beginning of period 2,160
 1,433
Balance at end of period $5,664
 $3,455
     
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s condensed consolidated balance sheets:
  At March 31, 2020 At December 31, 2019
Cash and cash equivalents $5,616
 $2,117
Restricted cash included in other current assets (1)
 3
 —
Restricted cash included in other assets (1)
 45
 43
Cash, cash equivalents and restricted cash $5,664
 $2,160
(1)
Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 11.
Contingencies.

See notes to condensed consolidated financial statements.
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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Background and Basis of Presentation:

Background

When used in these notes, the term "Altria” refers to Altria Group, Inc. and its subsidiaries, unless otherwise specified or unless otherwise required.

At March 31,September 30, 2020, Altria Group, Inc.’s wholly-ownedwholly 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 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; 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 (“MST”) and snus products and wine; and Philip Morris Capital Corporation (“PMCC”), which maintains a portfolio of finance assets, substantially all of which are leveraged leases. In addition, Altria owned an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of oral nicotine pouches. Other Altria wholly-ownedwholly owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria 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 and its subsidiaries. Altria’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 March 31,September 30, 2020, Altria’s significant wholly-ownedwholly owned subsidiaries were not limited by long-term debt or other agreements incontractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.

At March 31,September 30, 2020, Altria had a 10.1%10.0% ownership in Anheuser-Busch InBev SA/NV (“ABI”), which Altria accounts for under the equity method of accounting using a one-quarter lag. Altria receives cash dividends on its interest in ABI and will continue to do so as long as ABI pays dividends.

At March 31,September 30, 2020, Altria had a 35% economic interest in JUUL Labs, Inc. (“JUUL”), which Altria accounts for as an investment in an equity security. JUUL is engaged in the manufacture and sale of e-vapor products globally and isin the U.S. leader in e-vapor.and certain international markets.

During the third quarter of 2019, Helix acquired Burger Söhne Holding and its subsidiaries as well as certain affiliated companies (the “Burger Group”) that are engaged in the manufacture and sale of on! oral nicotine pouches. At closing, Altria indirectly owned an 80% interest in Helix, for which Altria paid $353 million in third quarter of 2019. The financial results of Helix are included in Altria’s condensed consolidated financial statements as part of its oral tobacco products segment (formerly smokeless products segment), with the 20% minority ownership interest in Helix (held by the former shareholders of the Burger Group) included as a noncontrollingnon-controlling interest. The final purchase price allocation which is subjecthas been completed, and there were no changes subsequent to post-closing adjustments, will be completed by the third quarter of 2020.acquisition date.

In March 2019,At September 30, 2020, Altria completed its acquisition ofhad a 45%44% ownership in Cronos Group Inc. (“Cronos”), a global cannabinoid company headquartered in Toronto, Canada. At March 31, 2020, Altria had a 45% ownership in Cronos,Canada, which Altria accounts for under the equity method of accounting using a one-quarter lag.

For further discussion of Altria’s investments in equity securities, see Note 4. Investments in Equity Securities.

Dividends and Share Repurchases

In January 2018,July 2020, Altria’s Board of Directors (the “Board of Directors”) declared a 2.4% increase in the quarterly dividend rate to $0.86 per share of Altria common stock versus the previous rate of $0.84 per share. The current annualized dividend rate is $3.44. Future dividend payments remain subject to the discretion of the Board of Directors.

In January 2018, the Board of Directors authorized a new $1.0 billion share repurchase program that it expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”). In June 2019, Altria completed the January 2018 share
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repurchase program, under which it purchased a total of 34.0 million shares of its common stock at an average price of $58.86 per share.


In July 2019, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2019 share repurchase program”). During the first quarter of 2020, there were 0 share repurchases made under 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 JulyCOVID-19 pandemic. There were 0 share repurchases made in 2020.

Altria’s 2019 share repurchase program to strengthen Altria’s liquidity position amidst the COVID-19 pandemic.

Altria’s share repurchase activity for the three months ended March 31, 2019 was as follows:
(in millions, except per share data)For the Nine Months Ended September 30, 2019For the Three Months Ended September 30, 2019
Total number of shares repurchased6.4 0 
Aggregate cost of shares repurchased$346 $0 
Average price per share of shares repurchased$54.36 $0 
(in millions, except per share data) 2019
Total number of shares repurchased 2.7
Aggregate cost of shares repurchased $151
Average price per share of shares repurchased $56.34


Basis of Presentation

The interim condensed consolidated financial statements of Altria are unaudited. It is the opinion of Altria’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected in the interim condensed consolidated financial statements. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

InCertain immaterial prior year amounts have been reclassified to conform with the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment.current year’s presentation.

These statements should be read in conjunction with theAltria’s audited consolidated financial statements and related notes, which appear in Altria’s Annual Report on Form 10-K for the year ended December 31, 2019.

In the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment.

During the second quarter of 2020, Altria began complying early, as permitted, with Regulation S-X Rules 13-01 and 13-02 regarding the financial disclosure requirements for registered debt securities with subsidiary guarantees. On October 23, 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. 33-10762, to reflect changes the U.S. Securities and Exchange Commission (“SEC”) has made to its disclosure rules on guaranteed debt securities offerings. 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 Quarterly Report on Form 10-Q as permitted by the new rules.

On January 1, 2020, Altria adopted Accounting Standards Update (“ASU”)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 condensed 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. 2018-15”). This 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 condensed consolidated financial statements.

For a description of issued accounting guidance applicable to, but not yet adopted by, Altria, see Note 13. New Accounting Guidance Not Yet Adopted.

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Certain immaterial prior year amounts have been reclassified to conform with the current year’s presentation.

Note 2. Revenues from Contracts with Customers:

Altria disaggregates net revenues based on product type. For further discussion, see Note 9. 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 condensed consolidated balance sheets. Cash discounts at March 31,September 30, 2020 and December 31, 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 condensed consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $219$250 million and $362 million at March 31,September 30, 2020 and December 31, 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 March 31,September 30, 2020 and December 31, 2019, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.

Receivables, which primarily reflect sales of wine produced and/or distributed by Ste. Michelle, were $147$151 million and $152 million at March 31,September 30, 2020 and December 31, 2019, respectively. At March 31,September 30, 2020 and December 31, 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 condensed 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 condensed 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 condensed consolidated financial statements.

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Note 3. Asset Impairment, Exit and Implementation Costs:

Pre-tax asset impairment, exit and implementation costs consisted of the following:
 For the Three Months Ended March 31,For the Nine Months Ended September 30,
 2020 201920202019
 
Implementation Costs (1)
 Total Asset Impairment and Exit Costs 
Implementation Costs (1)
 Total
Implementation Costs (1)
TotalAsset Impairment and Exit Costs
Implementation Costs (2)
Total
(in millions)(in millions)
Smokeable products $—
 $—
 $36
 $8
 $44
Smokeable products$0 $0 $50 $29 $79 
Oral tobacco products —
 —
 8
 1
 9
Oral tobacco products0 0 9 3 12 
Wine 392
 392
 —
 —
 —
Wine395 395 0 0 0 
All other —
 —
 (5) —
 (5)All other0 0 14 (7)7 
General corporate —
 —
 1
 —
 1
General corporate0 0 1 0 1 
Total 392
 392
 40
 9
 49
Total395 395 74 25 99 
Plus amounts included in net periodic benefit income, excluding service cost (2)
 —
 —
 12
 —
 12
Plus amounts included in net periodic benefit income, excluding
service cost (3)
Plus amounts included in net periodic benefit income, excluding
service cost (3)
0 0 12 0 12 
Total $392
 $392
 $52
 $9
 $61
Total$395 $395 $86 $25 $111 
(1) Included in cost of sales for 2020 and marketing, administration and research costs for 2019 in Altria’s condensed consolidated statements of earnings.
(2) Included in cost of sales ($1 million cost reversal) and marketing, administration and research costs ($26 million) in Altria’s condensed consolidated statements of earnings.
(2)(3) Represents curtailment costs. See Note 6. Benefit Plans.
For the Three Months Ended September 30,
20202019
Implementation Costs (1)
TotalAsset Impairment and Exit Costs
Implementation Costs (2)
Total
(in millions)
Smokeable products$0 $0 $0 $4 $4 
Oral tobacco products0 0 1 0 1 
Wine1 1 0 0 0 
Total$1 $1 $1 $4 $5 
(1) Included in cost of sales in Altria’s condensed consolidated statements of earnings.
(2) Included in cost of sales ($1 million) and marketing, administration and research costs ($3 million) in Altria’s condensed consolidated statements of earnings.


Implementation costs for 2020 were related to Ste. Michelle’s inventory-related charges,strategic reset as discussed below. The 2019 pre-tax asset impairment, exit and implementation costs were primarily related to the cost reduction program announced in December 2018, which was completed in 2019.

The movement in the restructuring liabilities, substantially all of which were severance liabilities, related to the cost reduction program was as follows:
(in millions)
Balances at December 31, 2019$67 
Charges0 
Cash spent(42)
Balances at September 30, 2020$25 
 (in millions)
Balances at December 31, 2019$67
Charges—
Cash spent(23)
Balances at March 31, 2020$44


Wine Business Strategic Reset

Evolving adult consumer preferences have posed strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increased inventory levels in recent periods. Against a backdrop of product volume demand uncertainty and long-term non-cancelable grape purchase commitments, which have been further negatively impacted by thegovernment actions which restrict direct-to-consumer sales and on-premise sales and economic uncertainty surrounding the COVID-19 pandemic,
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Ste. Michelle has experienced additional increases in inventory levels that at March 31, 2020 significantly exceedexceeded long-term forecasted demand.

As a result, in connection withDuring the preparation of Altria’s first quarter financial statements,nine and three months ended September 30, 2020, Ste. Michelle recorded pre-tax charges of $392$395 million and $1 million, respectively, which were included in cost of sales in Altria’s condensed consolidated statementstatements of earnings for the three months ended March 31, 2020.earnings. The charges consisted primarily of the following: (i) write-off of inventory ($292 million)million recorded in the first quarter of 2020) as Ste. Michelle no longer believes that the benefit of the blending and production plans for its inventory outweighs inventory carrying cost given the reduced product volume demand; and (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believes no longer have a future economic benefit ($100 million)million recorded in the first quarter of 2020). SuchThe non-cancelable grape purchase commitments will continue to require cash payments as grape commitments are fulfilled over the next five years.

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.

Additionally, Ste. Michelle expects to record additional charges of approximately $25$20 million during the remainder ofin 2020, consisting of inventory disposal costs and other charges.



Note 4. Investments in Equity Securities:

Altria’s investments consisted of the following:
 Carrying AmountCarrying Amount
 March 31, 2020 December 31, 2019September 30, 2020December 31, 2019
 (in millions)(in millions)
ABI $18,453
 $18,071
ABI$16,716 $18,071 
JUUL 4,205
 4,205
JUUL1,605 4,205 
Cronos (1)
 1,203
 1,305
Cronos (1)
1,087 1,305 
Total $23,861
 $23,581
Total$19,408 $23,581 
(1)March 31,September 30, 2020 includes Altria’s equity method investment in Cronos ($1,037986 million), the Cronos warrant ($13286 million) and the Fixed-price Preemptive Rights ($3415 million) and December 31, 2019 includes Altria’s equity method investment in Cronos ($1,002 million), the Cronos warrant ($234 million) and the Fixed -price Preemptive Rights ($69 million), as discussed further below.


Earnings (losses) from equity investments accounted for under the equity method of accounting consisted of the following:
  For the Three Months Ended March 31,
  2020 2019
  (in millions)
ABI $134
 $86
Cronos (1)
 23
 —
Total $157
 $86
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020201920202019
(in millions)
ABI (1)
$(306)$640 $(418)$252 
Cronos0 226 (54)81 
Total$(306)$866 $(472)$333 
(1)Represents At September 30, 2020 Altria recorded pre-tax losses associated with its share of ABI’s completion of the sale of its Australia subsidiary and ABI’s goodwill impairment charge associated with its Africa businesses. These amounts include Altria’s share of Cronos’s earnings, which includes the changeamounts recorded by ABI in fair valueits second quarter of Cronos’s derivative2020, as well as additional adjustments related to (i) conversion from international financial instruments associated with the issuance of additional shares. As a result of the acquisition of Cronos in March 2019reporting standards to United States generally accepted accounting principles, and Altria reporting its share of Cronos’s results using a one-quarter lag, no equity earnings from(ii) adjustments to Altria’s investment in Cronos were recorded forrequired under the three months ended March 31, 2019.equity method of accounting.

Altria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment on a quarterly basis in connection with the preparation of its financial statements by comparing the fair value of each of its investments to its respective 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. For further discussion, see
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Altria reviews its investment in ABI and InvestmentJUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in Cronos below.connection with the preparation of its financial statements. If this qualitative assessment indicates that Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value.

Investment in ABI

At March 31,September 30, 2020, Altria had a 10.1%10.0% ownership in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. Altria’s ownership percentage decreased from 10.1% at March 31, 2020 due to the issuance of additional shares by ABI.

Altria accounts for its investment in ABI under the equity method of accounting because Altria has the ability to exercise significant influence over the operating and financial policies of ABI, including having active representation on ABI’s board of directors (“ABI Board”) and certain ABI Boardboard committees. Through this representation, Altria participates in ABI policy making processes.

Altria reports its share of ABI’s results using a one-quarter lag because ABI’s results are not available in time for Altria to record them in the concurrent period.

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 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’s equity investment in ABI at March 31,September 30, 2020 and December 31, 2019 was $8.8$10.7 billion (carrying value of $18.5$16.7 billion) and $16.1 billion (carrying value of $18.1 billion), respectively, which was less than its carrying value by approximately 52%36% and 11%, respectively. As recently as September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value. 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 amidst the COVID-19 pandemic. The economic uncertainties of the COVID-19 pandemic which hashave also impacted the equity markets.ABI’s business. Altria has also evaluated the duration and magnitude of the fair value decline at September 30, 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 March 31,September 30, 2020 and December 31, 2019, that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, 0 impairment was recorded.

Consistent with the one-quarter lag for reporting ABI’s results in Altria’s financial results, in the second quarter of 2020 Altria will record its share of ABI’s first quarter 2020 net mark-to-market losses on certain ABI financial instruments associated with ABI’s share commitments, primarily related to ABI’s derivative financial instruments used to hedge exposure to approximately 100 million shares of ABI common stock. Such activity is primarily driven by the change in ABI’s share price, which decreased from €72.71 to €40.47 at December 31, 2019 and March 31, 2020, respectively.


Investment in JUUL

In December 2018, Altria made a minority 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 are convertible at Altria’s election into voting shares (“Share Conversion”), and 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”). During 2019, Altria recorded total pre-tax impairment charges of $8.6 billion related to its investment in JUUL resulting in a $4.2 billion carrying value of its investment in JUUL at December 31, 2019.

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.

On January 28, 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; and
▪upon Share Conversion, 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.

▪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;
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▪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; and
▪in the event of Share Conversion, 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 U.S. Federal Trade Commission (“FTC”) issued an administrative complaint challenging Altria’s investment in JUUL. The FTC has not sought to preliminarily enjoin Altria from converting its non-voting JUUL shares to voting shares. Altria has not converted its non-voting JUUL shares to voting shares and is considering whether to do so. so as well as which, if any, of its voting and governance rights to exercise if Altria does elect to effect such conversion. Altria has until November 30, 2020 to convert its JUUL shares under the regulations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), after which Altria would have to re-file for antitrust review with the FTC to again seek the ability to convert.For further discussion on the FTC litigation, see Note 11.12. Contingencies -  Antitrust Litigation.

In the event of Share Conversion, Altria expects to account for its investment in JUUL under the fair value option. Under this option, Altria’s consolidated statement of earnings will include any cash dividends received from its investment in JUUL as well as any changes in the fair value of the investment, which will be calculated quarterly.

At March 31,September 30, 2020 and December 31, 2019, Altria had a 35% economic interest in JUUL. Altria accounted for its investment in JUUL as an investment in an equity security as of March 31,September 30, 2020. Since the JUUL shares do not have a readily determinable fair value, Altria has elected to measure its investment in JUUL at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There have been 0 upward or downward adjustments to the carrying value of Altria’s investment in JUUL resulting from observable price changes in orderly transactions since the JUUL Transaction through March 31,September 30, 2020.

Altria reviewsJUUL announced a strategic update in September 2020, which includes its investment in JUULplans for impairment by performing a qualitative assessmentsignificant global workforce reduction, its evaluation of impairment indicators on a quarterly basis in connection withits resource allocation and the possibility of exiting various international markets. As part of the preparation of itsAltria’s financial statements. If this qualitative assessment indicates that

Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. Ifstatements for the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value.

period ended September 30, 2020, Altria performed its qualitative assessment of potential impairment indicators for its investment in JUUL which includedand determined that JUUL’s strategic update was an indicator of impairment at September 30, 2020, given the consideration of potential impacts of COVID-19 onsignificant deterioration in JUUL’s business as partprospects.

Given the existence of the preparationthis impairment indicator, Altria performed a quantitative valuation of its financial statements for the period ended March 31, 2020. Altria’s assessment did not result in impairment at March 31, 2020. The carrying value of Altria’s investment in JUUL was $4.2 billion at March 31, 2020 and December 31, 2019.

Upon Share Conversion, Altria expects to account for its investment in JUUL under the fair value option. Under this option, Altria’s consolidated statement of earnings will include any cash dividends received from its investment in JUUL as of September 30, 2020 and recorded a non-cash pre-tax charge of $2.6 billion for the nine and three months ended September 30, 2020, reported as impairment of JUUL equity securities in its condensed consolidated statements of earnings.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.

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.

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At September 30, 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.

Based on its quantitative valuation of its investment in JUUL, 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.

At December 31, 2019, Altria determined that a significant increase in the number of legal cases pending against JUUL in the fourth quarter of 2019 resulted in an additional indicator of impairment, which included a variety of class action lawsuits and personal injury claims, as well as any changescases brought by state attorneys general and local governments. The fourth-quarter 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, which resulted in an additional non-cash pre-tax charge of $4.1 billion at December 31, 2019.

Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows. Future cash flows 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 as of September 30, 2020, December 31, 2019 and September 30, 2019, Altria made various judgments, estimates and assumptions, the most significant of which will be calculated quarterly.were sales volume, operating margins, discount rates and perpetual growth rates. Additionally, Altria made significant assumptions regarding the likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of competitive dynamics and the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy.


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 and is accounted for under the equity method of accounting;
▪anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of Canadian dollar (“CAD”) $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of March 31, 2020, Altria estimates the Fixed-price Preemptive Rights allows Altria to purchase up to an additional approximately 37 million common shares of Cronos; and
▪a warrant providing Altria the ability to purchase up to an additional 10% of common shares of Cronos (approximately 78 million common shares at March 31, 2020) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.
▪149.8 million newly issued common shares of Cronos (“Acquired Common Shares”), which represented a 45% economic and voting interest;
▪anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of Canadian dollar (“CAD”) $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of September 30, 2020, Altria estimates the Fixed-price Preemptive Rights allows Altria to purchase up to an additional approximately 35 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 79 million common shares at September 30, 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 (collectively, “Investment in Cronos”) was CAD $2.4 billion (U.S. dollar (“USD”) $1.8 billion). Upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own a maximum of 55% of the outstanding common shares of Cronos.
In accounting for the acquisition of these assets as of the date of closing, the Fixed-price Preemptive Rights and warrant were recorded at each of their fair values using Black-Scholes option-pricing models, based on the assumptions described in Note 5. Financial Instruments. In addition, a deferred tax liability related to the Fixed-price Preemptive Rights and warrant was
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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;
▪$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.
▪$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 $0.6 billion (approximately USD $1.1 billion and $0.4 billion, respectively, based on the CAD to USD exchange rate on AprilOctober 27, 2020).
For a discussion of derivatives related to Altria’s investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 5. Financial Instruments.
At March 31,September 30, 2020, Altria had a 45%44% ownership 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 June 30, 2020 due to the issuance of additional shares by Cronos. Altria reports its share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for Altria to record them in the concurrent period.

Altria nominated 4 directors, including 1 director who is independent from Altria, who serve on Cronos’s 7-member Boardboard of Directors.

directors.

The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos at March 31,September 30, 2020 and December 31, 2019 was $0.9$0.8 billion and $1.2 billion, respectively, compared with its carrying value of $1.0 billion at March 31,September 30, 2020 and December 31, 2019. At March 31,September 30, 2020, the fair value of Altria’s

equity method investment in Cronos was less than its carrying value by approximately 14%20%. Based on Altria’s evaluation of the duration and magnitude of the fair value decline, Altria’s evaluation of Cronos’s financial condition (including its strong cash position) and near-term prospects and Altria’s intent and ability to hold its investment in Cronos until recovery, Altria concluded that the decline in fair value of its equity method investment in Cronos below its carrying value is temporary and, therefore, 0 impairment was recorded.

Note 5. Financial Instruments:

Altria enters into derivative financial instruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes.

Altria’s investment in ABI, whose functional currency is the Euro, exposes Altria to foreign currency exchange risk 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.

At both March 31,September 30, 2020 and December 31, 2019, Altria had foreign currency contracts with aggregate notional amounts of $1,402 million and $2,246 million.million, respectively. At March 31,September 30, 2020, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $4,595$5,368 million and $4,666$4,960 million, respectively. At December 31, 2019, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $5,057 million and $4,741 million, respectively.

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 therefore are classified in Level 2 of the fair value hierarchy. An adjustment for credit risk and nonperformance risk is included in the fair values of foreign currency contracts.

Altria’s estimate of the fair value of its short-term borrowings is derived from discounted future cash flows based on the contractual terms of the Credit Agreement (see Note 10. Debt) and observable interest rates and is classified in Level 2 of the fair value hierarchy. The fair value of Altria’s short-term borrowings at March 31, 2020 approximated its carrying value. Altria had 0 short-term borrowings at December 31, 2019.

Altria’s estimate of the fair value of its total long-term debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria’s total long-term debt at March 31,September 30, 2020 and December 31, 2019 was $28.3$33.8 billion and $30.7 billion, respectively, as compared with its carrying value of $27.0$29.3 billion and $28.0 billion, respectively.

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Altria’s
The Fixed-price Preemptive Rights and Cronos warrant, related to its investment in Cronos, which isare further discussed in Note 4. Investments in Equity Securities, are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are estimated using Black-Scholes option-pricing models, adjusted for observable inputs (which are classified in Level 1 of the fair value hierarchy), including share price, and unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:
 March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019September 30, 2020December 31, 2019September 30, 2020December 31, 2019
 Fixed-price Preemptive Rights Cronos WarrantFixed-price Preemptive RightsCronos Warrant
Share price (1)
 C$7.99 C$9.97 C$7.99 C$9.97
Share price (1)
C$6.69C$9.97C$6.69C$9.97
Expected life (2)
 1.60 years 1.67 years 2.93 years 3.18 years
Expected life (2)
1.18 years1.67 years2.43 years3.18 years
Expected volatility (3)
 79.97% 81.61% 79.97% 81.61%
Expected volatility (3)
80.68%81.61%80.68%81.61%
Risk-free interest rate (4)(5)
 0.38% 1.71% 0.49% 1.69%
Risk-free interest rate (4)(5)
0.20%1.71%0.25%1.69%
Expected dividend yield (6)
 —% —% —% —%
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 5.25 years at September 30, 2020 and 0.25 year to 6 years at March 31, 2020 and December 31, 2019) and the March 8, 2023 expiration date of the Cronos warrant.
(3) Based on a blend of historical volatility levels of the underlying equity security and peer companies.
(4) Based on the implied yield currently available on Canadian Treasury zero coupon issues (with a range from approximately 0.21%0.12% to 0.62%0.36% at March 31,September 30, 2020 and 1.66% to 1.74% at December 31, 2019) weighted for the remaining expected life of the Fixed-price Preemptive Rights.
(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)
Balance at December 31, 2019$303 
Pre-tax earnings (losses) recognized in net earnings(202)
Balance at September 30, 2020$101 
  (in millions)
Balance at December 31, 2019 $303
Pre-tax earnings (losses) recognized in net earnings (137)
Balance at March 31, 2020 $166

Altria elects to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on its condensed consolidated balance sheets. The fair values of Altria’s derivative financial instruments on a gross basis included on the condensed consolidated balance sheets were as follows:
Fair Value of AssetsFair Value of Liabilities
Balance Sheet ClassificationSeptember 30, 2020December 31, 2019Balance Sheet ClassificationSeptember 30, 2020December 31, 2019
Derivatives designated as hedging instruments:(in millions)
Foreign currency contractsOther current assets$3 $46 Other accrued liabilities$39 $7 
Foreign currency contractsOther assets0 0 Other liabilities16 21 
Total$3 $46 $55 $28 
Derivatives not designated as hedging instruments:
Cronos warrantInvestments in equity securities$86 $234 
Fixed-price Preemptive RightsInvestments in equity securities15 69 
Total$101 $303 
Total derivatives$104 $349 $55 $28 
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 Fair Value of Assets Fair Value of Liabilities
 Balance Sheet Classification March 31, 2020 December 31, 2019 Balance Sheet ClassificationMarch 31, 2020 December 31, 2019
Derivatives designated as hedging instruments:(in millions)
Foreign currency contractsOther current assets $55
 $46
 Other accrued liabilities$—
 $7
Foreign currency contractsOther assets 19
 —
 Other liabilities—
 21
Total $74
 $46
  $—
 $28
           
Derivatives not designated as hedging instruments:          
Cronos warrantInvestments in equity securities $132
 $234
     
Fixed-price
Preemptive Rights
Investments in equity securities 34
 69
     
Total  $166
 $303
  
 
           
Total derivatives  $240
 $349
  $—
 $28


Altria records in its condensed consolidated statements of earnings any changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur. For the nine and three months ended March 31,September 30, 2020 and 2019, Altria recognized pre-tax unrealized losses,gains/(losses), representing the changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant, as follows:
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020201920202019
(in millions)
Fixed-price Preemptive Rights$(54)$(400)$(25)$(188)
Cronos warrant(148)(896)(80)(448)
$(202)$(1,296)$(105)$(636)
 For the Three Months Ended March 31,
 2020 2019
 (in millions)
Fixed-price Preemptive Rights$(35) $(132)
Cronos warrant(102) (262)
 (137) (394)


Additionally, in January and February 2019, Altria entered into derivative financial instruments in the form of forward contracts, which were settled onin March 7, 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 Cronos transaction. The aggregate notional amounts of the forward contracts were USD $1.8 billion (CAD $2.4 billion). The forward contracts did not qualify for hedge accounting; therefore, in the first quarter of 2019, pre-tax losses of USD $31 million representing changes in the fair values of the forward contracts were recorded in loss on Cronos-related financial instruments in Altria’s condensed consolidated statement of earnings.

Counterparties to Altria’s foreign currency contracts are domestic and international financial institutions. Altria is exposed to potential losses due to non-performance by these counterparties. Altria manages its credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure Altria has with each counterparty and monitoring the financial condition of each counterparty. The counterparty agreements also contain provisions that require Altria to maintain an investment grade credit rating. In the event Altria’s credit rating falls below investment grade, counterparties to Altria’s foreign currency contracts can require Altria to post collateral. No collateral was received or posted related to derivative assets and liabilities at March 31,September 30, 2020 and December 31, 2019.

Net Investment Hedging

The pre-tax effects of Altria’s net investment hedges on accumulated other comprehensive losses and the condensed consolidated statements of earnings were as follows:
 Gain (Loss) Recognized in Accumulated Other Comprehensive Losses 
Gain (Loss) Recognized in Net Earnings (1)
Gain (Loss) Recognized in Accumulated Other Comprehensive Losses
Gain (Loss) Recognized in Net Earnings (Losses) (1)
Gain (Loss) Recognized in Accumulated Other Comprehensive Losses
Gain (Loss) Recognized in Net Earnings (Losses) (1)
 For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
 2020 2019 2020 201920202019202020192020201920202019
 (in millions)(in millions)
Foreign currency contracts $56
 $23
 $14
 $9
Foreign currency contracts$(28)$70 $33 $26 $(66)$57 $8 $10 
Foreign currency denominated debt 77
 33
 —
 —
Foreign currency denominated debt(215)168 0 0 (206)200 0 0 
Total $133
 $56
 $14
 $9
Total$(243)$238 $33 $26 $(272)$257 $8 $10 
(1) Related to amounts excluded from effectiveness testing.

The changes in the fair value of the foreign currency contracts and in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate were recognized in accumulated other comprehensive losses related to ABI. Gains on the foreign currency contracts arising from components excluded from effectiveness testing were recognized in interest and other debt expense, net in the condensed consolidated statements of earnings based on an amortization approach.


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Note 6. Benefit Plans:

Components of Net Periodic Benefit (Income) Cost

Net periodic benefit (income) cost consisted of the following: 
 For the Nine Months Ended September 30,For the Three Months Ended September 30,
PensionPostretirementPensionPostretirement
 20202019202020192020201920202019
 (in millions)
Service cost$55 $52 $13 $12 $18 $17 $5 $4 
Interest cost188 229 44 57 62 77 14 17 
Expected return on plan assets(376)(431)(11)(11)(125)(143)(4)(4)
Amortization:
Net loss108 119 7 3 55 39 0 (3)
Prior service cost (credit)4 4 (22)(22)2 1 (7)(8)
Curtailment0 7 0 5 0 0 0 0 
Net periodic benefit
(income) cost
$(21)$(20)$31 $44 $12 $(9)$8 $6 
 For the Three Months Ended March 31,
 Pension Postretirement
 2020 2019 2020 2019
 (in millions)
Service cost$19
 $17
 $4
 $4
Interest cost63
 77
 15
 20
Expected return on plan assets(126) (145) (3) (4)
Amortization:       
Net loss27
 42
 3
 3
Prior service cost (credit)1
 1
 (7) (7)
Curtailment—
 7
 —
 5
Net periodic benefit (income) cost$(16) $(1) $12
 $21


Curtailment costs shown in the table above were related to the cost reduction program discussedannounced in Note 3. Asset Impairment, Exit and Implementation Costs.December 2018, which was completed in 2019.

Employer Contributions

Altria makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service regulations. Altria made employer contributions of $4$16 million to its pension plans during the threenine months ended March 31,September 30, 2020. Currently, Altria anticipates making additional employer contributions to its pension plans during the remainder of 2020 of up to approximately $25$20 million based on current tax law. Altria did 0t make any employer contributions to its postretirement plans during the threenine months ended March 31,September 30, 2020. Currently, Altria anticipates making employer contributions to its postretirement plans of up to approximately $60 million in 2020. However, these estimates may be subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on assets, changes in interest rates or other considerations.

Note 7. Earnings (Losses) Per Share:

Basic and diluted earnings (losses) per share (“EPS”) were calculated using the following:
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020201920202019
(in millions)
Net earnings (losses) attributable to Altria$2,543 $516 $(952)$(2,600)
Less: Distributed and undistributed earnings attributable to share-based awards(6)(5)(1)(1)
Earnings (losses) for basic and diluted EPS$2,537 $511 $(953)$(2,601)
Weighted-average shares for basic EPS1,858 1,871 1,858 1,868 
Plus: contingently issuable performance stock units1 0 1 0 
Weighted-average shares for diluted EPS1,859 1,871 1,859 1,868 
  For the Three Months Ended March 31,
  2020 2019
  (in millions)
Net earnings attributable to Altria $1,552
 $1,120
Less: Distributed and undistributed earnings attributable to share-based awards (2) (2)
Earnings for basic and diluted EPS $1,550
 $1,118
     
Weighted-average shares for basic and diluted EPS 1,858
 1,874


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Note 8. 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:
For the Nine Months Ended September 30, 2020
Benefit PlansABICurrency
Translation
Adjustments and Other		Accumulated
Other
Comprehensive
Losses
 (in millions)
Balances, December 31, 2019$(2,192)$(693)$21 $(2,864)
Other comprehensive earnings (losses) before reclassifications(75)(1,211)(16)(1,302)
Deferred income taxes19 260 0 279 
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes(56)(951)(16)(1,023)
Amounts reclassified to net earnings (losses)111 29 0 140 
Deferred income taxes(28)(6)0 (34)
Amounts reclassified to net earnings (losses), net of deferred income taxes83 23 0 106 
Other comprehensive earnings (losses), net of deferred income taxes27 (928)(1)(16)(917)
Balances, September 30, 2020$(2,165)$(1,621)$5 $(3,781)
  For the Three Months Ended March 31, 2020
  Benefit Plans ABI 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
  (in millions)
Balances, December 31, 2019 $(2,192) $(693) $21
 $(2,864)
         
Other comprehensive earnings (losses) before reclassifications —
 388
 12
 400
Deferred income taxes —
 (85) —
 (85)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes —
 303
 12
 315
         
Amounts reclassified to net earnings 28
 (7) —
 21
Deferred income taxes (7) 2
 —
 (5)
Amounts reclassified to net earnings, net of deferred income taxes 21
 (5) —
 16
         
Other comprehensive earnings (losses), net of deferred income taxes 21
 298
(1) 
12
 331
         
Balances, March 31, 2020 $(2,171) $(395) $33
 $(2,533)


For the Three Months Ended September 30, 2020
Benefit PlansABICurrency
Translation
Adjustments and Other		Accumulated
Other
Comprehensive
Losses
(in millions)
Balances, June 30, 2020$(2,150)$(1,606)$(18)$(3,774)
Other comprehensive earnings (losses) before reclassifications(75)(71)23 (123)
Deferred income taxes19 22 0 41 
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes(56)(49)23 (82)
Amounts reclassified to net earnings (losses)55 44 0 99 
Deferred income taxes(14)(10)0 (24)
Amounts reclassified to net earnings (losses), net of deferred income taxes41 34 0 75 
Other comprehensive earnings (losses), net of deferred income taxes(15)(15)(1)23 (7)
Balances, September 30, 2020$(2,165)$(1,621)$5 $(3,781)
  For the Three Months Ended March 31, 2019
  Benefit Plans ABI 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
  (in millions)
Balances, December 31, 2018 $(2,168) $(374) $(5) $(2,547)
         
Other comprehensive earnings (losses) before reclassifications —
 (238) —
 (238)
Deferred income taxes —
 49
 —
 49
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes —
 (189) —
 (189)
         
Amounts reclassified to net earnings 39
 (12) —
 27
Deferred income taxes (10) 2
 —
 (8)
Amounts reclassified to net earnings, net of deferred income taxes 29
 (10) —
 19
         
Other comprehensive earnings (losses), net of deferred income taxes 29
 (199)
(1) 
—
 (170)
         
Balances, March 31, 2019 $(2,139) $(573) $(5) $(2,717)

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For the Nine Months Ended September 30, 2019
Benefit PlansABICurrency
Translation
Adjustments and Other		Accumulated
Other
Comprehensive
Losses
(in millions)
Balances, December 31, 2018$(2,168)$(374)$(5)$(2,547)
Other comprehensive earnings (losses) before reclassifications0 108 8 116 
Deferred income taxes0 (28)0 (28)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes0 80 8 88 
Amounts reclassified to net earnings (losses)113 (35)0 78 
Deferred income taxes(29)8 0 (21)
Amounts reclassified to net earnings (losses), net of deferred income taxes84 (27)0 57 
Other comprehensive earnings (losses), net of deferred income taxes84 53 (1)8 145 
Balances, September 30, 2019$(2,084)$(321)$3 $(2,402)

For the Three Months Ended September 30, 2019
Benefit PlansABICurrency
Translation
Adjustments and Other		Accumulated
Other
Comprehensive
Losses
(in millions)
Balances, June 30, 2019$(2,110)$(542)$6 $(2,646)
Other comprehensive earnings (losses) before reclassifications0 290 (5)285 
Deferred income taxes0 (67)2 (65)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes0 223 (3)220 
Amounts reclassified to net earnings (losses)35 (4)0 31 
Deferred income taxes(9)2 0 (7)
Amounts reclassified to net earnings (losses), net of deferred income taxes26 (2)0 24 
Other comprehensive earnings (losses), net of deferred income taxes26 221 (1)(3)244 
Balances, September 30, 2019$(2,084)$(321)$3 $(2,402)
(1) Primarily reflects Altria’s share of ABI’s currency translation adjustments and the impact of Altria’s designated net investment hedges. For further discussion of designated net investment hedges, see Note 55. . Financial Instruments.


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The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:earnings (losses):
 For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
 2020 20192020201920202019
 (in millions)(in millions)
Benefit Plans: (1)
    
Benefit Plans: (1)
Net loss $34
 $49
Net loss$129 $135 $60 $42 
Prior service cost/credit (6) (10)Prior service cost/credit(18)(22)(5)(7)
 28
 39
111 113 55 35 
    
ABI (2)
 (7) (12)
ABI (2)
29 (35)44 (4)
    
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings $21
 $27
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings (losses)Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings (losses)$140 $78 $99 $31 
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 6. Benefit Plans.
(2) Amounts are included in earnings (losses) from equity investments. For further information, see Note 4. Investments in Equity Securities.

Note 9. Segment Reporting:


In the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment.

The products of Altria’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 Middleton and premium cigars sold by Nat Sherman;Middleton; oral tobacco products, consisting of MST and snus products manufactured and sold by 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’s reportable segments of smokeable products, oral tobacco products (formerly smokeless products) and wine. The financial services and the innovative tobacco products businesses are included in all other.

Altria’s chief operating decision maker (the “CODM”) reviews operating companies income (loss) (“OCI”) 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. Interest and other debt expense, net, net periodic benefit income/cost, excluding service cost, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the CODM.


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Segment data were as follows: 
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020201920202019
(in millions)
Net revenues:
Smokeable products$17,522 $16,837 $6,313 $6,049 
Oral tobacco products1,901 1,762 640 620 
Wine434 483 157 167 
All other(8)21 13 20 
Net revenues$19,849 $19,103 $7,123 $6,856 
Earnings (losses) before income taxes:
OCI:
Smokeable products$7,609 $6,864 $2,789 $2,561 
Oral tobacco products1,297 1,195 436 417 
Wine(347)50 19 16 
All other(63)(27)(7)8 
Amortization of intangibles(54)(28)(17)(12)
General corporate expenses(150)(154)(60)(46)
Corporate asset impairment and exit costs0 (1)0 0 
Operating income8,292 7,899 3,160 2,944 
Interest and other debt expense, net(893)(989)(310)(293)
Net periodic benefit income, excluding service cost58 40 3 24 
Earnings (losses) from equity investments(306)866 (472)333 
Impairment of JUUL equity securities(2,600)(4,500)(2,600)(4,500)
Loss on Cronos-related financial instruments(202)(1,327)(105)(636)
Earnings (losses) before income taxes$4,349 $1,989 $(324)$(2,128)
  For the Three Months Ended March 31,
  2020 2019
  (in millions)
Net revenues:    
Smokeable products $5,606
 $4,935
Oral tobacco products 601
 540
Wine 146
 151
All other 6
 2
Net revenues $6,359
 $5,628
Earnings before income taxes:    
Operating companies income (loss):    
Smokeable products $2,370
 $1,932
Oral tobacco products 414
 358
Wine (379) 15
All other (5) (12)
Amortization of intangibles (19) (8)
General corporate expenses (45) (46)
Corporate asset impairment and exit costs —
 (1)
Operating income 2,336
 2,238
Interest and other debt expense, net (275) (384)
Net periodic benefit income, excluding service cost 27
 1
Earnings from equity investments 157
 86
Loss on Cronos-related financial instruments (137) (425)
Earnings before income taxes $2,108
 $1,516


The comparability of operating companies incomeOCI for the reportable segments was affected by the following:

Tobacco and Health Litigation Items - Pre-tax charges related to certain tobacco and health litigation items were recorded in Altria’s condensed consolidated statements of earnings as follows:
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020201920202019
(in millions)
Smokeable products segment$73 $43 $34 $3 
Interest and other debt expense, net3 5 0 0 
Total$76 $48 $34 $3 
  For the Three Months Ended March 31,
  2020 2019
  (in millions)
Smokeable products segment $22
 $15
Interest and other debt expense, net 2
 2
Total $24
 $17


The amounts shown in the table above for the smokeable products segment were recorded in marketing, administration and research costs. For further discussion, see Note 11.12. Contingencies.

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COVID-19 Special Items - Net pre-tax charges of $50 million ($41 million in the smokeable products segment and $9 million in the oral tobacco products segment) related to COVID-19 were recorded in Altria’s condensed consolidated statements of earnings for the nine months ended September 30, 2020. The net pre-tax charges, which were directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic, were all recorded in costs of sales in the second quarter of 2020 and included premium pay, personal protective equipment and health screenings, which were partially offset by certain employment tax credits. The COVID-19 special items do not include the inventory-related implementation costs associated with the wine business strategic reset, which are included in asset impairment, exit and implementation costs. 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.

Asset Impairment, Exit and Implementation Costs - See Note 3. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.


Note 10. Debt:

Short-term Borrowings and Borrowing Arrangements

Altria had $3.0 billion and 0 short-term borrowings at March 31,At September 30, 2020 and December 31, 2019, respectively.Altria had 0 short-term borrowings.

At March 31,September 30, 2020, Altria had a senior unsecured 5-year revolving credit agreement dated August 1, 2018 (as amended, the “Credit Agreement”), that provides for borrowings up to an aggregate principal amount of $3.0 billion.

On March 23, 2020, Altria provided notice to JPMorgan Chase Bank, N.A., as administrative agent under the The Credit Agreement, to borrow the entire available amount ($3.0 billion) under the Credit Agreement and, as of March 31, 2020, $3.0 billion was outstanding under the Credit Agreement. Altria typically accesses the commercial paper market early in the second quarter to help fund payments related to the 1998 Master Settlement Agreement (the “MSA”) and shareholder dividends. In light of the current uncertainty in the global capital markets, including the commercial paper markets, resulting from the COVID-19 pandemic, Altria elected to borrow the entire amount available under the Credit Agreement as a precautionary measure to increase its cash position and preserve financial flexibility. Altriawhich is used a portion of the proceeds from the borrowing under the Credit Agreement to help fund these payments and for other general corporate purposes.

All borrowings under the Credit Agreement maturepurposes, expires on August 1, 2023 unless extended pursuant to the terms of the Credit Agreement. The Credit Agreementand includes an option, subject to certain conditions, for Altria to extend the expiration dateCredit Agreement for 2 additional one-year periods. AltriaPricing for interest and fees under the Credit Agreement may repaybe modified in the event of a change in the rating of Altria’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement at any time without penalty. Altria has the intent and abilityare expected to repay the entire outstanding balance under the Credit Agreement within one year and believes it has adequate liquidity and access to financial resources to meet its anticipated obligations in the foreseeable future. As a result, Altria has classified the full amount of the borrowings as a current liability on its condensed consolidated balance sheet at March 31, 2020. Interest on the outstanding borrowings at March 31, 2020 wasbe based on the three-month London Interbank Offered Rate (“LIBOR”), or a mutually agreed upon benchmark rate, plus an applicablea percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services.Services (“Standard & Poor’s”). The applicable percentage based on Altria’s long-term senior unsecured debt ratings at March 31,September 30, 2020 for borrowings under the Credit Agreement was 1.0%. At March 31, 2020, the interest rate for Altria’s current borrowings under the Credit Agreement was 2.23%. The Credit Agreement does not include any other rating triggers, or any provisions that could require the posting of collateral.

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.

The Credit Agreement includes various covenants, one of which requires Altria to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Consolidated Interest Expense of not less than 4.0 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. At March 31,September 30, 2020, the ratio of consolidated EBITDA to Consolidated Interest Expense, calculated in accordance with the Credit Agreement, was 9.09.2 to 1.0. At March 31,September 30, 2020, Altria was in compliance with its covenants in the Credit Agreement. The terms “Consolidated EBITDA” and “Consolidated Interest Expense,” each as defined in the Credit Agreement, include certain adjustments.

At March 31, 2020, accrued interest on short-term borrowings under the Credit Agreement of $1 million was included in other accrued liabilities on Altria’s condensed consolidated balance sheet.

Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 12. USA.
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Condensed Consolidating Financial Information.

Long-term Debt
For discussion of the fair
The aggregate carrying value of Altria’s short-term borrowings, see Note 5. total long-term debt at September 30, 2020 and December 31, 2019 was $29.3 billion and $28.0 billion, respectively.
Financial Instruments.

In May 2020, Altria issued USD denominated long-term senior unsecured notes in the aggregate principal amount of $2.0 billion (collectively, the “Notes”). The net proceeds from the Notes were used for general corporate purposes, which included repayment of the outstanding balance of the Credit Agreement. The Notes contain the following terms:
Long-term Debt
▪$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.

The Notes are Altria’s senior unsecured obligations and rank equally in right of payment with all of Altria’s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria and (ii) the Notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria will be required to make an offer to purchase the Notes at a price equal to 101% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the Notes.

The obligations of Altria under the Notes are guaranteed by PM USA.

During the first quarter of 2020, Altria repaid in full at maturity senior unsecured notes in the aggregate principal amount of $1,000 million.$1.0 billion.

At March 31,September 30, 2020 and December 31, 2019, accrued interest on long-term debt of $270$244 million and $470 million, respectively, was included in other accrued liabilities on Altria’s condensed consolidated balance sheets.

Altria designatedFor a discussion of the fair value of Altria’s long-term debt and the designation of its Euro denominated senior unsecured notes as a net investment hedge of its investment in ABI.

For discussion of Altria’s net investment hedge and the fair value of Altria’s long-term debt,ABI, see Note 5. Financial Instruments.


Note 11. Income Taxes:

The income tax rate for the nine and three months ended September 30, 2020 was 41.8% and (195.1)%, respectively, versus 74.1% and (22.3)% for the nine and three months ended September 30, 2019, respectively. The changes in the tax rates were due primarily to the following:

▪a full valuation allowance in 2019 attributable to the tax benefits associated with the impairment of JUUL equity securities;

partially offset by:

▪a full valuation allowance in 2020 attributable to the tax benefits associated with the impairment of JUUL equity securities;
▪tax benefits recorded in 2019 for the reversal of tax accruals no longer required;
▪net tax expense in 2020 related to Altria’s equity investment in Cronos, which included a valuation allowance release on a deferred tax asset; and
▪net tax benefit in 2019 related to Altria’s equity investment in Cronos, which included a valuation allowance release on a deferred tax asset.



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A reconciliation of the beginning and ending valuation allowances for the period ended September 30, 2020 was as follows:
(in millions)
Balance at beginning of year$2,324 
Additions to valuation allowance charged to income tax expense673 
Reductions to valuation allowance credited to income tax benefit(145)
Foreign currency translation4 
Balance at end of period$2,856 

The current year addition to the valuation allowance was due primarily to valuation allowances recorded for deferred tax assets related to Altria’s equity investments in JUUL and Cronos. The current year reduction to the valuation allowance was due primarily to the write-off of a deferred tax asset related to Altria’s equity investment in Cronos for which a valuation allowance had previously been established.

Altria is subject to income taxation in many jurisdictions. Unrecognized tax benefits 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. At September 30, 2020, Altria’s total unrecognized tax benefits were $74 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2020 was $41 million, along with $33 million affecting deferred taxes. 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 $8 million. At December 31, 2019, Altria’s total unrecognized tax benefits were $64 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2019 was $40 million, along with $24 million affecting deferred taxes.

Note 12. Contingencies

Legal proceedings covering a wide range of matters are pending or threatened in various U.S. and foreign jurisdictions against Altria and its subsidiaries, including PM USA and USSTC, as well as their respective indemnitees and Altria’s investees. Various types of claims may be raised in these proceedings, including product liability, unfair trade practices, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors, shareholders or 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 and other litigation are or can be significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria 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 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 or its subsidiaries also 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 limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, also may also seek to repeal or alter bond cap statutes through legislation. Although Altria cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

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Altria and its subsidiaries record provisions in the condensed consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 11.12. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending 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 cases; and (iii) accordingly, management has not provided any amounts in the condensed consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.

Altria 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, or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria 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 and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria to do so.

Overview of Altria and/or PM USA Tobacco-Related Litigation

Types and Number of U.S. Cases

Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iii) e-vapor cases alleging violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), fraud, failure to warn, design defect, negligence and unfair trade practices; and (iv) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in tobacco-related litigation are discussed below.


The table below lists the number of certain tobacco-related cases pending in the U.S. against PM USA and, in some instances,and/or Altria as of AprilOctober 27, 2020, April 22,October 28, 2019 and April 23,October 22, 2018:
April 27, 2020 April 22, 2019 April 23, 2018October 27, 2020October 28, 2019October 22, 2018
Individual Smoking and Health Cases (1)
109 98 102
Individual Smoking and Health Cases (1)
14295101
Health Care Cost Recovery Actions (2)
— 1 1
Health Care Cost Recovery Actions (2)
001
E-vapor Cases(3)
202 2 3
E-vapor Cases(3)
1,145
Other Tobacco-Related Cases(4)
4 — —
Other Tobacco-Related Cases(4)
444
(1) Includes 2215 cases filed in New Mexico, 26 cases filed in Massachusetts and 4654 non-Engle cases filed in Florida. Does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (these Engle progeny cases are discussed below in Smoking and Health Litigation - Engle Class Action). Also does not include 1,4721,471 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. In March 2018, 923 of these cases were voluntarily dismissed without prejudice.
(2) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.
(3) Includes 2425 class action lawsuits, 1702 of which were filed in Canada, 1,064 individual lawsuits, 531 state or local government lawsuits and 325 lawsuits filed by school districts relating to JUUL e-vapor products. JUUL is an additional named defendant in each of these lawsuits.
(4)For 2019 and 2020, includesIncludes 2 inactive smoking and health cases alleging personal injury or seeking court-supervised programs or ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including 1 case in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, and 2 inactive class action lawsuits alleging that use of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of RICO.

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International Tobacco-Related Cases

As of AprilOctober 27, 2020, Altria is named as a defendant in 2 e-vapor class action lawsuits in Canada. PM USA also is a named defendant in 10 health care cost recovery actions in Canada, 8 of which also name Altria as a defendant. PM USA and Altria are also named defendants in 7 smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.

Tobacco-Related Cases Set for Trial

As of AprilOctober 27, 2020, 20 Engle progeny cases are set for trial through June 30, 2020. In addition, there are 0or individual smoking and health cases against PM USA are set for trial during this period.through December 31, 2020. Cases against other companies in the tobacco industry may be scheduled for trial during this period. Trial dates are subject to change and some trials have been postponed due to the COVID-19 pandemic.

Trial Results

Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 69 tobacco-related cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 44 of the 69 cases. These 44 cases were tried in Alaska (1), California (7), Connecticut (1), Florida (10), Louisiana (1), Massachusetts (4), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2).

Of the 25 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 20 have reached final resolution, and 1 case (Gentile) that was initially returned in favor of plaintiff was reversed post-trial and remains pending.

See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of verdicts in state and federal Engle progeny cases involving PM USA as of AprilOctober 27, 2020.

Judgments Paid and Provisions for Tobacco and Health Litigation Items (Including Engle Progeny Litigation)

After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid judgments and settlements (including related costs and fees) totaling approximately $748$798 million and interest totaling approximately $216$217 million as of March 31,September 30, 2020. These amounts include payments for Engle progeny

judgments (and related costs and fees) totaling approximately $327$364 million and related interest totaling approximately $54$55 million.

The changes in Altria’s accrued liability for tobacco and health litigation items, including related interest costs, for the periods specified below are as follows:
For the Three Months Ended March 31,    For the Nine Months Ended September 30,    For the Three Months Ended September 30,
(in millions)2020 2019(in millions)2020201920202019
Accrued liability for tobacco and health litigation items at beginning of period (1)
$14
 $112
Accrued liability for tobacco and health litigation items at beginning of period (1)
$14 $112 $22 $13 
Pre-tax charges for:   Pre-tax charges for:
Tobacco and health litigation22
(2) 
15
Tobacco and health litigation73 (2)43 34 3 
Related interest costs2
 2
Related interest costs3 5 0 0 
Payments (1)
(28)
(3) 
(109)
Payments (1)
(81)(3)(151)(47)(7)
Accrued liability for tobacco and health litigation items at end of period (1)
$10
 $20
Accrued liability for tobacco and health litigation items at end of period (1)
$9 $9 $9 $9 
(1) Includes amounts related to the costs of implementing the corrective communications remedy related to the Federal Government’s Lawsuit discussed below.
(2)Includes approximately $7$20 million related to pre-trial resolution of approximately 100240 tobacco and health cases.
(3) Includes approximately $7$20 million in payments related to above-mentioned pre-trial resolution of approximately 100240 tobacco and health cases and $2 million for pre-trial resolution of other tobacco and health cases that was accrued in 2019 but not paid until 2020.

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The accrued liability for tobacco and health litigation items, including related interest costs, was included in accrued liabilities on Altria’s condensed consolidated balance sheets. Pre-tax charges for tobacco and health litigation were included in marketing, administration and research costs on Altria’s condensed consolidated statements of earnings (losses).earnings. Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria’s condensed consolidated statements of earnings (losses).earnings.

Security for Judgments

To obtain stays of judgments pending appeal, PM USA has posted various forms of security. As of March 31,September 30, 2020, PM USA has posted appeal bonds totaling approximately $48$61 million, which have been collateralized with restricted cash that are included in assets on the condensed consolidated balance sheet.

Smoking and Health Litigation

Overview

Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of unfair trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.

Non-Engle Progeny Litigation

Summarized below are the non-Engle progeny smoking and health cases pending during 2020 in which a verdict was returned in favor of plaintiff and against PM USA. Charts listing certain verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.

Principe: In February 2020, a jury in a Florida state court returned a verdict in favor of plaintiff and against PM USA, awarding approximately $11 million in compensatory damages. There was no0 claim for punitive damages. PM USA’s post-trial motions are pending.appeal is pending in the Third District Court of Appeal.

Greene: In September 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiffs and against PM USA, awarding approximately $10 million in compensatory damages. An additionalIn May 2020, the court ruled on plaintiffs’ remaining claim by plaintiffs remains pending.and trebled the compensatory damages award to approximately $30 million. PM USA plans to file post-trial motions.


Laramie: In August 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiff, awarding $11 million in compensatory damages and $10 million in punitive damages. PM USA and plaintiff have appealed.

Gentile: In October 2017, a jury in a Florida state court returned a verdict in favor of plaintiff, awarding approximately $7.1 million in compensatory damages and allocating 75% of the fault to PM USA (an amount of approximately $5.3 million). PM USA appealed. In September 2019, the Florida Fourth District Court of Appeal reversed the judgment entered by the trial court, granted PM USA judgment on certain claims and remanded for a new trial on the remaining claims. Plaintiff has petitioned the Florida Supreme Court for further review.

Federal Government’s Lawsuit: See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America health care cost recovery case.

Engle Class Action

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
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In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent.

In August 2006, PM USA and plaintiffs sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In February 2008, the trial court decertified the class.

Pending Engle Progeny Cases

The deadline for filing Engle progeny cases expired in January 2008, at which point a total of approximately 9,300 federal and state claims were pending. As of AprilOctober 27, 2020, approximately 1,5001,300 state court cases were pending against PM USA or Altria asserting individual claims by or on behalf of approximately 1,9001,600 state court plaintiffs.  Because of a number of factors, including docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. While the Federal Engle Agreement (discussed below) resolved nearly all Engle progeny cases pending in federal court, as of AprilOctober 27, 2020, 43 cases were pending against PM USA in federal court representing the cases excluded from that agreement.

Engle Progeny Trial Results

As of AprilOctober 27, 2020, 134 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. NaN verdicts were returned in favor of plaintiffs and 45 verdicts (Skolnick, Calloway,Oshinsky-Blacker, Oshinsky-BlackerMcCoy andFreeman Frogel) that were initially returned in favor of plaintiffs were reversed post-trial or on appeal and remain pending.

NaN verdicts were returned in favor of PM USA, of which 4243 were state cases. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of AprilOctober 27, 2020. NaN verdicts (Pearson, D. Cohen, Collar and Chacon) that were returned in favor of PM USA were subsequently reversed for new trials. Juries in 2 cases (Reider and

Banks) returned 0 damages verdicts in favor of PM USA. Juries in 2 other cases (Weingart and Hancock) returned verdicts against PM USA awarding 0 damages, but the trial court in each case decided to award plaintiffs damages. NaN case, Pollari, resulted in a verdict in favor of PM USA following a retrial of an initial verdict returned in favor of plaintiff. Appeals by plaintiff and defendants are pending. NaN cases, Gloger, Rintoul (Caprio) and Duignan, resulted in verdicts in favor of plaintiffs following retrial of initial verdicts returned in favor of plaintiffs. Post-trial motions or appeals are pending. NaN case, Freeman, resulted in an appellate reversal of a jury verdict in favor of plaintiff, and a judgment in favor of PM USA.

The charts below list the verdicts and post-trial developments in certain Engle progeny cases in which verdicts were returned in favor of plaintiffs. The first chart lists such cases that are pending as of AprilOctober 27, 2020 where PM USA has recorded a provision in its consolidated financial statements because PM USA has determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated; the second chart lists other such cases that are pending as of AprilOctober 27, 2020 but where PM USA has determined an unfavorable outcome is not probable and the amount of loss cannot be reasonably estimated; and the third chart lists other such cases that have concluded within the previous 12 months. Unless otherwise noted for a particular case, the jury’s award for compensatory damages will not be reduced by any finding of plaintiff’s comparative fault. Further, the damages noted reflect adjustments based on post-trial or appellate rulings.

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Currently Pending Engle Cases with Accrued Liabilities
(rounded to nearest $ million)

PlaintiffVerdict DateDefendant(s)CourtCompensatory Damages (All Defendants)Punitive Damages (PM USA)Appeal Status
Accrual (1)
Berger (Cote)
September 2014PM USAFederal Court - Middle District of Florida$6 million$21 millionThe Eleventh Circuit Court of Appeals reinstated the punitive and compensatory damages awards and remanded the case to the district court. PM USA’s challenge to the punitive damages award was denied by the district court. Appeal by PM USA’s appealUSA to the Eleventh Circuit Court of Appeals is pending.$6 million accrual in the fourth quarter of 2018
SantoroMarch 2017
PM USA, R.J. Reynolds and Liggett Group(2)
Broward$2 million (<$1 million PM USA)<$1 millionThe Fourth District Court of Appeal affirmed the compensatory damages award and reinstated the punitive damages award. Defendants’ motion for rehearing was denied. Appeal by defendants of punitive damages award to Florida Supreme Court pending.<$1 million accrual for compensatory damages award in the second quarter of 2020
(1)Accrual amounts include interest and associated costs, if applicable. For cases with multiple defendants, if any, accrual amounts reflect the portion of compensatory damages PM USA believes it will have to pay if the case is ultimately decided in plaintiff’s favor after taking into account any portion potentially payable by the other defendant(s).
(2) References to “R.J. Reynolds,” “Lorillard” and “Liggett Group” are to R.J. Reynolds Tobacco Company, Lorillard Tobacco Company and Liggett Group, LLC, respectively.

Other Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)

PlaintiffVerdict DateDefendant(s)Court
Compensatory Damages (1)
Punitive Damages
(PM USA)		Appeal Status
Duignan
February 2020(2)
PM USA and
R.J. Reynolds(3)
Pinellas$3 million$12 millionDefendants’ post-trial motionsAppeal by defendants to Second District Court of Appeal pending.
CuddiheeJanuary 2020PM USADuval$3 million$0Defendant’s post-trial motionsAppeal by plaintiff and defendant to First District Court of Appeal pending.
Rintoul (Caprio)(Caprio)
November 2019(2)(2)
PM USA and R.J. ReynoldsBroward$9 million ($5 million PM USA)$74 millionDefendants’ post-trial motionAppeal by plaintiff and defendants to Fourth District Court of Appeal pending.
Gloger
November 2019(2)(2)
PM USA and R.J. ReynoldsMiami-Dade$15 million ($5 million PM USA)$11 millionAppeal by defendants to Third District Court of Appeal pending.
McCallMarch 2019PM USABroward<$1 million (<$1 million PM USA)<$1 millionNew trial ordered on punitive damages.
NeffMarch 2019PM USA and R.J. ReynoldsBroward$4 million$2 millionAppeals by plaintiff and defendants to Fourth District Court of Appeal pending.
FrogelMarch 2019PM USAPalm Beach<$1 million (<$1 million PM USA)$0Appeals by plaintiff and defendant to Fourth District Court of Appeal pending.

Other Currently Pending Engle Cases with Verdicts Againstreversed the judgment against PM USA
(rounded to nearest $ million)

and ordered a new trial.
Mahfuz
PlaintiffVerdict DateDefendant(s)Court
Compensatory Damages (1)
Punitive Damages
(PM USA)		Appeal Status
MahfuzFebruary 2019PM USA and R.J. ReynoldsBroward$12 million$10 millionAppeals by plaintiff and defendants to Fourth District Court of Appeal pending.
HollimanFebruary 2019PM USAMiami-Dade$3 million$0Defendant’s appeal to Third District Court of Appeal pending.
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ChadwellPlaintiffVerdict DateDefendant(s)Court
Compensatory Damages (1)
Punitive Damages
(PM USA)		Appeal Status
ChadwellSeptember 2018PM USAMiami-Dade$2 million$0Appeals by defendant and plaintiff to
Third District Court of Appeal pending.affirmed the compensatory damages award. PM USA petitioned Florida Supreme Court for review. Case stayed pending Florida Supreme Court decision in Prentice.(3)
KaplanJuly 2018PM USA and R.J. ReynoldsBroward$2 million$2 millionAppeals by defendants and plaintiff to Fourth District Court of Appeal pending.
LandiR. DouglasJune 2018November 2017PM USA and R.J. ReynoldsBroward$8 million$5 millionAppeals by plaintiff and defendants to Fourth District Court of Appeal pending.
R. DouglasNovember 2017PM USADuval<$1 million$0Awaiting entry of final judgment by the trial court.
SommersApril 2017PM USAMiami-Dade$1 million$0Third District Court of Appeal affirmed compensatory damages award and granted new trial on punitive damages. Defendant petitioned Florida Supreme Court denied PM USA's petition for review.
SantoroMarch 2017
PM USA, R.J. Reynolds and Liggett Group(3)
Broward$2 million$0Trial court set aside punitive damages award; appeals by plaintiff and defendants to Fourth District Court of Appeal pending.
Cooper (Blackwood)September 2015PM USA and R.J. ReynoldsBroward
$5 million
(<$1 million PM USA)
$0Fourth District Court of Appeal affirmed judgment and granted a new trial on punitive damages.
D. BrownJanuary 2015PM USAFederal Court - Middle District of Florida$8 million$9 million
Appeal by defendant to U.S. Court of Appeals for the Eleventh Circuit pending.stayed pending Florida Supreme Court decision in Prentice.(3)
KerrivanHarrisOctoberJuly 2014PM USA,
R.J. Reynolds and R.J. ReynoldsLorillard		Federal Court - Middle District of Florida$16 million$16 millionU.S. Court of Appeals for the Eleventh Circuit affirmed the judgment. Defendants’ motion for rehearing pending.
HarrisJuly 2014
PM USA,
R.J. Reynolds and Lorillard(3)
Federal Court - Middle District of Florida$2 million (<$1 million PM USA)$0Appeals by plaintiff and defendants to U.S. Court of Appeals for the Eleventh Circuit pending.
(1)PM USA’s portion of the compensatory damages award is noted parenthetically where the court has ruled that comparative fault applies.
(2) Plaintiff’s verdict following a retrial of an initial verdict in favor of plaintiff.
(3) References to “R.J. Reynolds,” “Liggett Group” and “Lorillard” are to R.J. Reynolds Tobacco Company, Liggett Group, LLC and Lorillard Tobacco Company, respectively. PM USA is not a defendant in this case.
Engle Cases Concluded Within Past 12 Months(1)
(rounded to nearest $ million)
Engle Cases Concluded Within Past 12 Months(1)
(rounded to nearest $ million)
PlaintiffVerdict DateDefendant(s)CourtAccrual Date
Payment Amount

(if any)
Payment Date
TheisDean (Kerrivan)(2)
May 2018October 2014PM USA and
R.J. Reynolds		SarasotaFirst quarter of 2020$17 millionFebruary 2020
Alvarez Del RealSeptember 2019PM USAMiami-DadeFourth quarter of 2019<$1 millionOctober 2019

Engle Cases Concluded Within Past 12 Months(1)
(rounded to nearest $ million)
PlaintiffVerdict DateDefendant(s)CourtAccrual Date
Payment Amount
(if any)
Payment Date
ZingaroMay 2019PM USA and
R.J. Reynolds		BrowardThird quarter of 2019<$1 millionOctober 2019
BryantDecember 2017PM USAEscambiaSecond quarter of 2019<$1 millionJuly 2019
WallaceOctober 2017PM USA and
R.J. Reynolds		BrevardSecond quarter of 2019$26 millionMay 2019
J. BrownFebruary 2017PM USA and
R.J. Reynolds		PinellasFirst quarter of 2019$4 millionApril 2019
L. MartinMay 2017PM USAMiami-DadeFirst quarter of 2019$2 millionApril 2019
DanielsonNovember 2015PM USAEscambiaFirst quarter of 2019$3 millionMarch 2019
S. MartinNovember 2016PM USA and
R.J. Reynolds		BrowardFirst quarter of 2019$5 millionMarch 2019
SearcyApril 2013PM USA and
R.J. Reynolds		Federal Court - Middle District of FloridaThird quarter of 20182020$226 millionMarch 2019August 2020
Boatright
Landi(3)
November 2014June 2018PM USA and Liggett GroupR.J. ReynoldsPolkBrowardSecond quarter of 20182020$4210 millionMarch 2019July 2020
M. BrownTheis(3)(4)
May 20152018PM USADuvalSecond quarter of 2018$8 millionMarch 2019
Jordan(4)
August 2015PM USADuvalSecond quarter of 2018$11 millionMarch 2019
PardueDecember 2016PM USA and
R.J. Reynolds		AlachuaSarasotaSecond and Third quarters of 2018$11 millionMarch 2019
McKeeverFebruary 2015PM USABrowardFourthFirst quarter of 20172020$2117 millionMarch 2019February 2020
(1)In two4 cases in which PM USA paid the judgments more than a year ago, Naugle, Gore, M. Brown and GoreJordan, plaintiffs were awarded approximately $8 million, $2 million, $9 million and approximately $2$4 million in fees and other costs, respectively.  In both cases, PM USA has appealed.appealed in all of these cases.
(2) In August 2020, the U.S. Court of Appeals for the Eleventh Circuit denied the defendants’ petition for rehearing. As a result, in the third quarter of 2020, PM USA recorded a pre-tax provision of approximately $26 million, reflecting its portion of the judgment plus interest, and paid this amount in August 2020.
(3) In June 2020, the Fourth District Court of Appeal affirmed the compensatory damages award. As a result, in the second quarter of 2020, PM USA recorded a pre-tax provision of approximately $10 million for the judgment plus interest and paid this amount in July 2020.
(4) In February 2020, the Florida Second District Court of Appeal denied PM USA’s petition for review.  As a result, in the first quarter of 2020, PM USA recorded a pre-tax provision of approximately $17 million for the judgment plus interest which was subsequentlyand paid in the first quarterthis amount.

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(3) The trial court also awarded plaintiff approximately $9 million in fees, interest and costs.  PM USA and plaintiff have appealed.
(4) The trial court also awarded plaintiff approximately $4 million in fees and costs. PM USA and plaintiff have appealed.

Florida Bond Statute

In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs have been unsuccessful in various challenges to the bond cap statute in Florida state court.

No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.

From time to time, legislation has been presented to the Florida legislature that would repeal the bond cap statute; however to date, no legislation repealing the statute has passed.

Other Smoking and Health Class Actions

Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.

Class certification has been denied or reversed by courts in 61 smoking and health class actions involving PM USA in Arkansas (1), California (1), Delaware (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1). See Certain Other Tobacco-Related

Litigation below for a discussion of “Lights” and “Ultra Lights” class action cases and medical monitoring class action cases pending against PM USA.

As of AprilOctober 27, 2020, PM USA and Altria are named as defendants, along with other cigarette manufacturers, in 7 class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (2 separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants’ cigarettes. In March 2019, all of these class actions were stayed as a result of 3 Canadian tobacco manufacturers (none of which is related to Altria or its subsidiaries) seeking protection under Canada’s Companies’ Creditors Arrangement Act (which is similar to Chapter 11 bankruptcy in the U.S.). The companies entered into these proceedings following a Canadian appellate court upholding 2 smoking and health class action verdicts against those companies totaling approximately CAD $13 billion. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI, which provides for indemnities for certain liabilities concerning tobacco products.

Health Care Cost Recovery Litigation

Overview

In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.

Although there have been some decisions to the contrary, most judicial decisions in the U.S. have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five federal circuit courts of appeal.

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In addition to the cases brought in the U.S., health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria, in Canada (10 cases), and other entities have stated that they are considering filing such actions.

Since the beginning of 2008, the Canadian Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in the British Columbia and Quebec cases, while both Altria and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia cases. The Nunavut Territory and Northwest Territory have passed legislation permitting similar claims, but lawsuits based on this legislation have not been filed. All of these cases have been stayed pending resolution of proceedings in Canada involving 3 tobacco manufacturers (none of which are affiliated with Altria or its subsidiaries) under the Companies’ Creditors Arrangement Act discussed above. See Smoking and Health Litigation - Other Smoking and Health Class Actions above for a discussion of these proceedings. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI that provides for indemnities for certain liabilities concerning tobacco products.

Settlements of Health Care Cost Recovery Litigation

In November 1998, PM USA and certain other tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia and certain U.S. territories to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers or “OPMs” (now PM USA and R.J. Reynolds and, with respect to certain brands, ITG Brands, LLC (“ITG”)) make annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the OPMs are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million. For the three months ended March 31,September 30, 2020 and

2019, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $1.2 billion and $1.1 billion, respectively. For the nine months ended September 30, 2020 and $0.92019, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $3.3 billion and $3.2 billion, respectively. These amounts include PM USA’s estimate of amounts related to NPM Adjustments discussed below.

NPM Adjustment Disputes

PM USA is participating in proceedings regarding the NPM Adjustment for 2003-2019. The “NPM Adjustment” is a reduction in MSA payments made by the OPMs and those manufacturers that are subsequent signatories to the MSA (collectively, the “participating manufacturers” or “PMs”) that applies if the PMs collectively lose at least a specified level of market share to non-participating manufacturers since 1997, subject to certain conditions and defenses. The independent auditor (the “IA”) appointed under the MSA calculates the maximum amount of the NPM Adjustment, if any, for each year.

NPM Adjustment Disputes - Settlement with 36 States and Territories and Settlement with New York.

PM USA has entered into 2 settlements of NPM Adjustment disputes with a total of 37 states and territories, one with 36 states and territories (the “multi-state settlement”) and the other with the State of New York. In the multi-state settlement, PM USA, by the end of October 2017, had settled the NPM Adjustment disputes for 2003-2015 with 26 states in exchange for a total of $740 million. In 2018, there were 2 principal developments with respect to this settlement. First, PM USA agreed to settle the NPM Adjustment disputes for 2016 and 2017 with the 26 states mentioned above. Second, PM USA settled the NPM Adjustment disputes for 2004-2017 with 10 additional states. As a result of these 2 developments, PM USA will receive approximately $248 million, $68 million of which it received in April 2018, $121 million of which it received in April 2019 and $47 million of which it received in April 2020. In connection with these 2 developments, PM USA recorded a reduction to cost of sales in the amount of $39 million in 2017 and in the amount of $209 million in 2018. In the first quarter of 2019, PM USA also recorded a reduction to cost of sales in the amount of $52 million for its estimate of the 2018 NPM Adjustment settlement credit it expects to receive under the multi-state settlement.

In the first quarter of 2020, the PMs agreed that certain conditions set forth in the multi-state settlement by the 10 states that settled the NPM Adjustment in 2018 had been met. As a result, PM USA’s and the other PMs’ settlement with Pennsylvania was extended to include NPM Adjustments for 2018-2024,2018-2024. In the third quarter of 2020, PM USA and settlementsthe other PMs also agreed with the other 935 states were extendedto extend the settlement with those
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states to include NPM Adjustments for 2018-2019.2018-2022. As a result of this development,these two developments, PM USA will receive approximately $43$361 million in credits to offset PM USA’s MSA payments over the following nine years.

In the NPM Adjustment settlement with New York, which was entered into in 2015, PM USA has received approximately $317 million for 2004-2018. PM USA and the other participating manufacturers are involved in a proceeding pursuant to the New York settlement in which an independent investigator will determine the amounts due to the participating manufacturers from New York for 2019 and 2020. PM USA expects to receive such amounts in April 2021 and April 2022, respectively.
Both the New York settlement and the multi-state settlement also contain provisions resolving certain disputes regarding the application of the NPM Adjustment going forward.

2003 and Subsequent NPM Adjustments - Continuing Disputes with States that have not Settled.

▪
▪2003 NPM Adjustment. In September 2013, an arbitration panel issued rulings regarding the 15 states and territories that remained in the arbitration, ruling that 6 of them did not establish valid defenses to the NPM Adjustment for 2003. In June 2014, 2 of these 6 states joined the multi-state settlement discussed above. With respect to the remaining 4 states, following the outcome of challenges in state courts, PM USA ultimately recorded $74 million primarily as a reduction to cost of sales, with the final adjustment being recorded in the third quarter of 2017. Subsequently, another one of the 6 states joined the multi-state settlement. NaN potential disputes remain outstanding regarding the amount of interest due to PM USA and there is no assurance that PM USA will prevail in either of these disputes.

▪ In September 2013, an arbitration panel issued rulings regarding the 15 states and territories that remained in the arbitration, ruling that 6 of them did not establish valid defenses to the NPM Adjustment for 2003. In June 2014, 2 of these 6 states joined the multi-state settlement discussed above. With respect to the remaining 4 states, following the outcome of challenges in state courts, PM USA ultimately recorded $74 million primarily as a reduction to cost of sales. Subsequently, another one of the 6 states joined the multi-state settlement. NaN potential disputes remain outstanding regarding the amount of interest due to PM USA and there is no assurance that PM USA will prevail in either of these disputes.

▪
2004 and Subsequent NPM Adjustments. PM USA has continued to pursue the NPM Adjustments for 2004 and subsequent years in multi-state arbitrations against the states that did not join either of the settlements discussed above. In September 2019, a New Mexico state appellate court affirmed a trial court’s order compelling New Mexico to arbitrate the 2004 NPM Adjustment claims in the multi-state arbitration with the other states. In November 2019, the New Mexico Supreme Court declined to review that decision. The arbitration hearing has not yet been scheduled. The Montana state courts ruled that Montana may litigate its claims in state court, rather than participate in a multi-state arbitration and the PMs have agreed not to contest the applicability of the 2004 NPM Adjustment to Montana. In April 2020, the State of Montana filed a motion in Montana state court against the PMs, including PM USA, and a Nat

Sherman affiliate, claiming that Montana’s share of the NPM Adjustment amounts should be paid to the state in advance of the resolution of disputes over the applicability of those adjustments. PM USA and the Nat Sherman affiliate havehas been placing the disputed NPM Adjustment amounts in the disputed payments account established pursuant to the terms of the MSA. Montana seeks a total of approximately $43 million in disputed payments from all defendants combined, as well as treble and punitive damages.

The hearings in a 2004 multi-state arbitration with all of the states that have not settled otherOther than Montana and New Mexico, all of the non-settling states participated in a 2004 multi-state arbitration. That arbitration initially concluded in July 2019.2019, although Missouri was granted a hearing in June 2020. As of AprilOctober 27, 2020, no decisions have resulted from the arbitration.

The PMs have reached an agreement with the states that have not settled (with the exception of Missouri and Montana) that the next round of NPM arbitrations will encompass three years, 2005-2007, and the parties have selected an arbitration panel for the 2005-2007 arbitration. Missouri is participating in the arbitration, but has agreed to arbitrate only one year, 2005, before the panel. The hearings in this arbitration have not yet been scheduled. No assurance can be given as to when proceedings for 20052008 and subsequent years will be scheduled or the precise form those proceedings will take.

The IA has calculated that PM USA’s share of the maximum potential NPM Adjustments for 2004-20182004-2019 is (exclusive of interest or earnings): $388 million for 2004; $181 million for 2005; $154 million for 2006; $185 million for 2007; $250 million for 2008; $211 million for 2009; $218 million for 2010; $166 million for 2011; $214 million for 2012; $224 million for 2013; $258 million for 2014; $313 million for 2015; $305 million for 2016; $297 million for 2017; $340 million for 2018 and $441 million for 2019. These maximum amounts will be reduced, likely substantially, to reflect the settlements with the signatory states and New York, and potentially for current and future calculation disputes and other developments. Finally, PM USA’s recovery of these amounts, even as reduced, is dependent upon subsequent determinations regarding state-specific defenses and disputes with other PMs.


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Other Disputes Under the State Settlement Agreements

The payment obligations of the tobacco product manufacturers that are parties to the State Settlement Agreements, as well as the allocations of any NPM Adjustments and related settlements, have been and may continue to be affected by R.J. Reynolds’s acquisition of Lorillard in 2015 and its related sale of certain cigarette brands to ITG (the “ITG brands”). In particular, R.J. Reynolds and ITG have asserted that they do not have to make payments on the ITG brands under the Florida, Minnesota and Texas State Settlement Agreements or include the ITG brands for purposes of certain calculations under the State Settlement Agreements. PM USA believes that R.J. Reynolds’s and ITG’s position violates the State Settlement Agreements and applicable law. PM USA further believes that these actions: (i) improperly increased PM USA’s payments for 2015-2019; (ii) may improperly increase PM USA’s payments for subsequent years; (iii) improperly decreased PM USA’s share of the 2015-2019 NPM Adjustments and of the settlements of related disputes; and (iv) may improperly decrease PM USA’s share of NPM Adjustments and related settlements for subsequent years.

In January 2017, PM USA and the State of Florida each filed a motion in Florida state court against R.J. Reynolds and ITG seeking to enforce the Florida State Settlement Agreement. In August 2018, the Florida trial court entered final judgment ruling that R.J. Reynolds (and not ITG) must make settlement payments under the Florida State Settlement Agreement on the ITG brands, and ordering R.J. Reynolds to pay PM USA approximately $9.8 million (inclusive of interest) for the 2015-2017 period. Both R.J. Reynolds and PM USA have each filed notices of appeal and, in July 2020, the Florida Fourth District Court of Appeal affirmed the trial court’s decision, which proceedings may result in further modifications to PM USA’s settlement payments underdecision. In September 2020, the Florida State Settlement Agreement.Fourth District Court of Appeal denied R.J. Reynolds’s motions for rehearing. In October 2020, R.J. Reynolds petitioned the Florida Supreme Court to review the appellate court decision.

In March 2018, PM USA and the State of Minnesota filed pleadings in Minnesota state court asserting claims against R.J. Reynolds and ITG, similar to those made in Florida, and seeking to enforce the Minnesota State Settlement Agreement. In September 2019, the Minnesota court granted the State of Minnesota’s and PM USA’s motions to enforce the agreement against R.J. Reynolds. The Minnesota court concluded, however, that it could not yet resolve the question of ITG’s liability under the Minnesota State Settlement Agreement. An evidentiary hearing on the question of ITG’s potential liability is to bewas held in the third quarter of 2020.

In December 2018, PM USA filed a motion in Mississippi state court seeking to enforce the Mississippi State Settlement Agreement against R.J. Reynolds and ITG with respect to the accuracy of certain submissions made by R.J. Reynolds and ITG concerning the calculation of payments relating to the ITG brands. A hearing in the case is currently scheduled for May 2021. In December 2019, in a separate matter, the State of Mississippi filed a motion in Mississippi state court seeking to enforce the Mississippi State Settlement Agreement against PM USA, R.J. Reynolds and ITG concerning the calculation of the April 2019 payments.

In January 2019, PM USA and the State of Texas each filed a motion in federal court in the Eastern District of Texas asserting claims against R.J. Reynolds and ITG, similar to those made in Florida and Minnesota, seeking to enforce the Texas State Settlement Agreement. On February 25, 2020, the Texas court granted the State of Texas’ and PM USA’s motions to enforce the settlement agreement against R.J. Reynolds. The Texas court, however, deferred the ultimate resolution of the motions to

enforce against ITG, because it concluded that question was dependent upon the outcome of separate litigation pending between ITG and R.J. Reynolds in the Delaware Court of Chancery. In August 2020, R.J. Reynolds appealed the Eastern District of Texas’s ruling to the U.S. Court of Appeals for the Fifth Circuit. ITG and the State of Texas also have filed notices of appeal, each of which is limited to the issue of how payments of statutory fees are treated under the Eastern District of Texas’s ruling.

Federal Government’s Lawsuit

In 1999, the United States government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria, asserting claims under three federal statutes. The case ultimately proceeded only under the civil provisions of RICO. In August 2006, the district court held that certain defendants, including Altria and PM USA, violated RICO and engaged in seven of the eight “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:

▪defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;
▪defendants hid from the public that cigarette smoking and nicotine are addictive;
▪defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;
▪defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;
▪defendants falsely denied that they intentionally marketed to youth;
▪defendants publicly and falsely denied that ETS is hazardous to non-smokers; and
▪defendants suppressed scientific research.
▪defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;
▪defendants hid from the public that cigarette smoking and nicotine are addictive;
▪defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;
▪defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;
39
▪defendants falsely denied that they intentionally marketed to youth;
▪defendants publicly and falsely denied that ETS is hazardous to non-smokers; and
▪defendants suppressed scientific research.

The court did not impose monetary penalties on defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes;” (iv) an injunction against conveying any express or implied health message or health descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to ETS; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the FTC for a period of 10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the U.S.; and (ix) payment of the government’s costs in bringing the action.

Following several years of appeals relating to the content of the corrective statements remedy described above, in October 2017, the district court approved the parties’ proposed consent order implementing corrective statements in newspapers and on television. The corrective statements began appearing in newspapers and on television in the fourth quarter of 2017. In April 2018, the parties reached agreement on the implementation details of the corrective statements on websites and onserts. The corrective statements began appearing on websites in the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018.

In 2014 and 2019, Altria and PM USA recorded provisions totaling $31approximately $36 million for the estimated costs of implementing the corrective communications remedy. In the fourth quarter of 2019, PM USA updated its estimate and recorded approximately $5 million for additional costs to finish implementing the corrective communications remedy.

The requirements related to corrective statements at point-of-sale remain outstanding. In May 2014, the district court ordered further briefing on the issue, which was completed in June 2014. In May 2018, the parties submitted a joint status report and additional briefing on point-of-sale signage to the district court. In May 2019, the district court ordered a hearing on the point-of-sale signage issue. The hearing is currently scheduled for July 2021.


In July 2020, the United States government filed a motion with the district court asking for clarification as to whether the court-ordered injunction that applies to cigarettes also applies to HeatSticks, a heated tobacco product used with the IQOS electronic device. In August 2020, Altria and PM USA filed an opposition to the government’s motion and, in the alternative, a motion to modify the injunction to make clear it does not apply to HeatSticks. Regardless of the district court’s decisions on the pending motions, the government has indicated it will not oppose a modification to the injunction that permits PM USA to use the Modified Risk Tobacco Product claim authorized by the FDA for HeatSticks.

E-vapor Product Litigation

As of AprilOctober 27, 2020, Altria and/or its subsidiaries, including PM USA, were named as defendants in 2425 class action lawsuits relating to JUUL e-vapor products. JUUL is an additional named defendant in each of these lawsuits. The theories of recovery include violation of RICO, fraud, failure to warn, design defect, negligence and unfair trade practices. Plaintiffs also are seekingsought to add antitrust claims due to the recent action by the FTC. Although the court denied this request in the class action lawsuits, the individual antitrust claims remain pending before the same court. See Antitrust Litigation below for further discussion. Plaintiffs seek various remedies, including compensatory and punitive damages and an injunction prohibiting product sales.

Altria and/or its subsidiaries, including PM USA, also have been named as defendants in other lawsuits involving JUUL e-vapor products, including 1701,064 individual lawsuits, 525 lawsuits filed by school districts and 31 lawsuits filed by state or local governments, and 3 lawsuits filed by school districts.including the state of Hawaii. JUUL is an additional named defendant in each of these lawsuits.
40

The majority of the individual and class action lawsuits mentioned above were filed in federal court. In October 2019, the United States Judicial Panel on Multidistrict Litigation ordered the coordination or consolidation of these lawsuits in the U.S. District Court for the Northern District of California for pretrial purposes.

Altria and its subsidiaries filed motions to dismiss certain claims in the class action and school district cases, including the federal RICO claim.In October 2020, the U.S. District Court for the Northern District of California granted the motion to dismiss the RICO class action claim.Although it otherwise denied the motion, the court found that plaintiffs had not sufficiently alleged standing or causation with respect to their claim under California law.The court also granted the motion to dismiss the RICO claim in the cases filed by various school districts, but denied the motion in all other respects.The court gave plaintiffs the opportunity to amend their complaints to attempt to cure the deficiencies the court identified.

An additional group of cases is pending in California state courts. In January 2020, the Judicial Council of California determined that this group of cases was appropriate for coordination and assigned the group to the Superior Court of California, Los Angeles County, for pretrial purposes.

Neither Altria nor any of its subsidiaries has filed a response in any of these cases, and 0NaN case in which Altria or any of its subsidiaries is named has been set for trial.

JUUL also is named in a significant number of additional individual and class action lawsuits to which neither Altria nor any of its subsidiaries is currently named.

Certain Other Tobacco-Related Litigation

IQOS Litigation

In April 2020, RAI Strategic Holdings, Inc. and R.J. Reynolds Vapor Co., which are affiliates of R.J. Reynolds, filed a lawsuit against Altria, PM USA, Altria Client Services LLC, PMI and its affiliate Philip Morris Products S.A., in the United States District Court for the Eastern District of Virginia. The lawsuit asserts claims of patent infringement based on the sale of the IQOS electronic device and HeatSticks in the United States. Plaintiffs seek various remedies, including preliminary and permanent injunctive relief, treble damages and attorneys’ fees. Altria and PMI have been dismissed from the lawsuit. In June 2020, the remaining defendants filed a motion to dismiss certain of plaintiffs’ claims and also filed counterclaims against the plaintiffs for infringement of various patents owned by the remaining defendants.

Also in April 2020, a related action was filed against the same defendants by the same plaintiffs, as well as R.J. Reynolds, with the United States International Trade Commission (“ITC”). There, the plaintiffs also allege patent infringement, but the remedies sought include a prohibition on the importation of the IQOS electronic device, HeatSticks and component parts into the United States. No damages are recoverable in the proceedings before the ITC.

“Lights/Ultra Lights” Cases and Other Smoking and Health Class Actions

Plaintiffs have sought certification of their cases as class actions, alleging among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and have sought injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria or its other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. NaN state courts in 23 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA. As of AprilOctober 27, 2020, 2 “Lights/Ultra Lights” class actions are pending in U.S. state court. Neither case is active.

As of AprilOctober 27, 2020, 2 smoking and health cases alleging personal injury or seeking court-supervised programs or ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, are pending in their respective U.S. state courts. Neither case is active.


41
UST Litigation

UST and/or its tobacco subsidiaries have been named in a number of individual tobacco and health lawsuits over time. Plaintiffs’ allegations of liability in these cases have been based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs have typically sought various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. As of AprilOctober 27, 2020, there is 1 case pending against USSTC.

Antitrust Litigation

In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act of 1890 (“Sherman Act”) and Section 5 of the Federal Trade Commission Act of 1914 (“FTC Act”), and substantially lessened competition in violation of Section 7 of the Clayton Antitrust Act (“Clayton Act”). If the FTC’s challenge is successful, the FTC may order a broad range of remedies, including divestiture of Altria’s minority investment in JUUL, rescission of the transaction and all associated agreements, and prohibition against any officer or director of either Altria or JUUL serving on the other party’s board of directors or attending meetings of the other party’s board of directors. The administrative trial will take place before an FTC administrative law judge and is currently scheduled to begin March 11,April 2021. Any ruling byThe administrative law judge’s decision is then submitted to the FTC, which decision is subject to review by the FTC Commissioners and subsequently, by a federalon its own motion or at the request of any party. The FTC then issues its ruling, which is subject to appellate court.review.

Also as of AprilOctober 27, 2020, 316 putative class action lawsuits werehave been filed against Altria and JUUL in the United States District Court for the Northern District of California. The lawsuits cite the FTC administrative complaint and allege that Altria and JUUL violated Sections 1, and 2 and/or 3 of the Sherman Act, and Section 7 of the Clayton Act and various state antitrust laws by restraining trade and/or substantially lessening competition in the U.S. closed-system electronic cigarette market. Plaintiffs seek various remedies, including treble damages, attorneys’ fees, a declaration that the agreements between Altria and JUUL are invalid, divestiture of Altria’s minority investment in JUUL and rescission of the transaction.

Neither the FTC nor the private plaintiffs has sought to preliminarily enjoin Altria from converting Altria’s non-voting JUUL shares to voting shares or appointing directors to the JUUL board of directors. As of April 30,October 27, 2020, Altria has not exercised these rights.rights, but has until November 30, 2020 to convert its JUUL shares under the regulations of the HSR Act, after which Altria would have to re-file for antitrust review with the FTC to again seek the ability to convert. For further discussion of Altria’s rights in the event of share conversion, see Note. 4. Investments in Equity Securities - Investment in JUUL.

Shareholder Class ActionsAction and Shareholder Derivative Lawsuits

In October and December 2019, 2 purported Altria shareholders filed putative class action lawsuits against Altria, Howard A. Willard III, Altria’s former Chairman and Chief Executive Officer, and William F. Gifford, Jr., Altria’s former Vice Chairman and Chief Financial Officer and current Chief Executive Officer, in the United States District Court for the Eastern District of New York. In December 2019, the court consolidated the 2 lawsuits into a single proceeding. The consolidated lawsuit was subsequently transferred to the United States District Court for the Eastern District of Virginia. The lawsuit asserts claims under Sections 10(b) and 20(a) and under Rule 10b-5 of the Exchange Act. In April 2020, JUUL, its founders, and some of its current and former executives were added to the lawsuit. The claims involve allegedlyallege false and misleading statements and omissions relating to Altria’s investment in JUUL. Plaintiffs seek various remedies, including damages and attorneys’ fees. In July 2020, the defendants filed motions to dismiss plaintiffs’ claims.

In August 2020, 2 purported Altria shareholders filed separate derivative lawsuits in the United States District Court for the Northern District of California on behalf of themselves and Altria, against Mr. Willard, Mr. Gifford, JUUL and certain of its executives and officers. These derivative lawsuits relate to Altria’s investment in JUUL, and assert claims of breach of fiduciary duty by the Altria defendants and aiding and abetting in that alleged breach of fiduciary duty by the remaining defendants. A responsethird derivative lawsuit was filed in September 2020 in the Circuit Court for Henrico County, Virginia against Mr. Willard, Mr. Gifford, Kevin C. Crosthwaite, Altria’s former Chief Growth Officer and current JUUL Chief Executive Officer, and members of Altria’s Board of Directors. This suit asserts a claim for breach of fiduciary duty. Plaintiffs seek various remedies, including damages, disgorgement of profits, reformation of Altria’s corporate governance and internal procedures, and attorneys’ fees. The plaintiffs have agreed to stay the Virginia derivative case pending the outcome of defendants’ motions to dismiss the shareholder class action. A fourth derivative lawsuit has not yet been filed.was filed in October 2020 in the
42
United States District Court for the Eastern District of Virginia against the same defendants in the Virginia lawsuit, JUUL, its founders and some of its current and former executives. The remedies sought are similar to those sought by plaintiffs in the Virginia lawsuit.

Environmental Regulation

Altria and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the U.S.: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.

Altria provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or

circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria’s consolidated results of operations, capital expenditures, financial position or cash flows.

Guarantees and Other Similar Matters

In the ordinary course of business, certain subsidiaries of Altria have agreed to indemnify a limited number of third parties in the event of future litigation. At March 31,September 30, 2020, Altria and certain of its subsidiaries (i) had $50$49 million of unused letters of credit obtained in the ordinary course of business; (ii) were contingently liable for guarantees related to their own performance, including $27$25 million for surety bonds; and (iii) had a redeemable noncontrolling interest of $38$39 million recorded on its condensed consolidated balance sheet. In addition, from time to time, subsidiaries of Altria issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria’s liquidity.

Under the terms of a distribution agreement between Altria and PMI (the “Distribution Agreement”), entered into as a result of Altria’s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria does not have a related liability recorded on its condensed consolidated balance sheet at March 31,September 30, 2020 as the fair value of this indemnification is insignificant.

 PMI has agreed not to seek indemnification with respect to the IQOS patent litigation discussed above under Certain Other Tobacco-Related Litigation - IQOS Litigation.
As more fully discussed in Note 12.
Condensed Consolidating Financial Information,
PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under its $3.0 billion Credit Agreement and amounts outstanding under its commercial paper program.

Note 12. Condensed Consolidating Financial Information:

PM USA, which is a 100% owned subsidiary of Altria Group, Inc., has guaranteed Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.

The Guarantees provide that PM USA guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.

The obligations of PM USA under the Guarantees are limited to the maximum amount as will not result in PM USA’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.


PM USA will be unconditionally released and discharged from the Obligations upon the earliest to occur of:

▪the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor;
▪the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of Altria Group, Inc.’s long-term senior unsecured debt by Standard & Poor’s Ratings Services of A or higher.

At March 31, 2020, the respective principal 100% owned subsidiaries of Altria Group, Inc. and PM USA were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.

The following sets forth the condensed consolidating balance sheets as of March 31, 2020 and December 31, 2019, condensed consolidating statements of earnings and comprehensive earnings for the three months ended March 31, 2020 and 2019, and condensed consolidating statements of cash flows for the three months ended March 31, 2020 and 2019 for Altria Group, Inc., PM USA and, collectively, Altria Group, Inc.’s other subsidiaries that are not guarantors of Altria Group, Inc.’s debt instruments (the “Non-Guarantor Subsidiaries”).

The financial information may not necessarily be indicative of results of operations or financial position had PM USA and the Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. and PM USA account for investments in their subsidiaries under the equity method of accounting.


Condensed Consolidating Balance Sheets
March 31, 2020
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 Consolidated
Assets          
Cash and cash equivalents $5,548
 $1
 $67
 $—
 $5,616
Receivables —
 17
 130
 —
 147
Inventories:          
Leaf tobacco —
 508
 387
 —
 895
Other raw materials —
 123
 70
 —
 193
Work in process —
 6
 461
 —
 467
Finished product —
 87
 364
 —
 451
  —
 724
 1,282
 —
 2,006
Due from Altria Group, Inc. and subsidiaries 91
 5,660
 1,361
 (7,112) —
Other current assets 301
 23
 68
 (226) 166
Total current assets 5,940
 6,425
 2,908
 (7,338) 7,935
Property, plant and equipment, at cost —
 2,970
 2,133
 —
 5,103
Less accumulated depreciation —
 2,186
 920
 —
 3,106
  —
 784
 1,213
 —
 1,997
Goodwill —
 —
 5,177
 —
 5,177
Other intangible assets, net —
 2
 12,666
 —
 12,668
Investments in equity securities 18,453
 —
 5,408
 —
 23,861
Investment in consolidated subsidiaries 18,905
 2,867
 —
 (21,772) —
Due from Altria Group, Inc. and subsidiaries 4,790
 —
 —
 (4,790) —
Other assets 71
 950
 567
 (608) 980
Total Assets $48,159
 $11,028
 $27,939
 $(34,508) $52,618

Condensed Consolidating Balance Sheets (Continued)
March 31, 2020
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 Consolidated
Liabilities          
Short-term borrowings $3,000
 $—
 $—
 $—
 $3,000
Accounts payable 1
 136
 141
 —
 278
Accrued liabilities:          
Marketing —
 391
 76
 —
 467
Settlement charges —
 4,410
 9
 —
 4,419
Other 312
 343
 377
 —
 1,032
Income taxes 6
 508
 105
 (226) 393
Dividends payable 1,565
 —
 —
 —
 1,565
Due to Altria Group, Inc. and subsidiaries 6,278
 587
 247
 (7,112) —
Total current liabilities 11,162
 6,375
 955
 (7,338) 11,154
Long-term debt 26,971
 —
 —
 —
 26,971
Deferred income taxes 3,228
 —
 2,571
 (608) 5,191
Accrued pension costs 196
 —
 231
 —
 427
Accrued postretirement health care costs —
 1,076
 722
 —
 1,798
Due to Altria Group, Inc. and subsidiaries —
 —
 4,790
 (4,790) —
Other liabilities 59
 90
 253
 —
 402
Total liabilities 41,616
 7,541
 9,522
 (12,736) 45,943
Contingencies 


 


 


 


 


Redeemable noncontrolling interest —
 —
 38
 —
 38
Stockholders’ Equity          
Common stock 935
 —
 9
 (9) 935
Additional paid-in capital 5,959
 3,310
 27,566
 (30,876) 5,959
Earnings reinvested in the business 36,528
 393
 (7,441) 7,048
 36,528
Accumulated other comprehensive losses (2,533) (216) (1,849) 2,065
 (2,533)
Cost of repurchased stock (34,346) —
 —
 —
 (34,346)
Total stockholders’ equity attributable
 to Altria Group, Inc.
 6,543
 3,487
 18,285
 (21,772) 6,543
Noncontrolling interests —
 —
 94
 —
 94
Total stockholders’ equity 6,543
 3,487
 18,379
 (21,772) 6,637
Total Liabilities and Stockholders’ Equity $48,159
 $11,028
 $27,939
 $(34,508) $52,618

Condensed Consolidating Balance Sheets
December 31, 2019
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 Non-
Guarantor
Subsidiaries
 Total
Consolidating
Adjustments
 Consolidated
Assets          
Cash and cash equivalents $2,022
 $—
 $95
 $—
 $2,117
Receivables —
 30
 122
 —
 152
Inventories:          
Leaf tobacco —
 494
 380
 —
 874
Other raw materials —
 120
 72
 —
 192
Work in process —
 4
 692
 —
 696
Finished product —
 119
 412
 —
 531
  —
 737
 1,556
 —
 2,293
Due from Altria Group, Inc. and subsidiaries 88
 4,005
 1,359
 (5,452) —
Other current assets 133
 64
 114
 (49) 262
Total current assets 2,243
 4,836
 3,246
 (5,501) 4,824
Property, plant and equipment, at cost —
 2,956
 2,118
 —
 5,074
Less accumulated depreciation —
 2,166
 909
 —
 3,075
  —
 790
 1,209
 —
 1,999
Goodwill —
 —
 5,177
 —
 5,177
Other intangible assets, net —
 2
 12,685
 —
 12,687
Investments in equity securities 18,071
 —
 5,510
 —
 23,581
Investment in consolidated subsidiaries 19,312
 2,831
 —
 (22,143) —
Due from Altria Group, Inc. and subsidiaries 4,790
 —
 —
 (4,790) —
Other assets 58
 951
 603
 (609) 1,003
Total Assets $44,474
 $9,410
 $28,430
 $(33,043) $49,271

Condensed Consolidating Balance Sheets (Continued)
December 31, 2019
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 Non-
Guarantor
Subsidiaries
 Total
Consolidating
Adjustments
 Consolidated
Liabilities          
Current portion of long-term debt $1,000
 $—
 $—
 $—
 $1,000
Accounts payable —
 146
 179
 —
 325
Accrued liabilities:          
Marketing —
 320
 73
 —
 393
Settlement charges —
 3,340
 6
 —
 3,346
Other 570
 482
 481
 —
 1,533
Income taxes 6
 —
 55
 (49) 12
Dividends payable 1,565
 —
 —
 —
 1,565
Due to Altria Group, Inc. and subsidiaries 4,693
 514
 245
 (5,452) —
Total current liabilities 7,834
 4,802
 1,039
 (5,501) 8,174
Long-term debt 27,042
 —
 —
 —
 27,042
Deferred income taxes 3,099
 —
 2,593
 (609) 5,083
Accrued pension costs 197
 —
 276
 —
 473
Accrued postretirement health care costs —
 1,078
 719
 —
 1,797
Due to Altria Group, Inc. and subsidiaries —
 —
 4,790
 (4,790) —
Other liabilities 80
 87
 178
 —
 345
Total liabilities 38,252
 5,967
 9,595
 (10,900) 42,914
Contingencies 


 


 


 


 


Redeemable noncontrolling interest —
 —
 38
 —
 38
Stockholders’ Equity          
Common stock 935
 —
 9
 (9) 935
Additional paid-in capital 5,970
 3,310
 27,565
 (30,875) 5,970
Earnings reinvested in the business 36,539
 352
 (6,997) 6,645
 36,539
Accumulated other comprehensive losses (2,864) (219) (1,877) 2,096
 (2,864)
Cost of repurchased stock (34,358) —
 —
 —
 (34,358)
Total stockholders’ equity attributable
to Altria Group, Inc.
 6,222
 3,443
 18,700
 (22,143) 6,222
Noncontrolling interests —
 —
 97
 —
 97
Total stockholders’ equity 6,222
 3,443
 18,797
 (22,143) 6,319
Total Liabilities and Stockholders’ Equity $44,474
 $9,410
 $28,430
 $(33,043) $49,271



Condensed Consolidating Statements of Earnings and Comprehensive Earnings
For the Three Months Ended March 31, 2020
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 Non-
Guarantor
Subsidiaries
 Total
Consolidating
Adjustments
 Consolidated
Net revenues $—
 $5,359
 $1,008
 $(8) $6,359
Cost of sales —
 1,532
 649
 (8) 2,173
Excise taxes on products —
 1,267
 46
 —
 1,313
Gross profit —
 2,560
 313
 —
 2,873
Marketing, administration and research costs 22
 387
 128
 —
 537
Operating income (expense) (22) 2,173
 185
 —
 2,336
Interest and other debt expense (income), net 237
 (18) 56
 —
 275
Net periodic benefit (income) cost, excluding service cost —
 (22) (5) —
 (27)
Earnings from equity investments (134) —
 (23) —
 (157)
Loss on Cronos-related financial instruments —
 —
 137
 —
 137
Earnings (losses) before income taxes and equity earnings of subsidiaries (125) 2,213

20

—

2,108
Provision (benefit) for income taxes (32) 550
 40
 —
 558
Equity earnings of subsidiaries 1,645
 126
 —
 (1,771) —
Net earnings 1,552
 1,789
 (20) (1,771) 1,550
Net (earnings) losses attributable to noncontrolling interests —
 —
 2
 —
 2
Net earnings attributable to Altria $1,552
 $1,789
 $(18) $(1,771) $1,552
           
           
Net earnings $1,552
 $1,789
 $(20) $(1,771) $1,550
Other comprehensive earnings (losses), net of deferred income taxes 331
 3
 28
 (31) 331
Comprehensive earnings 1,883
 1,792
 8
 (1,802) 1,881
Comprehensive (earnings) losses attributable to noncontrolling interests —
 —
 2
 —
 2
Comprehensive earnings attributable to Altria $1,883
 $1,792
 $10
 $(1,802) $1,883


Condensed Consolidating Statements of Earnings and Comprehensive Earnings
For the Three Months Ended March 31, 2019
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 Non-
Guarantor
Subsidiaries
 Total
Consolidating
Adjustments
 Consolidated
Net revenues $—
 $4,725
 $913
 $(10) $5,628
Cost of sales —
 1,340
 248
 (10) 1,578
Excise taxes on products —
 1,185
 54
 —
 1,239
Gross profit —
 2,200
 611
 —
 2,811
Marketing, administration and research costs 35
 384
 114
 —
 533
Asset impairment and exit costs 1
 35
 4
 —
 40
Operating income (expense) (36) 1,781
 493
 —
 2,238
Interest and other debt expense (income), net 355
 (25) 54
 —
 384
Net periodic benefit (income) cost, excluding service cost 1
 —
 (2) —
 (1)
Earnings from equity investments (86) —
 —
 —
 (86)
Loss on Cronos-related financial instruments —
 —
 425
 —
 425
Earnings (losses) before income taxes and equity earnings of subsidiaries (306) 1,806
 16
 —
 1,516
Provision (benefit) for income taxes (75) 459
 11
 —
 395
Equity earnings of subsidiaries 1,351
 95
 —
 (1,446) —
Net earnings 1,120
 1,442
 5
 (1,446) 1,121
Net (earnings) losses attributable to noncontrolling interests —
 —
 (1) —
 (1)
Net earnings attributable to Altria $1,120
 $1,442
 $4
 $(1,446) $1,120
           
           
Net earnings $1,120
 $1,442
 $5
 $(1,446) $1,121
Other comprehensive earnings (losses), net of deferred income taxes (170) 5
 23
 (28) (170)
Comprehensive earnings 950
 1,447
 28
 (1,474) 951
Comprehensive (earnings) losses attributable to noncontrolling interests —
 —
 (1) —
 (1)
Comprehensive earnings attributable to Altria $950
 $1,447
 $27
 $(1,474) $950


Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2020
(in millions of dollars)

43
  Altria Group, Inc.
 PM USA
 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 Consolidated
Cash Provided by (Used In) Operating Activities          
Net cash provided by (used in) operating activities $1,515
 $3,351
 $437
 $(2,174) $3,129
Cash Provided by (Used in) Investing Activities          
Capital expenditures —
 (15) (37) —
 (52)
Investment in consolidated subsidiaries (1) —
 —
 1
 —
Other, net —
 —
 —
 —
 —
Net cash provided by (used in) investing activities (1) (15) (37) 1
 (52)
Cash Provided by (Used in) Financing Activities          
Proceeds from short-term borrowings 3,000
 —
 —
 —
 3,000
Long-term debt repaid (1,000) —
 —
 —
 (1,000)
Dividends paid on common stock (1,563) —
 —
 —
 (1,563)
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
 1,584
 (1,582) (1) (1) —
Cash dividends paid to parent —
 (1,748) (426) 2,174
 —
Other, net (9) —
 (1) —
 (10)
Net cash provided by (used in) financing activities 2,012
 (3,330) (428) 2,173
 427
Cash, cash equivalents and restricted cash (1):
          
Increase (decrease) 3,526
 6
 (28) —
 3,504
Balance at beginning of period 2,022
 43
 95
 —
 2,160
Balance at end of period $5,548
 $49
 $67
 $—
 $5,664
(1)
Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 11. Contingencies.

Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2019
(in millions of dollars)

  Altria Group, Inc.
 PM USA
 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 Consolidated
Cash Provided by (Used In) Operating Activities          
Net cash provided by (used in) operating activities $1,642
 $2,520
 $166
 $(2,039) $2,289
Cash Provided by (Used in) Investing Activities          
Capital expenditures —
 (9) (29) —
 (38)
Investment in Cronos —
 —
 (1,831) —
 (1,831)
Investment in consolidated subsidiaries (1,947) —
 —
 1,947
 —
Other, net (3) —
 (78) —
 (81)
Net cash provided by (used in) investing activities (1,950) (9) (1,938) 1,947
 (1,950)
Cash Provided by (Used in) Financing Activities          
Repayment of short-term borrowings (12,800) —
 —
 —
 (12,800)
Long-term debt issued 16,265
 —
 —
 —
 16,265
Repurchases of common stock (151) —
 —
 —
 (151)
Dividends paid on common stock (1,502) —
 —
 —
 (1,502)
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
 657
 (771) 2,061
 (1,947) —
Cash dividends paid to parent —
 (1,737) (302) 2,039
 —
Other (120) —
 (9) —
 (129)
Net cash provided by (used in) financing activities 2,349
 (2,508) 1,750
 92
 1,683
Cash, cash equivalents and restricted cash (1):
          
Increase (decrease) 2,041
 3
 (22) —
 2,022
Balance at beginning of period 1,277
 100
 56
 —
 1,433
Balance at end of period $3,318
 $103
 $34
 $—
 $3,455
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 11. Contingencies.


Note 13. New Accounting Guidance Not Yet Adopted:

The following table provides a description of issued accounting guidance applicable to, but not yet adopted by, Altria:
StandardsDescriptionEffective Date for Public EntityEffect on Financial Statements
ASU 2019-12 Simplifying the Accounting for Income Taxes (Topic 740)
The guidance removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes.The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including adoption in any interim period.Altria is in the process of evaluating the impactAltria's adoption of this guidance is not expected to have a material impact on its consolidated financial statements and related disclosures.statements.
ASU 2020-01 Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities.The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including adoption in any interim period.Altria's adoption of this guidance is not expected to have a material impact on its consolidated financial statements.
ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
The guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.  Key provisions of the guidance include reducing the number of accounting models, simplifying the earnings per share calculations and expanding the disclosures related to convertible instruments.
The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.Altria is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.


44

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Description of the Company

When used in this Quarterly Report on Form 10-Q (“Form 10-Q”), the terms "Altria," "we," "us"“Altria,” “we,” “us” and "our"“our” refers to Altria Group, Inc. and its subsidiaries, unless otherwise specified or unless otherwise required.

For a description of Altria, see Background in Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Part I, Item 1. Financial Statements of this Form 10-Q (“Item 1”).

In the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment. Altria’s reportable segments are smokeable products, oral tobacco products and wine. The financial services and the innovative tobacco products businesses are included in an all other category due to the continued reduction of the lease portfolio of Philip Morris Capital Corporation and the relative financial contribution of Altria’s innovative tobacco products businesses to Altria’s consolidated results.
Executive Summary

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, Altria refers to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted operating companies incomeOCI margins; adjusted net earnings attributable to Altria andAltria; adjusted diluted earnings per share attributable to Altria (“EPS”).Altria; and adjusted effective tax rates. These adjusted financial measures are not required by, or calculated in accordance with, United States generally accepted accounting principles (“GAAP”) and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Except as noted in 2020 Forecasted Results section below, when Altria provides a non-GAAP measure in this Form 10-Q, it also provides a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below.

COVID-19

The recent outbreak of the novel coronavirus, COVID-19 which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and createdcontinues to create economic uncertainty. Although much uncertainty still surrounds the pandemic, including its duration and ultimate overall impact on U.S and global economies, our subsidiaries’ operations and those of ourAltria’s investees, Altria iscontinues to monitor the macroeconomic risks of COVID-19 and to carefully evaluatingevaluate potential outcomes and workingwork to mitigate risks. Specifically, Altria isremains focused on any potential impact to ourits liquidity, operations, supply and distribution chains and on economic conditions.

In terms of Altria’s liquidity, despite some volatility in the commercial paper market in March 2020, Altria believes it is in a solid financial position and for the coming quarters, expectscontinues to maintain a higher cash balance than normal to preserve its financial flexibility. As a precautionary measure, in March 2020, Altria borrowed the entirefull $3.0 billion available under its senior unsecured 5-year revolving credit agreement dated August 1, 2018 (as amended, the “Credit Agreement”)., which Altria subsequently repaid in full in June 2020. In addition,May 2020, Altria did not repurchase any sharesissued $2.0 billion of long-term debt in the first quarterform of 2020 under its current $1.0 billion share repurchase program, and insenior unsecured notes. In April 2020, Altria’s Board of Directors (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 in the nine months ended September 30, 2020.

As with so many other companies throughout the U.S. and globally, Altria’s operations have been affected by COVID-19. Altria has implemented remote working for many employees and aligned with the recommended social distancing protocols fromrecommended by public health authorities. To date, Altria believes it hasits tobacco businesses have not experienced minimal impactany material adverse effects associated with governmental actions to productivityrestrict consumer movement or business operations, but continues to monitor these factors. Altria continues to believe that remote working due to the remote working and itsCOVID-19 pandemic has had minimal impact on productivity. Also, Altria’s critical information technology systems have remained operational. Although Altria temporarilyAltria’s tobacco businesses previously suspended operations temporarily at Philip Morris USA Inc.’s (“PM USA”) Richmond, Virginia-areaseveral of their manufacturing facilities, John Middleton Co.’s (Middleton) King of Prussia, Pennsylvania manufacturing facility, as well as U.S. Smokeless Tobacco Company LLC’s (“USSTC”) Nashville, Tennessee-area manufacturing facilities in March 2020, Altria resumed operations at those facilities under enhanced safety protocols in April 2020 and all of Altria’s manufacturing facilities are currently operational.operational under enhanced safety protocols. In addition, Helix Innovations LLC (“Helix”) continues to build domestic manufacturing capacity for on! in the Richmond Manufacturing Center. Currently, installed annualized capacity is approximately 25 million cans; however, due to the impacts of COVID-19, Helix expects potential delays in its ability to achieve annualized production capacity of 50 million cans by mid-yearCenter and 75

million cans by the end of 2020.expand distribution. Altria is continuingcontinues to monitor the risks associated with facility disruptions and workforce availability as a result of COVID-19 uncertainty.

45
Altria’s suppliers and those within its distribution chain are also may be subject to government action requiringactions 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, nor has it experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but is continuing to monitor these factors. The majority of retail stores in which Altria’s tobacco products are sold, including convenience stores, have been deemed to be essential businesses by authorities and have remained open. Altria is continuingcontinues to monitor the risk that a supplier, distributorone or more suppliers, distributors or any other entityentities within our supply and distribution chain closes temporarily or permanently.

In MarchJune 2020, Philip Morris USA Inc. (“PM USA temporarily closedUSA”) re-opened its Atlanta and Richmond IQOS stores, and paused its in July 2020, PM USA launchedIQOS interactive marketing efforts. PM USA will consider guidance from public health authorities and consumer sentiment in deciding when to reopen the stores and resume its interactive marketing approach. HeatSticks remain available for sale in over 500 Atlanta and Richmond retail stores, and PM USA does not currently anticipate product availability issues. PM USA has also delayed the launch of IQOS in Charlotte, duewith all stores operating under enhanced safety protocols.

In the first nine months of 2020, Altria incurred net pre-tax charges of $50 million, which were directly related to COVID-19 concerns.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 core tobacco businesses have not been materially impacted to date by COVID-19, there is continued uncertainty as to how COVID-19 may impact adult tobacco consumers in the adult consumer.future. Altria is monitoringcontinues to monitor the macro-economic risks of COVID-19 and their effect on adult tobacco consumers, including impacts to unemployment rates, consumer confidence levels, number of housing startsdisposable income (which may be impacted by potential future changes in government stimulus and gasoline prices.federal unemployment benefit payments) and mobility. Altria is also monitoringcontinues to monitor adult tobacco consumersconsumers’ purchasing behavior,behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases (including a significant increase in deep discount category volumes in the first quarter of 2020 versus the prior quarter) and interest in noncombustible products.

While Altria’s core tobacco businesses have not been materially impacted to date by COVID-19, Altria has experienced someadverse impacts to its alcohol assets. In the wine business, Ste. Michelle Wine Estates Ltd.’s (“Ste. Michelle”) direct-to-consumer sales and on-premise wine sales in restaurants, bars and hospitality venues and on cruise lines have been, and continue to be, negatively affectedimpacted by disruptions arising from the COVID-19 disruptions.pandemic, which also may have an impact on adult wine consumers going forward. In the first quarter of 2020, Ste. Michelle recorded pre-tax charges of $392 million consisting of (i) the write-off of inventory and (ii) estimated losses on future non-cancelable grape purchase commitments associated with product volume demand uncertainty, which has beenwere further impacted by government restrictions and the economic uncertainty surrounding COVID-19.the COVID-19 pandemic. Altria and Ste. Michelle also undertook a review of the wine business resulting in a strategic reset. Ste. Michelle will continuecontinues to monitor the impact of COVID-19 associated risks to its business, results of operations, cash flows or financial position.

Anheuser-Busch InBev SA/NV (“ABI’ABI”) has also been impacted by COVID-19, recently announcingincluding a 50% reduction to its upcomingfinal 2019 dividend paid in the second quarter of 2020 and its recent announcement to forgo its interim 2020 dividend that would have been paid in the fourth quarter of 2020; the withdrawal of its earning guidance for 2020 due to the uncertainty, volatility and impact of COVID-19.COVID-19; and a goodwill impairment charge related to its Africa businesses in its second quarter of 2020 (which Altria recorded in the third quarter of 2020 due to its one-quarter lag in reporting ABI’s results). ABI expects its performance in the second half of this year to be better than the first, although the environment remains volatile and uncertain, including potential renewed restrictions in several markets. As a result of these announcements,actions, Altria has reduced expectations for equity earnings and cash dividends from ABI in 2020. In addition, the extreme market disruption and volatility associated with COVID-19 has resulted in a steep decline in ABI’s stock price in the first half of 2020, and the fair value of Altria’s investment in ABI is now well below the carrying value of its investment in ABI.value. While Altria believes that this decline is temporary, it will continue to monitor its investment in ABI, andincluding the impact of COVID-19 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 be material.

Altria considered the impact of COVID-19 on the business of JUUL Labs, Inc. (“JUUL”), including its sales, distribution, operations, supply chain and liquidity, in conducting its periodic impairment assessment. While the impact of COVID-19 was considered in our quantitative valuation that resulted in a non-cash pre-tax impairment charge of $2.6 billion for the period ended September 30, 2020, it was not an indicator of impairment for this assessment. Altria will continue to monitor its investment in JUUL and the impact of COVID-19 on JUUL’s business.

Altria has considered the impact of COVID-19 on the businessesbusiness of JUUL Labs, Inc. (“JUUL”) and Cronos Group Inc. (“Cronos”), including theirits sales, distribution, operations, supply chain and liquidity,liquidity. Cronos continues to be impacted by COVID-19, due in part to government action requiring closures or limited occupancy of retail stores in the United States. During the second quarter of 2020, Cronos recorded an impairment charge on goodwill and at this time, Altria believesintangible assets as a result of the impact of COVID-19 (which Altria recorded
46
in the third quarter of 2020 due to these businesses is not material, and Altria’s assessment, which included the consideration of potential impacts of COVID-19 on the businesses, did not resultits one-quarter lag in impairment at March 31, 2020.

reporting Cronos’s results). In addition, duethe fair value of Altria’s equity method investment in Cronos was approximately 20% less than its carrying value of $1.0 billion at September 30, 2020. While Altria believes that this decline in fair value is temporary, it will continue to the uncertainties related tomonitor its equity method investment in Cronos, including the impact of COVID-19 on Cronos’s business and varying economic recovery scenarios,market valuation. If Altria withdrewwere 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 forecast for its full-year 2020 adjusted diluted EPS growth rate. For further discussion, see 2020 Forecasted Results below.

equity method investment, which could be material.
Consolidated Results of Operations for the ThreeNine Months Ended March 31,September 30, 2020: The changes in net earnings (losses) attributable to Altria and diluted EPSearnings (losses) per share (“EPS”) attributable to Altria for the threenine months ended March 31,September 30, 2020, from the threenine months ended March 31,September 30, 2019, were due primarily to the following:
Net Earnings (Losses)Diluted EPS
Net Earnings Diluted EPS(in millions, except per share data)
For the nine months ended September 30, 2019For the nine months ended September 30, 2019$516 $0.27 
(in millions, except per share data)
For the three months ended March 31, 2019$1,120
 $0.60
   
2019 Asset impairment, exit, implementation and acquisition-related costs125
 0.06
2019 Asset impairment, exit, implementation and acquisition-related costs163 0.08 
2019 Tobacco and health litigation items13
 0.01
2019 Tobacco and health litigation items36 0.02 
2019 Impairment of JUUL equity securities2019 Impairment of JUUL equity securities4,500 2.41 
2019 ABI-related special items 1
129
 0.07
2019 ABI-related special items 1
9 — 
2019 Cronos-related special items328
 0.17
2019 Cronos-related special items816 0.44 
2019 Tax items19
 0.01
2019 Tax items(56)(0.03)
Subtotal 2019 special items614
 0.32
Subtotal 2019 special items5,468 2.92 
   
2020 Implementation and acquisition-related costs(300) (0.16)2020 Implementation and acquisition-related costs(314)(0.17)
2020 Tobacco and health litigation items(19) (0.01)2020 Tobacco and health litigation items(57)(0.03)
2020 Impairment of JUUL equity securities2020 Impairment of JUUL equity securities(2,600)(1.40)
2020 ABI-related special items(44) (0.03)2020 ABI-related special items(544)(0.29)
2020 Cronos-related special items(95) (0.05)2020 Cronos-related special items(143)(0.08)
2020 COVID-19 special items2020 COVID-19 special items(37)(0.02)
2020 Tax items(24) (0.01)2020 Tax items(38)(0.02)
Subtotal 2020 special items(482) (0.26)Subtotal 2020 special items(3,733)(2.01)
   
Fewer shares outstanding—
 0.01
Fewer shares outstanding— 0.02 
Change in tax rate(1) —
Change in tax rate(75)(0.04)
Operations301
 0.16
Operations367 0.20 
For the three months ended March 31, 2020$1,552
 $0.83
For the nine months ended September 30, 2020For the nine months ended September 30, 2020$2,543 $1.36 
   
2020 Reported Net Earnings$1,552
 $0.83
2019 Reported Net Earnings$1,120
 $0.60
2020 Reported Net Earnings (Losses)2020 Reported Net Earnings (Losses)$2,543 $1.36 
2019 Reported Net Earnings (Losses)2019 Reported Net Earnings (Losses)$516 $0.27 
% Change38.6% 38.3%% Change100%+100%+
   
2020 Adjusted Net Earnings and Adjusted Diluted EPS$2,034
 $1.09
2020 Adjusted Net Earnings and Adjusted Diluted EPS$6,276 $3.37 
2019 Adjusted Net Earnings and Adjusted Diluted EPS 1
$1,734
 $0.92
2019 Adjusted Net Earnings and Adjusted Diluted EPS 1
$5,984 $3.19 
% Change17.3% 18.5%% Change4.9 %5.6 %
1 Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures. For further discussion, see below.

For a discussion of events affecting the comparability of statementstatements of earnings amounts and reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.

47
Fewer Shares OutstandingOutstanding: : Fewer shares outstanding during the threenine months ended March 31,September 30, 2020 compared with the prior-year period were due primarily to shares repurchased by Altria in the fourth quarter of 2019 under its share repurchase programs.program.

Change in tax rate: The change in the tax rate was driven primarily by lower dividends from ABI.

Operations: The increase of $301$367 million in operations shown in the table above was due primarily to higher income from the smokeable products and oral tobacco products segments, partially offset by lower earnings from Altria’s equity investmentinvestments in ABI.ABI and Cronos.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.

Consolidated Results of Operations for the Three Months Ended September 30, 2020: The changes in net earnings (losses) attributable to Altria and diluted EPS attributable to Altria for the three months ended September 30, 2020, from the three months ended September 30, 2019, were due primarily to the following:
Net Earnings (Losses)Diluted EPS
(in millions, except per share data)
For the three months ended September 30, 2019$(2,600)$(1.39)
2019 Asset impairment, exit, implementation and acquisition-related costs5 — 
2019 Tobacco and health litigation items2 — 
2019 Impairment of JUUL equity securities4,500 2.41 
2019 ABI-related special items 1
(18)(0.01)
2019 Cronos-related special items432 0.23 
2019 Tax items(97)(0.05)
Subtotal 2019 special items4,824 2.58 
2020 Implementation and acquisition-related costs(8)— 
2020 Tobacco and health litigation items(25)(0.01)
2020 Impairment of JUUL equity securities(2,600)(1.40)
2020 ABI-related special items(405)(0.22)
2020 Cronos-related special items(142)(0.08)
2020 Tax items13 0.01 
Subtotal 2020 special items(3,167)(1.70)
Change in tax rate(60)(0.03)
Operations51 0.03 
For the three months ended September 30, 2020$(952)$(0.51)
2020 Reported Net Earnings (Losses)$(952)$(0.51)
2019 Reported Net Earnings (Losses)$(2,600)$(1.39)
% Change63.4 %63.3 %
2020 Adjusted Net Earnings and Adjusted Diluted EPS$2,215 $1.19 
2019 Adjusted Net Earnings and Adjusted Diluted EPS 1
$2,224 $1.19 
% Change(0.4)%— %
1 Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures.For further discussion, see below.

For a discussion of events affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.
48

Change in tax rate: The change in tax rate was driven primarily by lower dividends from ABI.

Operations: The increase of $51 million in operations shown in the table above was due primarily to higher income from the smokeable products segment, partially offset by lower earnings from Altria’s equity investments in ABI and Cronos.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.

2020 Forecasted Results: Due to the uncertainties related to the impact of the COVID-19 pandemic and economic recovery scenarios, Altria withdrewnarrowed its forecast for its2020 full-year 2020 adjusted diluted EPS to be in the range of $4.30 to $4.38, representing a growth rate in the range of 4%2% to 7%4% over its 2019 full-year adjusted diluted EPS base whichof $4.21. This forecasted growth rate excludes the 2020 forecasted income and expense items in the second table below. Altria’s 2020 full-year earnings guidance is based on Altria’s year-to-date performance and insight into an additional quarter of ABI earnings contributions. While the 2020 full-year adjusted diluted EPS guidance accounts for a range of scenarios, the external environment remains dynamic. Altria will continue to monitor conditions for adult tobacco consumers, including unemployment rates, disposable income (which may be impacted by potential future changes in government stimulus and federal unemployment benefit payments), mobility and purchasing behaviors. Altria also narrowed its expectations for its 2020 full-year adjusted effective tax rate to be in a range of 24.5% to 25.5%.
Reconciliation of 2019 Reported Diluted EPS to 2019 Adjusted Diluted EPS
2019
2019 Reported diluted EPS$(0.70)
Asset impairment, exit, implementation and acquisition-related costs0.15 
Tobacco and health litigation items0.03 
Impairment in JUUL equity securities4.60 
ABI-related special items 1
(0.16)
Cronos-related special items0.34 
Tax items(0.05)
2019 Adjusted diluted EPS$4.21 
1 This amount has been recast to $4.21 (from $4.22) for a change in ABI-related special items as shown

in the table below. In making the decision, Altria considered various factors, including uncertain contributions from its equity investment in ABI and the potential impacts of COVID-19 on the macro-economic environment and adult tobacco consumers. Altria is continuing to assess the COVID-19 situation and intends to reestablish guidance at the appropriate time.

Reconciliation of 2019 Reported Diluted EPS to 2019 Adjusted Diluted EPS
2019 Reported diluted EPS$(0.70)
Asset impairment, exit, implementation and acquisition-related costs0.15
Tobacco and health litigation items0.03
Impairment of JUUL equity securities4.60
ABI-related special items 1
(0.16)
Cronos-related special items0.34
Tax items(0.05)
2019 Adjusted diluted EPS$4.21
1 Beginning in the first quarter of 2020, Altria changed its treatment of Altria’s share of ABI’s mark-to-market activity relating to certain ABI financial instruments associated with its share-based compensation programs that were previously included in Altria’s adjusted results. These amounts will now be treated as special items and excluded from Altria’s adjusted results. The change is consistent with Altria’s treatment of its share of ABI’s mark-to-market activity on ABI’s financial instruments associated with its other share commitments. Altria has recast prior period results to conform with current period presentation.presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures.


The following (income) expense items are excluded from Altria’s 2020 forecasted growth rate provided above:
(Income) Expense Excluded from 2020 Forecasted Adjusted Diluted EPS
2020
Implementation and acquisition-related costs$0.17 
Tobacco and health litigation items0.03 
Impairment in JUUL equity securities1.40 
ABI-related special items0.29 
Cronos-related special items0.08 
COVID-19 special items0.02 
Tax items
0.02 
$2.01 

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
49
tax rate forecast.

The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast and to the other forward-looking statements made in this Form 10-Q.


Discussion and Analysis

Critical Accounting Policies and Estimates

Altria’s critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”); there have been no material changes to these critical accounting policies and estimates, except as noted below.
▪Investments in ABI and Cronos:
▪Investments in ABI, Cronos and JUUL:
Altria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment on aat least quarterly basis in connection with the preparation of its financial statements by comparing the fair value of each of its investments to their carrying value. If the carrying value of an investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and reduced to fair value, and the impairment is recognized in the period identified.
Altria reviews its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicates that Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value, and the impairment is recognized in the period identified.
Investment in ABI
At March 31,September 30, 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 March 31,September 30, 2020 and December 31, 2019 was $8.8$10.7 billion (carrying value of $18.5$16.7 billion) and $16.1 billion (carrying value of $18.1 billion), respectively, which was less than its carrying value by approximately 52%36% and 11%, respectively. At AprilOctober 27, 2020, the fair value of Altria’s investment wasincreased to approximately $8.6$11.0 billion (approximately 53%34% below its carrying value). As recently as September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value. 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 amidst the COVID-19 pandemic. The economic uncertainties of the COVID-19 pandemic which hashave also impacted the equity markets.ABI’s business. Altria has also evaluated the duration and magnitude of the fair value decline at September 30, 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 at March 31,September 30, 2020, the decline in fair value of its investment in ABI below its carrying value is 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 October 27, 2020, which Altria believes indicates investor confidence in ABI’s ability to implement its business strategies and deleveraging plans;
▪the period of time (approximately 12 months) that ABI shares have traded below Altria’s carrying value;
▪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
50
the second quarter of 2020 and its recent announcement 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 and affirmation that substantially all proceeds from the divestiture will be used to reduce debt; and (iii) ABI’s aggregate refinancing of $11 billion through issuance and redemption activity, specifically front-end maturities into longer dated maturities;
▪ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance;
▪the strategic plans implemented by ABI in response to the adverse impacts of the COVID-19 pandemic, including the ability to leverage learnings from recovering markets, to better position ABI for a robust recovery as evidenced by ABI’s expectation that its performance in the second half of this year will be better than the first, although the environment remains volatile and uncertain, including potential renewed restrictions in several markets; and
▪Altria’s ownership of restricted shares being subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021, which Altria believes provides sufficient time to allow for an anticipated recovery in the fair value of its investment in ABI.

▪the fair value of Altria’s equity investment in ABI historically exceeding its carrying value since October 2016, when Altria obtained its ownership interest in ABI, with the exception of certain periods starting in September 2018;
▪a history of significant recovery in stock price during 2019 which Altria believes indicates investor confidence in ABI’s ability to implement its business strategies and deleveraging plans;
▪the relatively short period of time that ABI shares have traded below Altria’s carrying value;
▪the extreme equity market disruption and volatility associated with the COVID-19 pandemic, resulting in stock prices across all markets that Altria does not believe are reflective of actual underlying equity values;
▪ABI’s recent proactive actions to preserve financial flexibility through the period of significant financial market and operational volatility and uncertainty associated with the COVID-19 pandemic, including the following actions since December 31, 2019: (i) ABI’s April 2020 announcement of a 50% reduction to its upcoming dividend; (ii) ABI’s borrowing of the full $9 billion commitment under its revolving facility; (iii) ABI’s debt issuances of $6 billion and 4.5 billion euro denominated senior notes for general corporate purposes; and (iv) ABI’s reaffirmation that it expects to close the sale of its Australia subsidiary in the second quarter of 2020;
▪ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and
▪Altria’s ownership of restricted shares being subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021, which Altria believes provides sufficient time to allow for an anticipated recovery in the fair value of its investment in ABI.

Altria will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic on ABI’s business and market valuation. If Altria were to conclude that the decline in fair value is other than temporary, Altria would determine and recognize, in the period identified, the impairment of its investment, which could result in a material adverse effect on Altria’s consolidated financial position or earnings.

Investment in Cronos
The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos at March 31,September 30, 2020 and December 31, 2019 was $0.9$0.8 billion and $1.2 billion, respectively, compared with its carrying value of $1.0 billion at March 31,September 30, 2020 and December 31, 2019. At March 31,September 30, 2020, the fair value of Altria’s equity method investment in Cronos was below its carrying value by 14%approximately 20%. Cronos’s share price has continued to be volatile during the third quarter of 2020 and October 2020. While the fair value of Altria’s equity method investment in Cronos was below its carrying value at September 30, 2020, the fair value of Altria’s equity method investment exceeded its carrying value at certain times during the third quarter of 2020, and at October 27, 2020, the fair value of Altria’s equity method investment in Cronos increased to approximately $0.9 billion (approximately 12% below its carrying value). Altria has evaluated the factors related to the fair value decline, including the recent impact on the fair value of Cronos’s shares as a result of the COVID-19 pandemic. Cronos continues to be impacted by COVID-19, due in part to government action requiring closures or limited occupancy of retail stores in the United States. In addition, during the second quarter of 2020, Cronos recorded an impairment charge on goodwill and intangible assets as a result of the impact of COVID-19. Based on Altria’s evaluation of the duration (fairly short period of time) and magnitude of the fair value decline at March 31,September 30, 2020, Altria’s evaluation of Cronos’s financial condition (including its strong cash position) and near-term prospects, and Altria’s intent and ability to hold its investment in Cronos until recovery, Altria concluded that the decline in fair value of its equity method investment in Cronos below its carrying value is temporary and, therefore, no impairment was recorded. At April 27, 2020, the fair value of Altria’s equity method investment in Cronos was approximately $1.0 billion (which approximates its carrying value).
Altria will continue to assess the fair value ofmonitor its equity method investment in Cronos, including the impact of the COVID-19 pandemic on Cronos’s business and market valuation. If Altria were to determine if anyconclude that the decline in fair value below its carrying value is other than temporary.temporary, Altria would determine and recognize, in the period identified, the impairment of its equity method investment, which could result in a material adverse effect on Altria’s consolidated financial position or earnings.
For further discussion of Altria’s investments in ABI and Cronos, see Note 4. Investments in Equity Securities to the condensed consolidated financial statements in Item 1.1 (“Note 4”).
Investment in JUUL
As part of the preparation of its financial statements for the periods ended September 30, 2020 and 2019 and December 31, 2019, Altria performed qualitative assessments of impairment indicators for its investment in JUUL and determined that indicators of impairment existed.

JUUL announced a strategic update in September 2020, which includes 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 its 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.
51


Given the existence of this impairment indicator, Altria performed a quantitative valuation of its investment in JUUL as of September 30, 2020 and recorded a non-cash pre-tax charge of $2.6 billion for the nine and three months ended September 30, 2020, reported as impairment of JUUL equity securities in its condensed consolidated statements of earnings. 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.

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.

At September 30, 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.

Based on its quantitative valuation of its investment in JUUL, 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 pre-tax charge of $4.5 billion.

At December 31, 2019, Altria determined that a significant increase in the number of legal cases pending against JUUL in the fourth quarter of 2019 resulted in an additional indicator of impairment, 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 indicator of impairment. The fourth-quarter 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, which resulted in an additional pre-tax charge of $4.1 billion at December 31, 2019.

Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and certain 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, legislative and market outcomes.

In determining the fair value of its investment in JUUL, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. The discount rates used in performing the valuations ranged from 17.0% to 20.5% at September 30, 2020, 13.5% to 16.5% at September 30, 2019 and 19.5% to 23.0% at December 31, 2019. The perpetual growth rates used in performing the valuations remained unchanged, ranging from (0.5%) to 0.0% at September 30, 2020 and 2019 and December 31, 2019. Additionally, Altria made significant assumptions regarding the likelihood and extent of various potential regulatory and legislative actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of competitive dynamics and the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy.

Although Altria’s discounted cash flow analyses were based on assumptions that Altria’s management considered reasonable and are based on the best available information at the time that the analyses were developed, there is significant judgment used in determining future cash flows. Altria believes the following factors have the most potential to impact projected future cash flows and, therefore, Altria’s valuation of JUUL: federal, state, local and international regulatory and legislative developments; JUUL’s execution of its strategy; category growth rates; e-vapor-related litigation against JUUL; consumer preferences; and competitive dynamics.

While Altria’s management believes that the estimated fair value of its investment in JUUL as of September 30, 2020 is appropriate, JUUL’s actual performance in the short term or long term could be significantly different from forecasted
52
performance due to changes in the factors noted above. One or more such changes could result in additional impairment charges to Altria’s investment in JUUL in future periods.

For additional information on Altria’s investment in JUUL, see Note 4.

Consolidated Operating Results
For the Three Months Ended
March 31,
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020 20192020201920202019
(in millions)(in millions)
Net revenues:   Net revenues:
Smokeable products$5,606
 $4,935
Smokeable products$17,522 $16,837 $6,313 $6,049 
Oral tobacco products601
 540
Oral tobacco products1,901 1,762 640 620 
Wine146
 151
Wine434 483 157 167 
All other6
 2
All other(8)21 13 20 
Net revenues$6,359
 $5,628
Net revenues$19,849 $19,103 $7,123 $6,856 
   
Excise taxes on products:   Excise taxes on products:
Smokeable products$1,278
 $1,203
Smokeable products$3,950 $3,998 $1,407 $1,406 
Oral tobacco products31
 31
Oral tobacco products98 96 33 33 
Wine4
 5
Wine14 15 5 5 
All otherAll other1 — — — 
Excise taxes on products$1,313
 $1,239
Excise taxes on products$4,063 $4,109 $1,445 $1,444 
   
Operating income:   Operating income:
Operating companies income (loss):   
OCI:OCI:
Smokeable products$2,370
 $1,932
Smokeable products$7,609 $6,864 $2,789 $2,561 
Oral tobacco products414
 358
Oral tobacco products1,297 1,195 436 417 
Wine(379) 15
Wine(347)50 19 16 
All other(5) (12)All other(63)(27)(7)8 
Amortization of intangibles(19) (8)Amortization of intangibles(54)(28)(17)(12)
General corporate expenses(45) (46)General corporate expenses(150)(154)(60)(46)
Corporate asset impairment and exit costs—
 (1)
Corporate asset impairment and exit
costs
— (1)— — 
Operating income$2,336
 $2,238
Operating income$8,292 $7,899 $3,160 $2,944 

As discussed further in Note 9. Segment Reporting to the condensed consolidated financial statements in Item 1 (“Note 9”), Altria’s chief operating decision maker (“CODM”) reviews operating companies income (loss) (“OCI”)OCI to evaluate the performance of, and allocate resources to, the segments. OCI for the segments is defined as operating income before general corporate expenses and amortization of intangibles.

53

The following table provides a reconciliation of adjusted net earnings (losses) attributable to Altria and adjusted diluted EPS attributable to Altria for the threenine months ended March 31:September 30:
(in millions of dollars, except per share data)Earnings before Income TaxesProvision for Income TaxesNet Earnings
Net Earnings Attributable
to Altria
Diluted EPS(in millions of dollars, except per share data)Earnings (Losses) before Income TaxesProvision for Income TaxesNet Earnings (Losses)Net Earnings (Losses) Attributable
to Altria		Diluted EPS
2020 Reported$2,108
$558
$1,550
$1,552
$0.83
2020 Reported$4,349 $1,817 $2,532 $2,543 $1.36 
ABI-related special items56
12
44
44
0.03
ABI-related special items689 145 544 544 0.29 
Implementation and acquisition-related costs395
95
300
300
0.16
Implementation and acquisition-related costs415 101 314 314 0.17 
Tobacco and health litigation items
24
5
19
19
0.01
Tobacco and health litigation items
76 19 57 57 0.03 
Impairment of JUUL equity securitiesImpairment of JUUL equity securities2,600 — 2,600 2,600 1.40 
Cronos-related special items89
(6)95
95
0.05
Cronos-related special items144 1 143 143 0.08 
COVID-19 special itemsCOVID-19 special items50 13 37 37 0.02 
Tax items—
(24)24
24
0.01
Tax items— (38)38 38 0.02 
2020 Adjusted for Special Items$2,672
$640
$2,032
$2,034
$1.09
2020 Adjusted for Special Items$8,323 $2,058 $6,265 $6,276 $3.37 
 
2019 Reported$1,516
$395
$1,121
$1,120
$0.60
2019 Reported$1,989 $1,473 $516 $516 $0.27 
ABI-related special items 1
163
34
129
129
0.07
ABI-related special items 1
11 2 9 9 — 
Asset impairment, exit, implementation and acquisition-related costs159
34
125
125
0.06
Asset impairment, exit, implementation and acquisition-related costs215 52 163 163 0.08 
Tobacco and health litigation items17
4
13
13
0.01
Tobacco and health litigation items48 12 36 36 0.02 
Impairment of JUUL equity securitiesImpairment of JUUL equity securities4,500 — 4,500 4,500 2.41 
Cronos-related special items425
97
328
328
0.17
Cronos-related special items1,093 277 816 816 0.44 
Tax items—
(19)19
19
0.01
Tax items— 56 (56)(56)(0.03)
2019 Adjusted for Special Items$2,280
$545
$1,735
$1,734
$0.92
2019 Adjusted for Special Items$7,856 $1,872 $5,984 $5,984 $3.19 
1Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures. For further discussion, see Executive Summary -
2020 Forecast Results
54
Table of Contents    above.
The following table provides a reconciliation of adjusted net earnings (losses) attributable to Altria and adjusted diluted EPS attributable to Altria for the three months ended September 30:
(in millions of dollars, except per share data)Earnings (Losses) before Income TaxesProvision for Income TaxesNet Earnings (Losses)Net Earnings (Losses) Attributable
to Altria		Diluted EPS
2020 Reported$(324)$632 $(956)$(952)$(0.51)
ABI-related special items513 108 405 405 0.22 
Implementation and acquisition-related costs12 4 8 8 — 
Tobacco and health litigation items
34 9 25 25 0.01 
Impairment of JUUL equity securities2,600 — 2,600 2,600 1.40 
Cronos-related special items143 1 142 142 0.08 
Tax items— 13 (13)(13)(0.01)
2020 Adjusted for Special Items$2,978 $767 $2,211 $2,215 $1.19 
2019 Reported$(2,128)$474 $(2,602)$(2,600)$(1.39)
ABI-related special items 1
(23)(5)(18)(18)(0.01)
Asset impairment, exit, implementation and acquisition-related costs11 6 5 5 — 
Tobacco and health litigation items3 1 2 2 — 
Impairment of JUUL equity securities4,500 — 4,500 4,500 2.41 
Cronos-related special items549 117 432 432 0.23 
Tax items— 97 (97)(97)(0.05)
2019 Adjusted for Special Items$2,912 $690 $2,222 $2,224 $1.19 
1 Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures.

The following events that occurred during the nine and three months ended March 31,September 30, 2020 and 2019 affected the comparability of statementstatements of earnings amounts:

▪
Tobacco and Health Litigation Items: For a discussion of tobacco and health litigation items and a breakdown of these costs by segment, see Note 11. Contingencies to the condensed consolidated financial statements in Item 1 (“Note 11”) and Tobacco and Health Litigation Items in Note 9, respectively.
▪Tobacco and Health Litigation Items: For a discussion of tobacco and health litigation items and a breakdown of these costs by segment, see Note 12. Contingencies to the condensed consolidated financial statements in Item 1 (“Note 12”) and Tobacco and Health Litigation Items in Note 9, respectively.

▪
Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax asset impairment, exit, implementation and acquisition-related costs were $395 million and $159
▪Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax implementation and acquisition-related costs were $415 million and $12 million for the nine and three months ended September 30, 2020, respectively. Pre-tax asset impairment, exit, implementation and acquisition-related costs were $215 million and $11 million for the nine and three months ended September 30, 2019, respectively.

Evolving adult consumer preferences have posed strategic challenges for the three months ended March 31, 2020 and 2019, respectively.

Ste. Michelle, has been experiencing product volume demand uncertainty, which has seen slowing growth in the wine category and increased inventory levels in recent periods. In addition, Ste. Michelle’s direct-to-consumer sales and on-premise wine sales in restaurants, bars and hospitality venues and on cruise lines have been, furtherand continue to be, negatively impacted in the first quarter by the economic uncertainty surroundingdisruptions arising from the COVID-19 pandemic as discussed inpandemic. For the Operating Results - Wine Segment - Business Environment. As a result of wine inventory levels significantly exceeding forecasted product volume demand as of March 31,nine and three months ended September 30, 2020, and other factors, Ste. Michelle recorded pre-tax charges of $392$395 million and $1 million, respectively, which were included in cost of sales in Altria’s condensed consolidated statementstatements of earnings for the three months ended March 31, 2020.earnings. The charges consisted primarily of the following: (i) write-off of inventory ($292 million) as Ste. Michelle no longer believes thatmillion recorded in the benefitfirst quarter of the blending and production plans for its inventory outweighs inventory carrying cost given the reduced product volume demand;2020); and (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believes no longer have a futureassociated with product volume demand uncertainty, which was further impacted by the economic benefituncertainty surrounding the COVID-19 pandemic ($100 million). In conjunction with Ste. Michelle’s examinationmillion recorded in the first quarter of its inventory levels,2020). Altria and Ste. Michelle also undertook a review of Ste. Michelle’sthe wine business and have implementedresulting in a strategic reset in the first quarter of 2020 in order to maximize Ste. Michelle’s profitability and achieve improved long-term cash-flow generation. Ste. Michelle expects the reset to deliver pre-tax cost savings of approximately $15 million and pre-tax cash savings of approximately $40 million annually by 2021.

In December 2018, Altria announced a cost reduction program (which included workforce reductions and third-party
55
spending across the businesses) that delivered approximately $600 million in annualized cost savings in 2019. The program was completed in 2019.


For further discussion on asset impairment, exit and implementation costs, including a breakdown of these costs by segment, see Note 3. Asset Impairment, Exit and Implementation Costs to the condensed consolidated financial statements in Item 1 (“Note 3”).

For the nine and three months ended March 31, 2020 andSeptember 30, 2019, Altria incurred pre-tax acquisition-related costs of $3$104 million and $98$6 million, respectively. Substantially all of the pre-tax acquisition-related costs for the three months ended March 31, 2019 were 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 JUUL and Cronos.

▪
▪Impairment of JUUL equity securities: For the nine and three months ended September 30, 2020 and 2019, Altria recorded non-cash pre-tax impairment charges of $2,600 million and $4,500 million, respectively, reported as impairment of JUUL equity securities in its condensed consolidated statements of earnings. A full tax valuation was recorded in 2020 and 2019 attributable to the tax benefit associated with the impairment charges. For further discussion, see Note 4 and Note 11. Income Taxes to the condensed consolidated financial statements in Item 1 (“Note 11”).

▪ABI-Related Special Items: Altria’s losses from its equity investment in ABI for the nine months ended September 30, 2020 included net pre-tax charges of $689 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 three months ended March 31, 2020 included net pre-tax charges of $56 million, consisting primarily of Altria’s share of ABI’s net mark-to-market losses on certain ABI financial instruments associated with its share commitments, partially offset by an additional net gain related to the completion in October 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited.

Altria’s earningslosses from its equity investment in ABI for the three months ended March 31, 2019September 30, 2020 included net pre-tax charges of $163$513 million, consisting primarily of Altria’s share of ABI’s completion of the sale of its Australia subsidiary and ABI’s goodwill impairment charge associated with its Africa businesses.

These amounts include Altria’s share of amounts recorded by ABI in the second quarter of 2020, as well as 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 nine and three months ended September 30, 2020 and 2019, Altria recorded net mark-to-market losses onpre-tax (income) expense consisting of the following:
For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020201920202019
(in millions)(in millions)
Loss on Cronos-related financial instruments(1)
$202 $1,327 $105 $636 
(Earnings) losses from equity investments(2)
(58)(234)38 (87)
      Total Cronos-related special items - (income) expense$144 $1,093 $143 $549 
(1)The 2020 amounts and substantially all of the 2019 amounts are related to the non-cash change in the fair value of the warrant and certain ABIanti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction.
(2)Amounts include Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with itsthe issuance of additional shares. Amounts in 2020 also include Altria’s share commitments.of Cronos’s impairment charge on goodwill and intangible assets.

•
Cronos-Related Special Items: For the three months ended March 31, 2020 and 2019, Altria recorded net pre-tax losses of $89 million and $425 million, respectively, consisting of the following:
 For the Three Months Ended March 31,
 2020 2019
 (in millions)
Loss on Cronos-related financial instruments(1)
$137
 $425
Earnings from Equity Investments(2)
(48) —
      Total Cronos-related special items - (Income) Expense$89
 $425
(1)The 2020 and substantially all of the 2019 amounts are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction.
(2)Substantially all of these amounts represent Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.

For further discussion, see Note 5. Financial Instruments to the condensed consolidated financial statements in Item 1.

▪COVID-19 Special Items: For the nine months ended September 30, 2020, Altria recorded 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, all of which were recorded in the second quarter of 2020, 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 inventory-related implementation costs associated with the wine business strategic reset. These implementation costs discussed above 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: Tax items for the nine months ended September 30, 2020 included net tax expense of $38 million due primarily to tax expense of $17 million for a tax basis adjustment to Altria’s investment in ABI and net tax expense of $12 million for adjustments resulting from amended returns and audit adjustments related to prior years. Tax items for the three months ended September 30, 2020 included tax benefits of $13 million, due primarily to tax benefits of $17 million for a tax basis adjustment of Altria’s investment in ABI.

Tax items for the nine and three months ended September 30, 2019 included net tax benefits of $56 million and $97 million, respectively, due primarily to tax benefits of $91 million for the reversal of tax accruals no longer required and $30 million for the release of a valuation allowance on Altria’s equity investment in Cronos, partially offset by tax expense of $63 million and $21 million, respectively, for a tax basis adjustment to Altria’s equity investment in ABI.

Consolidated Results of Operations for the ThreeNine Months Ended March 31,September 30, 2020 versus the ThreeNine Months Ended March 31,September 30, 2019

Net revenues, which include excise taxes billed to customers, increased $731$746 million (13.0%(3.9%), due to higher net revenues in the smokeable products and oral tobacco products segments.segments, partially offset by lower net revenues in the wine segment.

Cost of sales increased $595$542 million (37.7%(10.1%), due primarily to the inventory-related charges in the wine segment in 2020 (as discussed above), higher per unit settlement charges and higherCOVID-19 special items in 2020, partially offset by lower shipment volume in the smokeable products segment.and wine segments.

Excise taxes on products increased $74decreased $46 million (6.0%(1.1%), due primarily to higherlower smokeable products shipment volume.

Marketing, administration and research costs decreased $69 million (4.2%), due primarily to lower spending in the smokeable products segment, partially offset by higher amortization expense.

Operating income increased $98$393 million (4.4%(5.0%), due primarily to higher operating results from the smokeable products and oral tobacco products segments, partially offset by lower operating results from the wine segment.segment and higher amortization expense.

Interest and other debt expense, net, decreased $109$96 million (28.4%(9.7%), due primarily to debt issuance costs in 2019 for borrowings associated with the JUUL and Cronos transactions.

Earnings (losses) from Altria’s equity investments increased $71decreased $1,172 million (82.6%(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.

Altria’s income tax rate decreased 32.3 percentage points to 41.8%, due primarily to higher earnings from Altria’s investmenta full valuation allowance in ABI and earnings from Altria’s investment in Cronos2019 attributable to the tax benefits associated with the impairment of JUUL equity securities, partially offset by a full valuation allowance in 2020 (which were both positively impacted by special items).attributable to the tax benefits associated with the impairment of JUUL equity securities. For further discussion, see Note 11.


Reported net earnings (losses) attributable to Altria of $1,552$2,543 million increased $432$2,027 million (38.6%(100.0%+), due primarily to the 2019 impairment of JUUL equity securities, lower loss on Cronos-related financial instruments, higher operating income and the write-off of debt issuance costs in 2019 associated with the JUUL and higher earningsCronos transactions, partially offset by the 2020 impairment of JUUL equity securities and losses from Altria’s equity investments. Reported diluted and basic EPS attributable to Altria of $0.83,$1.36 and $1.37, respectively, each increased by 38.3%100.0%+, due to higher net earnings (losses) attributable to Altria and fewer shares outstanding.

Adjusted net earnings attributable to Altria of $2,034$6,276 million increased $300$292 million (17.3%(4.9%), due primarily to higher adjusted OCI fromin the smokeable products and oral tobacco products segments, partially offset by lower adjusted earnings from Altria’s equity investment in ABI.investments and higher income taxes. Adjusted diluted EPS attributable to Altria of $1.09$3.37 increased by 18.5%5.6%, due to higher adjusted net earnings attributable to Altria and fewer shares outstanding.

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Consolidated Results of Operations for the Three Months Ended September 30, 2020 versus the Three Months Ended September 30, 2019

Net revenues, which include excise taxes billed to customers, increased $267 million (3.9%), due to higher net revenues in the smokeable products segment.

Cost of sales increased $46 million (2.4%), due primarily to higher per unit settlement charges, partially offset by lower manufacturing costs in the smokeable products segment.

Operating income increased $216 million (7.3%), due primarily to higher operating results from the smokeable products segment.

Earnings (losses) from Altria’s equity investments, which decreased $805 million (100.0%+), were negatively impacted by ABI and Cronos special items and the impact of the COVID-19 pandemic on ABI’s ongoing operations.

Altria’s income tax rate decreased 172.8 percentage points to (195.1)%, due primarily to a full valuation allowance in 2019 attributable to the tax benefits associated with the impairment of JUUL equity securities, partially offset by a full valuation allowance in 2020 attributable to the tax benefits associated with the impairment of JUUL equity securities. For further discussion, see Note 11.

Reported net earnings (losses) attributable to Altria of $(952) million increased $1,648 million (63.4%), due primarily to the 2019 impairment of JUUL equity securities, a lower loss on Cronos-related financial instruments and higher operating income, partially offset by the 2020 impairment of JUUL equity securities, 2020 losses from Altria’s equity investments in ABI and Cronos compared with earnings in 2019 and higher income taxes. Reported diluted and basic EPS attributable to Altria of $(0.51), each increased by 63.3%, due to higher net earnings (losses) attributable to Altria.

Adjusted net earnings attributable to Altria of $2,215 million were essentially unchanged as lower adjusted earnings from Altria’s equity investments in ABI and Cronos and higher income taxes were offset by higher adjusted OCI in the smokeable products segment. Adjusted diluted EPS attributable to Altria of $1.19 was unchanged.

Non-GAAP Financial Measures

While Altria reports its financial results in accordance with GAAP, its management reviews certain financial results, including OCI, OCI margins, net earnings (losses) attributable to Altria and diluted EPS, on an adjusted basis, which excludesexclude certain income and expense items that management believes are not part of underlying operations. These items may include, for example, restructuring charges, asset impairment charges, acquisition-related costs, COVID-19 special items, equity investment-related special items (including any changes in fair value for the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain nonparticipating manufacturer (“NPM”) adjustment disputes under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 11.12. Altria’s management does not view any of these special items to be part of Altria’s underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s adjusted effective tax rate may exclude certain tax items from its reported effective tax rate.

Altria’s management believes that adjusted financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to Altria’s CODM for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. These adjusted financial measures are not required by, or calculated in accordance with GAAP and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.

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Operating Results by Business Segment

Tobacco Space

Business Environment

Summary

The U.S. tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume of Altria’s tobacco subsidiaries and investees and Altria’s consolidated results of operations, cash flows or financial position. These challenges, some of which are discussed in more detail below, in Note 1112 and in Part II, Item 1A., Risk Factors of this Form 10-Q (“Item 1A”), include:

▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the Food and Drug Administration (“FDA”);
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪
▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;
▪additional restrictions on the advertising and promotion of tobacco products;

▪other actual and proposed tobacco product legislation and regulation; and
▪governmental investigations;
▪the diminishing prevalence of cigarette smoking;
▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products;
▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower-priced tobacco products;
▪the highly competitive nature of the tobacco categories in which Altria’s tobacco subsidiaries operate, including competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;
▪illicit trade in tobacco products;
▪potential adverse changes in prices, availability and quality of tobacco, other raw materials and components; and
▪the COVID-19 pandemic.

▪additional restrictions on the advertising and promotion of tobacco products;
▪other actual and proposed tobacco-related legislation and regulation; and
▪governmental investigations;
▪the diminishing prevalence of cigarette smoking;
▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products;
▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower-priced tobacco products;
▪the highly competitive nature of all tobacco categories, including, without limitation, competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;
▪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’s tobacco subsidiaries. Altria’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. In fact, a growing number of adult smokers are converting from cigarettes to exclusive use of non-combustible tobacco product alternatives. Up until the second half of 2019, the e-vapor category had experienced significant growth in recent years, and the number of adults who exclusively used e-vapor products also increased during that time which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes and moist smokeless tobacco (“MST”). GrowthWhile growth of oral nicotine pouches has continued, growth in the e-vapor category has been negatively impacted by the legislative and regulatory activities discussed below. Based on the accelerated adult smoker movement across categoriesbelow and the federal government raising the legal age to purchase tobacco products to 21, as discussed below under Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products, Altria expects the U.S. adjusted cigarette industry volume for 2020 to decline by 4% - 6%. Due to the expected continued volatility across tobacco categories, Altria is no longer providing a multi-year forecast for U.S. cigarette industry volume decline.increasingly competitive. Altria and its tobacco subsidiaries believe the innovative tobacco product categoriesproducts category (in particular, e-vapor) will continue to be dynamic as adult tobacco consumers explore a variety of tobacco product options and as the regulatory environment for these innovative tobacco products evolves. For the cigarette category, based on year-to-date industry performance and expectations for continued category resilience, in October 2020, Altria revised its 2020 estimated full-year domestic cigarette industry adjusted volume to be in a range of unchanged versus the prior year to down 1.5%. This range replaces Altria’s previous estimate of down 2% to 3.5% versus the prior year.


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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. IfAs a result of the current economic downturn resulting from the COVID-19 pandemic, results in an economic recession, adult tobacco consumers may increasingly choose these products. See Operating Results - Smokeable Products SegmentExecutive Summary in Item 2above for further discussion.

Altria and its tobacco subsidiaries work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the U.S. through innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties).

FSPTCA and FDA Regulation

The Regulatory 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 disclosuresproducts (see Final Tobacco Marketing Rule below);
▪establish pre-market review pathways for new and modified tobacco products (see Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below);
▪prohibit any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
▪authorize the FDA to impose tobacco product standards that are appropriate for the protection of related information;the public health; and (3) enforce
▪equip the FDA with a variety of investigatory and enforcement tools, including the authority to inspect product manufacturing and other facilities.

The FSPTCA also bans descriptors such as “light,” “low” or “mild” when used as descriptors of modified risk, unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by Middleton, the Department of Justice, on behalf of the FDA, informed Middleton that at present, the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to bring another lawsuit.

Final Tobacco Marketing Rule

As required by the FSPTCA, in March 2010 the FDA promulgated a wide range of advertising and related regulations. The FSPTCA applies topromotion restrictions for cigarettes cigarette tobacco and smokeless tobacco(1)1products (the “Final Tobacco Marketing Rule”). The May 2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, e-vapor products containing nicotine or other tobacco derivatives, pipe tobacco and oral nicotine pouches, but do not include any component or part that is not made or derived from tobacco.

The Final Tobacco Marketing Rule, as amended, among other things:

▪restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;
▪prohibits sampling of all tobacco products except that sampling of smokeless tobacco products is permitted in qualified adult-only facilities;
▪prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos;
▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and
▪requires the development by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and asgives the FDA the authority to require new warnings for any type of 2016, Other Tobacco Products. Seetobacco product (see FDA Regulatory Actions - Deeming RegulationsGraphic Warnings below.below).

Among other measures, the FSPTCA or its implementing regulations:

▪imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail;

___________________________

(1) 1“Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
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▪bans descriptors such as “light,” “mild” or “low” or similar descriptors when used as descriptors of modified risk unless expressly authorized by the FDA;
▪requires extensive product disclosures to the FDA and may require public disclosures;
prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
▪imposes reporting obligations relating to contraband activity and grants the FDA authority to impose recordkeeping and other obligations to address illicit trade in tobacco products;
▪
changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size and requires the development by the FDA of graphic warningsSubject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes establishes warning requirements for Other Tobacco Products and gives the FDA the authority to require new warnings for any type of tobacco products (see FDA Regulatory Actions - Graphic Warnings below);
▪
authorizes the FDA to adopt product regulations and related actions, including imposing tobacco product standards that are appropriate for the protection of the public health and imposing manufacturing standards for tobacco products (see FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation and FDA Regulatory Actions - Potential Product Standards below);
▪
establishes pre-market review pathways for new and modified tobacco products for the FDA to follow (see Pre-Market Review Pathways Including Substantial Equivalence below); and
▪equips the FDA with a variety of investigatory and enforcement tools, including the authority to inspect tobacco product manufacturing and other facilities.

Pre-Market Review Pathways for Tobacco Products, Including Substantial Equivalence

The FSPTCA permits the sale of tobacco products that were commercially marketed as of February 15, 2007, and for which no modifications have been made to the products since that date (“Grandfathered Products”). For new and modified tobacco products, however, the FSPTCA imposes restrictions on marketing, requiring FDA review and authorization before marketing a new or modified product. Specifically, cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced intoand in August 2016 for all other tobacco products.

At the market after March 22, 2011, and Othertime of the promulgation of the Final Tobacco Products modified or first introduced into the market after August 8, 2016, are subject to new tobacco product application and pre-market review and authorization requirements unless a manufacturer can demonstrate they are “substantially equivalent” to products commercially marketed as of February 15, 2007. The FDA could deny any such new tobacco product application or determine lack of substantial equivalence, thereby preventing the distribution and sale of any product affected by such denial. A manufacturer is permitted, however, to introduce Grandfathered Products into the marketplace.

For cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced into the market between February 15, 2007 and March 22, 2011 (“Provisional Products”) for which a manufacturer submitted substantial equivalence reports,Marketing Rule, the FDA may determine that such products are not “substantially equivalent”also issued an Advance Notice of Proposed Rulemaking (“ANPRM”) to products commercially marketed asestablish restrictions on the placement of February 15, 2007. In such cases, the FDA could require the removal of such products from the marketplace (seeoutdoor tobacco advertising in relation to schools and playgrounds. See FDA Regulatory Actions - Substantial EquivalenceRulemaking and Other New Product Processes/Pathways - Cigarettes and Smokeless Tobacco Products below).

Similarly, the FDA could determine that Other Tobacco Products modified or first introduced into the market between February 15, 2007 and August 8, 2016 for which a manufacturer submits substantial equivalence reports, are not “substantially equivalent” to products commercially marketed as of February 15, 2007, or reject a new tobacco product application submitted by a manufacturer, both of which could require the removal of such products from the marketplace (see FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation, and FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways - Other Tobacco Products below).

Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, can trigger the FDA’s pre-market review process described above. As noted, adverse determinations by the FDA during that process could restrict a manufacturer’s ability to continue marketing such products.

FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation

In July 2017, the FDA announced a comprehensive plan for tobacco and nicotine regulation designed to strike a balance between regulation and encouraging the development of innovative tobacco products that may be less risky than combustible cigarettes. Since then, the FDA has issued additional information about its comprehensive plan in response to concerns associated with the rise in the use of e-vapor products by youth, and the potential youth appeal of flavored tobacco products.

The FDA said it is monitoring youth tobacco usage rates, particularly e-vapor product use, and exercised its regulatory authority by implementing measures designed to decrease youth tobacco use, including the removal of certain e-vapor products from the market (see FDA Regulatory Actions - Underage Access and Use of Certain Tobacco Products below).

Major components of the FDA’s comprehensive plan include the following:

▪issuing advance notices of proposed rulemaking (“ANPRM”) relating to potential product standards for nicotine in cigarettes, flavors in all tobacco products (including menthol in cigarettes and characterizing flavors in all cigars); and, for e-vapor products, protection against known public health risks such as concerns about youth exposure to liquid nicotine;
▪taking actions to restrict youth access to e-vapor products;
▪establishing content requirements for “new tobacco product” and “modified risk tobacco product” applications;
▪reconsidering the FDA review processes of substantial equivalence reports for Provisional Products and establishing review processes for e-vapor new product applications; and
▪revisiting the timelines (previously extended by the FDA) to submit applications for Other Tobacco Products.

See FDA Regulatory ActionsGuidance below for further discussion.description of the rulemaking process.

Rulemaking and Guidance

The provisions of the FSPTCA that require the FDA to take action through rulemaking generally involve consideration of public comment and, for some issues, scientific review. As required by the FSPTCA, the FDA has established a tobacco product scientific advisory committee (the “TPSAC”), which consists of voting and non-voting members, to provide advice, reports, information and recommendations to the FDA on certain scientific and health issues relating to tobacco products. TPSAC votes are considered by the FDA, but are not binding. From time to time, the FDA issues proposed rules or guidance, which may be issued in draft or final form, generally involve public comment and generally involves public comment.may include scientific review. The FDA also may request comments on broad topics through an ANPRM. Altria’s tobacco subsidiaries participate actively in processes established byengage with the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA policies and proposals and participation in public hearings and engagement sessions.

The FDA’s implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by U.S. states, territories and localities of their laws and regulations as well as of the State Settlement Agreements discussed below (see State Settlement Agreements below).  Such enforcement efforts may adversely affect the ability of Altria’s tobacco subsidiaries and investees to market and sell regulated tobacco products in those states, territories and localities.

FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation

In July 2017, the FDA announced a “Comprehensive Plan for Tobacco and Nicotine Regulation” (“Comprehensive Plan”) designed to strike a balance between regulation and encouraging the development of innovative tobacco products that may be less risky than cigarettes. Since then, the FDA has issued additional information about its Comprehensive Plan in response to
concerns associated with the rise in the use of e-vapor products by youth, and the potential youth appeal of flavored tobacco products (see Underage Access and Use of Certain Tobacco Products below). As part of the Comprehensive Plan, the FDA:

▪issued ANPRMs relating to potential product standards for nicotine in cigarettes, flavors in all tobacco products (including menthol in cigarettes and characterizing flavors in all cigars); and, for e-vapor products, to protect against known public health risks such as concerns about youth exposure to liquid nicotine;
▪took actions to restrict youth access to e-vapor products;
▪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 Pre-market Tobacco Product Application (“PMTA”), Substantial Equivalence (“SE”) or SE Exemption pathways.

The FDA pre-market authorization enforcement policy varies based on product type and date of availability in the market; specifically:

▪All tobacco products on the market as of February 15, 2007, and not subsequently modified, are Grandfathered Products and exempt from the pre-market authorization requirement;
▪Cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health; and
▪Tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Grandfathered Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020.

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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 U.S. Smokeless Tobacco Company LLC (“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 a PMTA for on! oral nicotine pouches on May 15, 2020. 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 these systems as modified risk tobacco products with a reduced exposure claim. The IQOS electronic device heats but does not burn tobacco.

Manufacturers that receive product authorizations through the PMTA process must submit 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
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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.

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, the final rule will be effective October 16, 2021. 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 investment in underage tobacco use prevention efforts. For example, during 2019, Altria advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage tobacco use, which is now federal law. See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for further discussion.

In March 2019, the FDA issued draft guidance 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)
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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 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. 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


Regulations imposed and otherFDA regulatory actions taken by the FDA under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries in a number of differentvarious 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; or
▪otherwise significantly increase the cost of doing business.
▪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.

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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 regulation and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the statuteFSPTCA 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. The use of any of these investigatoryInvestigations or enforcement tools by the FDAactions 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.

Final Tobacco Marketing Rule

As required by the FSPTCA, the FDA re-promulgated in March 2010 a wide range of advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to a United States Supreme Court ruling) (the “Final Tobacco Marketing Rule”). The May 2016 amendments to the Final Tobacco Marketing Rule apply certain provisions to certain “covered tobacco products,” which include cigars, e-vapor products containing nicotine or other tobacco derivatives, pipe tobacco and oral nicotine pouches, but do not include any component or part that is not made or derived from tobacco. The Final Tobacco Marketing Rule as so amended:

▪bans the use of color and graphics in cigarette and smokeless tobacco product labeling and advertising;
▪
prohibits the sale of cigarettes, smokeless tobacco and covered tobacco products to persons under the age of 18 (See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for a discussion of more recent laws raising the minimum legal age to purchase tobacco products to 21);
▪restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;
▪requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions;
▪prohibits sampling of cigarettes and covered tobacco products and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities;
▪prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos; and
▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event.

Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products and in August 2016 for covered tobacco products. At the time of the re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an ANPRM regarding the so-called “1000 foot rule,” which would establish restrictions on the placement of outdoor tobacco advertising in relation to schools and playgrounds.

FDA Regulatory Actions

Graphic Warnings

In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting the negative health consequences of smoking. According to the final rule, the graphic health warnings will (i) be located beneath the cellophane, and comprise the top 50% of the front and rear panels of cigarette packages and (ii) occupy 20% of a cigarette advertisement and be located at the top of the advertisement. The final rule is effective as of June 18, 2021. Other tobacco manufacturers also filed a lawsuit challenging the final rule. In the preamble to the final rule, the FDA stated that it would not

exempt from the final rule HeatSticks,a heated tobacco productused with the IQOS electronic device, but would consider the HeatSticks market order, and similar market orders, on a case-by-case basis.

Substantial Equivalence and Other New Product Processes/Pathways

Cigarettes and Smokeless Tobacco Products:In general, in order to continue marketing Provisional Products, manufacturers of such products were required to submit to the FDA reports demonstrating substantial equivalence by March 22, 2011 for the FDA to determine if such tobacco products are “substantially equivalent” to products commercially available as of February 15, 2007.  Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are Provisional Products, as are some of the products currently marketed by Sherman Group Holdings, LLC (“Nat Sherman”). Altria’s subsidiaries submitted timely substantial equivalence reports for these Provisional Products and can continue marketing these products unless the FDA makes a determination that a specific Provisional Product is not substantially equivalent. If the FDA ultimately makes such a determination, it could require the removal of such products from the marketplace, leaving Altria’s cigarette and smokeless tobacco subsidiaries with the option of marketing other products that have received FDA pre-market authorization or Grandfathered Products.

The FDA has communicated that it will not review a certain subset of Provisional Product substantial equivalence reports and that the products that are the subject of those reports can generally continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products, but also have a number of Provisional Products that will continue to be subject to the substantial equivalence review process. In addition, PM USA and USSTC have submitted, and continue to submit, substantial equivalence reports on products proposed to be marketed after March 22, 2011 (“Non-Provisional Products”).

PM USA and USSTC have received substantial equivalence determinations on certain Provisional and Non-Provisional Products. The Provisional Products that were found to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, the determinations did not impact business results.

While Altria’s cigarette and smokeless tobacco subsidiaries believe all of their current products meet the statutory requirements of the FSPTCA, they cannot predict whether, when or how the FDA ultimately will apply its guidance to their various respective substantial equivalence reports or seek to enforce the law and regulations. Should Altria’s cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any substantial equivalence reports currently pending with the FDA, they believe they have the ability to replace most of their respective product volumes that could be impacted by these determinations with other products that have received FDA pre-market authorization or with Grandfathered Products.

Other Tobacco Products:In 2016, the FDA said that it would permit manufacturers to continue marketing Other Tobacco Products modified or introduced into the market for the first time between February 15, 2007 and August 8, 2016, until the FDA rendered decisions on the applicable substantial equivalence reports and new tobacco product applications. A number of cigars were on the market as of February 15, 2007, including certain cigars manufactured by Middleton. Therefore, in addition to being able to file new tobacco product applications, certain cigar manufacturers, including Middleton, can file substantial equivalence reports with the FDA for products that were on the market as of August 8, 2016. Few if any e-vapor products or oral nicotine pouches, however, were on the market as of February 15, 2007. Therefore manufacturers of these products may not be able to file substantial equivalence reports with the FDA on e-vapor products or oral nicotine pouches that were on the market as of August 8, 2016. In such cases, manufacturers, including JUUL and Helix, have to file new tobacco product applications that, among other things, demonstrate that the marketing of the products would be appropriate for the protection of the public health.

Previously, the deadlines to file all substantial equivalence reports and new tobacco product applications for combustible Other Tobacco Products, such as cigars and pipe tobacco, and for non-combustible Other Tobacco Products, such as e-vapor products and oral nicotine pouches, were at various points in 2018. The FDA extended these deadlines to August 8, 2021 for combustible Other Tobacco Products and August 8, 2022 for non-combustible Other Tobacco Products through guidance rather than by providing notice and allowing for public comment. In May 2019, in a lawsuit filed by the American Academy of Pediatrics, among other plaintiffs, a federal district court in Maryland found that the FDA’s failure to engage in the notice and comment process violated the Administrative Procedures Act. In July 2019, the court ordered that: (1) the FDA require that for Other Tobacco Products on the market as of August 8, 2016, applications must be filed with the FDA by May 12, 2020; (2) at the FDA’s discretion, Other Tobacco Products for which applications are not timely filed will be subject to FDA enforcement action; (3) applications for Other Tobacco Products that are timely filed can remain on the market during FDA review without being subject to FDA enforcement action for up to one year from the date of the application; and (4) on a case-by-case basis,

the FDA can exempt Other Tobacco Products from filing requirements for good cause. The court’s ruling did not, however, prevent the FDA from taking enforcement action against Other Tobacco Products prior to the May 12, 2020 filing deadline. The FDA and other parties appealed the court’s ruling to the United States Court of Appeals for the Fourth Circuit. In April 2020, amid the COVID-19 pandemic, the federal district court extended the filing deadline to September 9, 2020.

If JUUL is unable to meet the court-ordered filing deadline, or if JUUL’s new tobacco product applications are timely filed but subsequently denied, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.

Manufacturers of cigars and oral nicotine pouches also must file substantial equivalence reports or new tobacco product applications by the court-ordered filing deadline in order for their products to remain on the market. Middleton has received market authorizations from the FDA that cover a significant portion of its cigar product volume, and plans to file any required substantial equivalence reports with the FDA for its remaining cigar product volume by the court-ordered filing deadline. Helix also plans to file all required new tobacco product applications for its oral nicotine pouches by the court-ordered filing deadline.

Failure of Other Tobacco Product manufacturers, including Middleton, Helix and JUUL, to meet the court-ordered filing deadline for currently marketed products or to ultimately obtain market authorization from the FDA following proper submission, could result in Other Tobacco Products being removed from the market.

In January 2020, in an effort to address youth usage of certain Other Tobacco Products, the FDA issued final guidance (the “January 2020 Final Guidance”) in which it stated that certain cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) would be prioritized for FDA enforcement action beginning early February 2020, effectively requiring the removal of these products from the market unless these products receive FDA market authorization. E-vapor product manufacturers may still, however, file new tobacco product applications for these products. In its January 2020 Final Guidance, separate from the above-mentioned federal court order, the FDA adopted the filing deadline set by the court and stated that after that deadline, it would prioritize its enforcement against any e-vapor product (in any format or flavor) offered for sale but for which either no new tobacco product application has been filed or for which an application was timely filed but for which the FDA issued an adverse decision. See FDA Regulation - Underage Access and Use of Certain Tobacco Products below for further discussion. The effect of this guidance is to restrict the sale of certain flavored cartridge-based e-vapor products including those manufactured by JUUL, but permit the continued sale (subject to the exceptions discussed above) of other flavored e-vapor products, including flavored disposable e-vapor products. If these other flavored e-vapor products are sold in higher volumes than JUUL’s e-vapor products, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.

All Tobacco Products:In March 2019, the FDA issued a proposed rule that would, if finalized, require that all substantial equivalence reports filed after the effective date of the final rule meet certain content and format requirements. Such requirements would not apply to substantial equivalence reports for Provisional Products or to any substantial equivalence report submitted to the FDA before this proposed rule becomes final. Various products marketed by Altria’s tobacco subsidiaries may fall within the scope of this proposed rule if finalized.

In September 2019, the FDA issued a proposed rule in which it set forth requirements for content, format and FDA’s procedures for reviewing new tobacco product applications. PM USA, Nat Sherman, Middleton, USSTC and Helix filed comments with the FDA. As of April 27, 2020, the FDA has not issued a final rule.

It is not possible to predict how long reviews by the FDA of substantial equivalence reports or new tobacco product applications for any tobacco product will take. A “not substantially equivalent” determination or denial of a new tobacco product application on one or more products could have a material adverse impact on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.

Deeming Regulations

As discussed above under FSPTCA and FDA Regulation - The Regulatory Framework, in 2016, the FDA issued final regulations for all Other Tobacco Products, imposing the FSPTCA regulatory framework on the cigar products manufactured, marketed and sold by Middleton and Nat Sherman. At the same time the FDA issued its final deeming regulations, it also amended the Final Tobacco Marketing Rule as described above in FSPTCA and FDA Regulation - Final Tobacco Marketing Rule.


Among the FSPTCA requirements that apply to Other Tobacco Products is a ban on descriptors, including “mild,” when used as descriptors of modified risk unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by Middleton, the Department of Justice, on behalf of the FDA, informed Middleton that at present, the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to make a submission to the FDA and ultimately, if necessary, to bring another lawsuit.

Underage Access and Use of Certain Tobacco Products

The FDA announced in September 2018 that it is using its regulatory authority to address underage access and use of e-vapor products. Altria engaged with the FDA on this topic in 2018 before discontinuing its Nu Mark LLC e-vapor business and also after acquiring a 35% economic interest in JUUL in December 2018. Altria reaffirmed to the FDA its ongoing and long-standing investment in underage tobacco use prevention efforts. For example, during 2019, Altria advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage tobacco use, which is now federal law. See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for further discussion.

In March 2019, the FDA issued draft guidance (the “March 2019 Draft Guidance”) further reflecting, among other things, its concerns about youth e-vapor use. The FDA finalized this guidance in the form of the January 2020 Final Guidance discussed above, which revises the FDA’s compliance policy and states that the FDA intends to prioritize enforcement action against:

▪cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and
▪all e-vapor products (in any format or flavor):
▪for which a manufacturer has failed or is failing to take adequate measures to prevent access by those under the age of 21 (referred to in the FDA guidance as “minors”);
▪that are targeted to minors and the marketing for which is likely to promote use of such products by minors; or
▪offered for sale after the court-ordered filing deadline and for which the manufacturer has either not submitted a pre-market application or for which an application was timely filed but an adverse decision on the application was issued by the FDA.

The January 2020 Final Guidance became effective in early February 2020. FDA enforcement action could result in tobacco products that are subject to such action being removed from the market unless and until these products receive pre-market authorization from the FDA. JUUL ceased its sales of all of its cartridge-based, flavored e-vapor products (other than tobacco and menthol) in 2019. If FDA enforcement action is taken against currently marketed JUUL e-vapor products, and a significant number of those products are removed from the market or if the FDA does not ultimately allow for the reintroduction of flavors other than tobacco and menthol, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.

Potential Product Standards

▪
Nicotine in cigarettes and potentially other combustible tobacco products:In March 2018, the FDA issued an ANPRM through which it sought comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels through achievable product standards. Specifically, the FDA sought comments on the consequences of such a product standard, including (i) smokers compensating by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) the illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars.

This ANPRM process may ultimately lead to the FDA’s development of product standards for nicotine in combustible tobacco products such as cigarettes and cigars. If such regulations were to become final and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries.

▪
Flavors in tobacco products:In March 2018, the FDA issued an ANPRM seeking comments on the role that flavors (including menthol) in tobacco products play in attracting youth and may play in helping some smokers switch to

potentially less harmful forms of nicotine delivery. The FDA previously released its preliminary scientific evaluation on menthol, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” The FDA’s evaluation followed an earlier report to the FDA from TPSAC on the impact of the use of menthol in cigarettes on the public health and included a recommendation that the “[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States” and an observation that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences. As discussed above under FDA’s Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation,the FDA indicated that it is considering proposing rulemaking for a product standard that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, and that it intends to propose a product standard that would ban characterizing flavors in all cigars. While the FDA has yet to define “characterizing flavors” with respect to cigars, most of Middleton’s cigar products contain added flavors and may be subject to any action by the FDA to ban flavors in cigars. No future action can be taken by the FDA to ban characterizing flavors in all cigars or regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) until the completion of a full rulemaking process.

In the March 2019 Draft Guidance, noted above under FDA Regulatory Action - Underage Access and Use of Certain Tobacco Products,the FDA also proposed prioritizing enforcement action against flavored cigars (other than tobacco flavor) that either are not Grandfathered Products or have not received market authorization from the FDA to remain on the market. In the January 2020 Final Guidance, the FDA declined to prioritize enforcement action against such cigars before the court-ordered filing deadline. Instead, the FDA reiterated its intention to issue a proposed rule for a product standard banning all cigars with characterizing flavors. In its March 2019 Draft Guidance, the FDA indicated that such a rule would include Grandfathered Products and cigars that have received market authorization from the FDA.

Altria’s tobacco subsidiaries submitted public comments in response to the ANPRM regarding flavors in tobacco products and to the March 2019 Draft Guidance. Any proposed rules ultimately may lead to the FDA banning characterizing flavors in not only cigars, but in all tobacco products including oral nicotine pouches. If these regulations become final and are upheld in the courts, it could have a material adverse effect on the business, consolidated results of 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 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.

Excise Taxes

Tobacco products are subject to substantial excise taxes in the U.S. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the U.S., including as a result of the COVID-19 pandemic as a way for governments to address potential budget shortfalls. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies.

Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation. Between the end of 1998 and AprilOctober 27, 2020, the weighted-average state cigarette excise tax increased from $0.36 to $1.82$1.83 per pack. As of AprilOctober 27, 2020, noone state has increased cigarette excise taxes in 2020 butand various increases are under consideration or have been proposed.

A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria’s subsidiaries support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of AprilOctober 27, 2020, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST.


An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As of AprilOctober 27, 2020, 2326 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, ten10 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.

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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 AprilOctober 27, 2020, 180181 countries, as well as the European Community, have become parties to the FCTC. While the U.S. is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues.

There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the U.S., either indirectly or as a result of the U.S. becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.

State Settlement Agreements

As discussed in Note 11,12, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. For a discussion of the impact of the State Settlement Agreements on Altria, see Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below and Note 11.12. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions areThe State Settlement Agreements also placedplace restrictions on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also placeproducts and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.

In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.

Other International, Federal, State and Local Regulation and Governmental and Private Activity

International, Federal, State and Local Regulation:Regulation

A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including e-vaporcigarettes, smokeless tobacco, cigars and other innovative tobaccoe-vapor products), such as legislation that (1) prohibits the sale of tobacco product categories, such as e-vapor, and/or(2) prohibits the sale of tobacco products with certain characterizing flavors, such as menthol cigarettes, (2)(3) requires the disclosure of health information separate from or in addition to federally mandated health warnings and (3)(4) restricts

commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales). The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As of AprilOctober 27, 2020, 2316 states and the District of Columbia have proposed legislation to ban flavors in one or more tobacco products, including e-vapor products, oral nicotine pouches and cigarettes and fourfive states, California, Massachusetts, New Jersey, Utah and New York, have passed such legislation. Similar legislation has been introduced in the U.S. Congress and was passed by the U.S. House of Representatives in 2020. Some of these states, such as New York and Utah, exempt certain products that have received FDA market authorization.authorization through the PMTA pathway. The legislation in California bans the sale of most tobacco products with characterizing flavors, including menthol, mint and wintergreen, effective January 1, 2021. Following enactment of the flavor ban in August 2020, several registered California voters filed a referendum against the legislation. Over 600,000 registered voter signatures must be collected to place the issue on the 2022
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ballot, which, if successfully completed, would delay its implementation until after a vote on the referendum occurs. Altria’s tobacco operating companies, in conjunction with other companies, are funding this effort. Additionally, in October 2020, Altria���s tobacco operating companies, along with several other parties including R.J. Reynolds, filed a lawsuit challenging the flavor ban and seeking to enjoin its implementation. Massachusetts has passed legislation capping the amount of nicotine in e-vapor products. Similar legislation is pending in three other states.

In addition to legislation, some state governors had imposed restrictions on tobacco products through executive action. For example, in response to reports of lung injuries and deaths related to e-vapor product use, the governors of eight states exercised executive action to temporarily prohibit either the sale of all e-vapor products or e-vapor products with flavors other than tobacco. Some of those executive actions have been challenged in the courts and many of those executive actions have expired. Restrictions on e-vapor products also have been instituted or proposed internationally. For example, India and Singapore have instituted bans on e-vapor products.

Altria’s tobacco subsidiaries have challenged and will continue to challenge certain federal, state and local legislation and other governmental action, including through litigation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.

Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products

After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, in December 2019, the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. Although an increase in the minimum age to purchase tobacco products may have a negative impact on sales volume of our tobacco businesses, as discussed above under Underage Access and Use of Certain Tobacco Products, Altria supported raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, reflecting its longstanding commitment to combat underage tobacco use.

Health Effects of Tobacco Products, Including E-vapor Products

Reports with respect to the health effects of smoking have been publicized for many years, including various reports by the U.S. Surgeon General. In 2019, there were public health advisories concerning vaping-related lung injuries and deaths and more recently, there have been health concerns raised about potential increased risks associated with COVID-19 among smokers and vapers. Altria and its tobacco subsidiaries believe that the public should be guided by the messages of the U.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.

Most jurisdictions within the U.S. have restricted smoking in public places and some have restricted vaping in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking and vaping in outdoor places, in private apartments and in cars transporting children. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on legislation and regulation.

Other Legislation or Governmental Initiatives

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; establish educational campaigns relating to tobacco consumption or tobacco control programs or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes;

require tax stamping of smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and Other Tobacco Products.other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful.

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It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.

Governmental Investigations

From time to time, Altria, its subsidiaries and investees are subject to governmental investigations on a range of matters.  For example,example: (i) the FTCFederal Trade Commission (“FTC”) issued a Civil Investigative Demand (“CID”) to Altria while conducting its antitrust review of Altria’s investment in JUUL seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee andemployee; (ii) the SEC hasU.S. Securities and Exchange Commission (“SEC”) commenced an investigation relating to Altria’s disclosures and accountingcontrols in connection with the JUUL investment.investment; and (iii) the Attorney General of the State of Minnesota issued a CID relating to the marketing of Nu Mark LLC (“Nu Mark”) e-vapor products, which were discontinued in 2018. Additionally, JUUL is currently under investigation by various federal and state agencies, including the SEC, the FDA and the FTC, and state attorneys general.  Such investigations vary in scope but at least some appear to include JUUL’s marketing practices,practices; particularly as such practices relate to youth.youth, and Altria may be asked in the context of those investigations to provide information concerning its investment in JUUL or relating to its marketing of Nu Mark e-vapor products. 

Private Sector Activity on E-Vapor

A number of retailers, including national chains, have discontinued the sale of e-vapor products. Reasons for the discontinuation include reported illnesses related to e-vapor product use and the uncertain regulatory environment. It is possible that this private sector activity could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.

Illicit Trade in Tobacco Products

Illicit trade in tobacco products can have an adverse impact on the businesses of Altria, its tobacco subsidiaries and investees. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the U.S. that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our tobacco subsidiaries’ and investees’ products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment Altria’s tobacco subsidiaries and investees have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes; imposing legislative or regulatory requirements that may adversely impact Altria’s consolidated results of operations and cash flows, including adversely affecting the value of Altria’s investment in JUUL, and the businesses of its tobacco subsidiaries and investees; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold.

Altria’s tobacco subsidiaries communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect their trademarks.

Price, Availability and Quality of Tobacco, Other Raw Materials and Component Parts

Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, 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 raw materials or component parts used to manufacture our companies’ products. Any significant change in the price, quality or availability of tobacco, other raw materials or component parts used to manufacture our products could restrict our subsidiaries’ ability to continue marketing

existing products or impact adult consumer product acceptability and adversely affect our subsidiaries’ profitability and businesses.
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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, are increasingly unpredictable in lightincluding the economic effects of the COVID-19 pandemic, are unpredictable, which, among other economic factors, may result in changes in the patterns of demand for agricultural products and the cost of tobacco production which could impact tobacco leaf prices and tobacco supply. Tobacco production in certain countries also is subject to a variety of controls, including government-mandated prices and production control programs.  CertainMoreover, certain types of tobacco are only available in limited geographies, including geographies experiencing political instability or government prohibitions on the import or export of tobacco, and loss of their availability could impair our subsidiaries’ ability to continue marketing existing products or impact adult tobacco consumer product acceptability.

The COVID-19 pandemic also may limit access to and increase the cost of raw materials, component parts and personal protective equipment as U.S. and global suppliers temporarily shut down facilities in order to address exposure to the virus or as a result of a government mandate.

Timing of Sales

In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.



Operating Results
Smokeable products segment

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
Smokeable Products
For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020 2019 Change20202019Change20202019Change
     
Net revenues$5,606
 $4,935
 13.6%Net revenues$17,522 $16,837 4.1 %$6,313 $6,049 4.4 %
Excise taxes(1,278) (1,203)  Excise taxes(3,950)(3,998)(1,407)(1,406)
Revenues net of excise taxes$4,328
 $3,732
  Revenues net of excise taxes$13,572 $12,839 $4,906 $4,643 
     
Reported OCI$2,370
 $1,932
 22.7%Reported OCI$7,609 $6,864 10.9 %$2,789 $2,561 8.9 %
Asset impairment, exit and implementation costs—
 44
  Asset impairment, exit and implementation costs— 79 — 4 
Tobacco and health litigation items22
 15
  Tobacco and health litigation items73 43 34 3 
COVID-19 special itemsCOVID-19 special items41 — — — 
Adjusted OCI$2,392
 $1,991
 20.1%Adjusted OCI$7,723 $6,986 10.5 %$2,823 $2,568 9.9 %
     
Reported OCI margins 1
54.8% 51.8% 3.0 pp
Reported OCI margins 1
56.1 %53.5 %2.6 pp56.8 %55.2 %1.6 pp
Adjusted OCI margins 1
55.3% 53.3% 2.0 pp
Adjusted OCI margins 1
56.9 %54.4 %2.5 pp57.5 %55.3 %2.2 pp
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, for the nine months ended September 30, 2020 increased $671$685 million (13.6%), due primarily to higher shipment volume ($370 million) and higher pricing ($306 million), which includes higher promotional investments.


Reported OCI increased $438 million (22.7%(4.1%), due primarily to higher pricing ($306920 million), which includes higher promotional investments, higherpartially offset by lower shipment volume ($205189 million).

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Reported OCI for the nine months ended September 30, 2020 increased $745 million (10.9%), due primarily to higher pricing ($920 million), which includes higher promotional investments, lower costs ($165 million) and 2019 asset impairment, exit and implementation costs in 2019 ($4479 million), partially offset by higher per unit settlement charges. Reported OCI margins increased 3.0 percentage points to 54.8%charges, lower shipment volume ($126 million), COVID-19 special items ($41 million) and higher tobacco and health litigation items ($30 million).

Adjusted OCI for the nine months ended September 30, 2020 increased $401$737 million (20.1%(10.5%), due primarily to higher pricing ($306920 million), which includes higher promotional investments, and higher shipment volumelower costs ($205165 million), partially offset by higher per unit settlement charges. charges and lower shipment volume ($126 million).

Net revenues, which include excise taxes billed to customers, for the three months ended September 30, 2020 increased $264 million (4.4%), due primarily to higher pricing ($280 million), which includes higher promotional investments.

Reported OCI for the three months ended September 30, 2020 increased $228 million (8.9%), due primarily to higher pricing ($280 million), which includes higher promotional investments, and lower costs ($58 million), partially offset by higher per unit settlement charges and higher tobacco and health litigation items ($31 million).

Adjusted OCI marginsfor the three months ended September 30, 2020 increased 2.0 percentage points$255 million (9.9%), due primarily to 55.3%.

higher pricing ($280 million), which includes higher promotional investments, and lower costs ($58 million), partially offset by higher per unit settlement charges.

The following table summarizes the smokeable products segment shipment volume performance:
Shipment VolumeShipment Volume
For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020 2019 Change20202019Change20202019 Change
(sticks in millions)(sticks in millions)
Cigarettes:     Cigarettes:
Marlboro21,842
 20,467
 6.7 % Marlboro67,890 68,347 (0.7)%24,258 24,081 0.7 %
Other premium1,137
 1,165
 (2.4)% Other premium3,496 3,772 (7.3)%1,231 1,302 (5.5)%
Discount2,045
 1,962
 4.2 % Discount6,205 6,564 (5.5)%2,130 2,349 (9.3)%
Total cigarettes25,024
 23,594
 6.1 %Total cigarettes77,591 78,683 (1.4)%27,619 27,732 (0.4)%
Cigars:     Cigars:
Black & Mild430
 380
 13.2 % Black & Mild1,317 1,231 7.0 %468 426 9.9 %
Other2
 2
 — % Other8 7 14.3 %3 2 50.0 %
Total cigars432
 382
 13.1 %Total cigars1,325 1,238 7.0 %471 428 10.0 %
Total smokeable products25,456
 23,976
 6.2 %Total smokeable products78,916 79,921 (1.3)%28,090 28,160 (0.2)%

Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament, Benson & Hedges and Nat’s; and Discount brands, which include L&M, Basic and Chesterfield. Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.

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The following table summarizes cigarettes retail share performance:
Retail Share
For the Nine Months Ended September 30,For the Three Months Ended September 30,
20202019Percentage Point Change20202019Percentage Point Change
Cigarettes:
     Marlboro43.0 %43.3 %(0.3)43.3 %43.3 %— 
     Other premium2.3 2.5 (0.2)2.3 2.4 (0.1)
     Discount3.9 4.1 (0.2)3.8 4.0 (0.2)
Total cigarettes49.2 %49.9 %(0.7)49.4 %49.7 %(0.3)
 Retail Share
 For the Three Months Ended March 31,
 2020 2019 Percentage Point Change
Cigarettes:     
     Marlboro42.8% 43.3% (0.5)
     Other premium2.4
 2.5
 (0.1)
     Discount4.0
 4.1
 (0.1)
Total cigarettes49.2% 49.9% (0.7)

Retail share results for cigarettes are based on data from IRI/Management Science Associates, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service.


For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.

The smokeable products segment’s reported domestic cigarettes shipment volume for the nine months ended September 30, 2020 decreased 1.4%, driven primarily by retail share losses, partially offset by calendar differences and inventory trade movements. When adjusted for calendar differences, trade inventory movements and other factors, the smokeable products segment’s reported domestic cigarettes shipment volume for the nine months ended September 30, 2020 decreased by an estimated 2%.

When adjusted for calendar differences, trade inventory movements and other factors, estimated total domestic cigarette industry volumes for the nine months ended September 30, 2020 were unchanged.

The smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended March 31,September 30, 2020 increased 6.1%decreased 0.4%, driven primarily by trade inventory movements, calendar differencesretail share losses and consumer pantry loading due to COVID-19,other factors, partially offset by the industry’s growth rate of decline, retail share losses and other factors.trade inventory movements. When adjusted for the traditional factors of trade inventory movements, calendar differences and other factors, the smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended March 31,September 30, 2020 decreased by an estimated 3.5%1%. However, Altria believes that its preliminary estimates of consumer pantry loading due to COVID-19 should be an adjusting factor to reported volumes due to its high likelihood of near-term volume payback.

When adjusted for trade inventory movements, calendar differences, Altria’s preliminary estimates of consumer pantry loading due to COVID-19 and other factors, the smokeable products segment’s domestic cigarettes shipment volume decreased by an estimated 5%. While it’s difficult to identify trends based on short time periods, especially in such a fluid environment, Altria will continue to monitor marketplace dynamics and will update its estimates as more data becomes available.
When adjusted for the traditional factors of trade inventory movements, calendar differences and other factors, total domestic cigarette industry volumes for the three months ended March 31,September 30, 2020 declinedincreased by an estimated 2%. When adjusted for trade inventory movements, calendar differences, Altria’s preliminary estimates of consumer pantry loading due to COVID-19 and other factors, total domestic cigarette industry volumes decreased by an estimated 3.5%1%.

Shipments of premium cigarettes accounted for 91.8%92.0% and 92.3% of smokeable products’ reported domestic cigarettes shipment volume for the nine and three months ended March 31,September 30, 2020, respectively, versus 91.7% and 91.5% for the nine and three months ended March 31, 2019.September 30, 2019, respectively.

Sequentially, Marlboro’s retail share of the total cigarette category declined 0.5 share points to 42.8% for the three months ended March 31,September 30, 2020 due to adult smoker movement across tobacco categories and dynamics withinincreased 0.5 share points from the discount cigarette category, each discussed above.second quarter.

Total cigarettes industry discount category retail share increased 0.80.4 share points to 24.8%24.5% and 0.2 share points to 24.3% for the nine and three months ended March 31,September 30, 2020, driven primarily byrespectively. Sequentially, total discount retail share decreased 0.3 share points from the deep discount category.second quarter of 2020.

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PM USA and Middleton executed the following pricing and promotional allowance actions during 2020 and 2019:

▪Effective February 16, 2020, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.

▪Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.08 per five-pack.

▪Effective October 20, 2019, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.

▪Effective August 4, 2019, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.04 per five-pack.

▪
Effective June 16, 2019, PM USA increased the list price on all of its cigarette brands by $0.06 per pack, except for L&M, which had no list price change.

▪
Effective February 24, 2019, PM USA increased the list price on Marlboro and L&M by $0.11 per pack and Parliament and Virginia Slims by $0.16 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.31 per pack.

▪Effective June 21, 2020, PM USA increased the list price on all of its cigarette brands by $0.11 per pack.

Table▪Effective February 16, 2020, PM USA increased the list price on all of Contentsits cigarette brands by $0.08 per pack.

▪Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.08 per five-pack.

▪Effective October 20, 2019, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.

▪Effective August 4, 2019, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.04 per five-pack.

▪Effective June 16, 2019, PM USA increased the list price on all of its cigarette brands by $0.06 per pack, except for L&M, which had no list price change.

▪Effective February 24, 2019, PM USA increased the list price on Marlboro and L&M by $0.11 per pack and Parliament and Virginia Slims by $0.16 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.31 per pack.

In addition on October 28, 2020, PM USA announced a list price increase effective November 1, 2020 on all of its cigarette brands by $0.13 per pack.

Oral tobacco products segment

The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the oral tobacco products segment:
Operating Results
Oral Tobacco Products
For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020 2019 Change20202019Change20202019Change
Net revenues$601
 $540
 11.3%Net revenues$1,901 $1,762 7.9 %$640 $620 3.2 %
Excise taxes(31) (31)  Excise taxes(98)(96)(33)(33)
Revenues net of excise taxes$570
 $509
  Revenues net of excise taxes$1,803 $1,666 $607 $587 
     
Reported OCI$414
 $358
 15.6%Reported OCI$1,297 $1,195 8.5 %$436 $417 4.6 %
Asset impairment, exit, implementation and acquisition-related costs2
 9
  Asset impairment, exit, implementation and acquisition-related costs6 16 4 5 
COVID-19 special itemsCOVID-19 special items9 — — — 
Adjusted OCI$416
 $367
 13.4%Adjusted OCI$1,312 $1,211 8.3 %$440 $422 4.3 %
     
Reported OCI margins 1
72.6% 70.3% 2.3 pp
Reported OCI margins 1
71.9 %71.7 %0.2 pp71.8 %71.0 %0.8 pp
Adjusted OCI margins 1
73.0% 72.1% 0.9 pp
Adjusted OCI margins 1
72.8 %72.7 %0.1 pp72.5 %71.9 %0.6 pp
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, for the nine months ended September 30, 2020 increased $139 million (7.9%), due primarily to higher pricing ($105 million), which includes higher promotional investments, and higher shipment volume ($31 million). Reported OCI for the nine months ended September 30, 2020 increased $102 million (8.5%), due primarily to higher pricing ($105 million), which includes higher promotional investments, and higher volume ($18 million), partially offset by higher investments in on!.

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Adjusted OCI for the nine months ended September 30, 2020 increased $101 million (8.3%), due primarily to higher pricing ($105 million), which includes higher promotional investments, and higher volume ($18 million), partially offset by higher investments in on!.

Net revenues, which include excise taxes billed to customers, for the three months ended September 30, 2020 increased $61$20 million (11.3%(3.2%), due primarily to higher pricing ($4326 million) and, which includes higher promotional investments, partially offset by lower shipment volume ($208 million).

Reported OCI for the three months ended September 30, 2020 increased $56$19 million (15.6%(4.6%), due primarily to higher pricing ($4326 million), which includes higher promotional investments, partially offset by lower shipment volume ($1910 million) and lower asset impairment, exit, implementation and acquisition-related costs, partially offset by increased costs associated with the expansion of .
on!. Reported OCI margins increased 2.3 percentage points to 72.6%.

Adjusted OCI for the three months ended September 30, 2020 increased $49$18 million (13.4%(4.3%),due primarily to higher pricing ($4326 million), which includes higher promotional investments, partially offset by lower shipment volume ($1910 million), partially offset by increased costs associated with the expansion of on!. Adjusted OCI margins increased 0.9 percentage points to 73.0%.

The following table summarizes oral tobacco products segment shipment volume performance:
Shipment VolumeShipment Volume
For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020 2019 Change20202019Change20202019Change
(cans and packs in millions)(cans and packs in millions)
Copenhagen125.0
 125.2
 (0.2)%Copenhagen395.0 393.1 0.5 %131.1 135.2 (3.0)%
Skoal51.3
 50.3
 2.0 %Skoal157.2 164.2 (4.3)%52.3 55.7 (6.1)%
Other1
20.4
 15.9
 28.3 %
Other1
65.0 51.1 27.2 %23.3 18.1 28.7 %
Total oral tobacco products196.7
 191.4
 2.8 %Total oral tobacco products617.2 608.4 1.4 %206.7 209.0 (1.1)%
1 Other includes Red Seal and on!.

Altria’s estimated oral tobacco industry shipment volume for the current and comparable periods includes MST, snus and oral nicotine pouch products.

Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is currently not material to the oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.

TableAs discussed above, in the first quarter of Contents
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 oral tobacco products segment retail share performance (excluding international volume):
Retail Share
For the Nine Months Ended September 30,For the Three Months Ended September 30,
20202019Percentage Point Change20202019Percentage Point Change
Copenhagen32.1 %34.2 %(2.1)31.8 %33.8 %(2.0)
Skoal14.0 15.2 (1.2)13.6 15.0 (1.4)
Other1
4.0 3.4 0.6 4.5 3.5 1.0 
Total oral tobacco products50.1 %52.8 %(2.7)49.9 %52.3 %(2.4)
 Retail Share
 For the Three Months Ended March 31,
 2020 2019 Percentage Point Change
Copenhagen32.4% 34.6% (2.2)
Skoal14.3
 15.1
 (0.8)
Other3.7
 3.5
 0.2
Total oral tobacco products50.4% 53.2% (2.8)
1 Other includes Red Seal and on!.

Retail share results for oral tobacco products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends.  This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold.  Oral tobacco products is defined by IRI as MST, snus and oral nicotine pouches. New types of oral tobacco products, as well as new packaging
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configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share.  It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.

As discussed above, in the first quarter of 2020, Altria’s smokeless products segment was renamed as the oral tobacco products segment. Prior to 2020, the smokeless products segment retail share performance and category industry volume estimates included MST and snus products, but excluded oral nicotine pouch products. Altria has restated prior period retail share performance data and estimated category industry volume to reflect the inclusion of oral tobacco products. The quarterly and year-to-date retail share results for the oral tobacco products segment, which are summarized below, have been restated to reflect this change.
 Restated Retail Share
 For the Three Months Ended
 12/31/19 9/30/19 6/30/19 3/31/19
Copenhagen33.2% 33.8% 34.1% 34.6%
Skoal14.6
 15.0
 15.4
 15.1
Other3.6
 3.5
 3.5
 3.5
Total oral tobacco products51.4% 52.3% 53.0% 53.2%

 Restated Retail Share
 For the Year Ended For the Nine Months Ended For the Six Months Ended For the Year Ended
 12/31/19 9/30/19 6/30/19 12/31/18
Copenhagen33.9% 34.2% 34.4% 34.4%
Skoal15.0
 15.2
 15.2
 15.9
Other3.6
 3.4
 3.5
 3.4
Total oral tobacco products52.5% 52.8% 53.1% 53.7%
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.

The oral tobacco products segment’s reported domestic shipment volume increased 2.8%1.4% for the threenine months ended March 31,September 30, 2020, driven primarily by the industry’s growth rate, calendar differences and retail and consumer pantry loading due to COVID-19, partially offset by retail share losses (primarily due to the rapid growth of oral nicotine pouches) and wholesale trade inventory movements.. When adjusted for traditional factors of wholesale trade inventory movements calendar differences and other factors, the oral tobacco products segment’s reported domestic shipment volume for the nine months ended September 30, 2020 increased by an estimated 1%1.5%.

The oral tobacco products segment’s reported domestic shipment volume decreased 1.1% for

the three months ended March 31, 2020. However, Altria believes that its preliminary estimates ofSeptember 30, 2020, driven primarily by retail and consumer pantry loadingshare losses (primarily due to COVID-19 should be an adjusting factor to reported volumes due to its high likelihoodthe growth of near-term volume payback.oral nicotine pouches), calendar differences and trade inventory movements, partially offset by the industry’s growth rate and other factors. When adjusted for wholesalecalendar differences, trade inventory movements Altria’s preliminary estimates of retail and consumer pantry loading due to COVID-19, calendar differences and other factors, the oral tobacco products segment’s reported domestic shipment volume decreasedfor the three months ended September 30, 2020 increased by an estimated 0.5%4%.

TheTotal oral tobacco products category industry volume increased by an estimated 6%6.5% over the past six months, ended March 31, 2020, as thedriven primarily by growth in oral nicotine pouches more than offset the volume decline in MST and snus. When adjusted for Altria’s preliminary estimates of retail and consumer pantry loading due to COVID-19, thepouches.

The oral tobacco products category industry volume increased by an estimated 5% over the six months ended March 31, 2020.

Oral tobacco products segmentsegment’s retail share of 50.4% declinedwas 50.1% and 49.9% for the nine and three months ended March 31,September 30, 2020, due to the rapid growth of oral nicotine pouchesrespectively, and the associated volume declines in MST and snus.

Copenhagen continued to be the leading oral tobacco brand with retail share of 32.1% and 31.8% for the nine and three months ended September 30, 2020, respectively. Share losses for both the segment and Copenhagen were due to the growth of oral nicotine pouches.

In stores with distribution, on! achieved a retail share of 32.4%.2.1 percentage points of the oral tobacco category for the nine months ended September 30, 2020.

USSTC executed the following pricing actions during 2020 and 2019:

▪
Effective February 18, 2020, USSTC increased the list price on its Skoal X-TRA products by $0.56 per can. USSTC also increased the list price on its Skoal Blend products by $0.16 cents per can and increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.07 per can.

▪
Effective October 22, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.09 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.04 per can.

▪
Effective July 23, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.08 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.03 per can.

▪
Effective April 30, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.17 per can.  USSTC also increased the list price on its Husky and Red Seal brands and its Copenhagen and Skoal popular price products by $0.12 per can.  In addition, USSTC increased the list price on the balance of its Copenhagen and Skoal products by $0.07 per can.

▪Effective October 20, 2020, USSTC increased the list price on its Skoal Blend products by $0.15 per can. USSTC also increased the list price on its 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.

▪Effective February 18, 2020, USSTC increased the list price on its Skoal X-TRA products by $0.56 per can. USSTC also increased the list price on its Skoal Blend products by $0.16 cents per can and increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.07 per can.

▪Effective October 22, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.09 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.04 per can.

▪Effective July 23, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.08 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of its Copenhagen and Skoal products by $0.03 per can.

▪Effective April 30, 2019, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.17 per can.  USSTC also increased the list price on its Husky and Red Seal brands and its Copenhagen and Skoal popular price products by $0.12 per can.  In addition, USSTC increased the list price on the balance of its Copenhagen and Skoal products by $0.07 per can.
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Wine Segment

Business Environment

Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle and 14 Hands, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley, Patz & Hall in Sonoma and Erath in Oregon. In addition, Ste. Michelle imports and markets Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. Ste. Michelle works to meet evolving adult consumer preferences over time by developing, marketing and distributing products through innovation.

Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors.

Adult consumer preferences among alcohol categories and within the wine category can shift due to a variety of factors, including changes in taste preferences, demographics or social trends, and changes in leisure, dining and beverage consumption patterns and economic conditions. Evolving adult consumer preferences pose challenges to the wine category, which has seen slowing volume growth and increases in inventory levels. Ste. Michelle has been experiencing product volume demand uncertainty, which has been further negatively impacted in the first quarternine months of 2020 by the economic uncertainty surrounding the

COVID-19 pandemic. Ste. Michelle’s direct-to-consumer sales and on-premise 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. pandemic, which also may have an impact on adult wine consumers going forward.

As a result of wine inventory levels significantly exceeding forecasted product volume demand, as of March 31, 2020, Ste. Michelle recorded pre-tax charges of $392$395 million in costthe first nine months of sales, including2020. The charges primarily included a $292 million inventory write off and estimated losses of $100 million in estimated losses on future non-cancelable grape purchase commitments.commitments recorded in the first quarter of 2020. Ste. Michelle expects to record additional charges up toof approximately $25$20 million during the remainder ofin 2020, consisting of inventory disposal costs and other charges. For further discussion see Asset Impairment, Exit and Implementation Costs in Note 3. In addition, Ste. Michelle also temporarily suspended operations at an operating facility as a result of the COVID-19 pandemic. Evolving adult consumer preferences, anthe current economic downturn, or recession, an extended disruption in on-premise sales or facility shutdowns, either voluntary or government-mandated, could result in a further slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business, the consolidated results of operations, cash flows or financial position of Ste. Michelle.

As with other agricultural commodities, grape quality and availability can be influenced by plant disease and infestation, as well as by variations in weather patterns, such as fires and smoke damage from fires, including those caused by climate change. For example, in 2019, freezing temperatures reduced grape production and resulted in fewer grapes being available to Ste. Michelle. Additionally, Ste. Michelle has experienced some impact from the ongoing fires in the western United States. As of October 27, 2020, the impact has not been material to Altria, but Ste. Michelle continues to monitor the situation.

Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages could have an adverse effect on Ste. Michelle’s wine business.

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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:
Operating Results
Wine
For the Three Months Ended March 31,For the Nine Months Ended September 30,For the Three Months Ended September 30,
2020 2019 Change20202019Change20202019Change
Net revenues$146
 $151
 (3.3)%Net revenues$434 $483 (10.1)%$157 $167 (6.0)%
Excise taxes(4) (5)  Excise taxes(14)(15)(5)(5)
Revenues net of excise taxes$142
 $146
  Revenues net of excise taxes$420 $468 $152 $162 
     
Reported OCI$(379) $15
 (100.0)%+
Reported OCI$(347)$50 (100.0)%+$19 $16 18.8 %
Implementation costs392
 $—
  Implementation costs395 — 1 — 
Adjusted OCI13
 15
 (13.3)%Adjusted OCI$48 $50 (4.0)%$20 $16 25.0 %
     
Reported OCI margins 1
(100.0)%+
 10.3% (100.0)%+
Reported OCI margins 1
(82.6)%10.7 %(93.3) pp12.5 %9.9 %2.6 pp
Adjusted OCI margins 1
9.2% 10.3% (1.1) pp
Adjusted OCI margins 1
11.4 %10.7 %0.7 pp13.2 %9.9 %3.3 pp
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, for the nine months ended September 30, 2020 decreased $5$49 million (3.3%(10.1%), due primarily to lower shipment volume, partially offset by higher pricing, which includes lower promotional investments, and favorable mix.

investments. Reported OCI for the nine months ended September 30, 2020 decreased $394$397 million (100.0%+), due primarily to the inventory-related charges discussed above (included in implementation costs and charged to cost of sales) ,and lower shipment volume, and higher costs, partially offset by higher pricing, which includes lower promotional investments, and favorable mix. Reported OCI margins decreased in excess of 100.0 percentage points.lower costs.

Adjusted OCI for the nine months ended September 30, 2020 decreased $2 million (13.3%(4.0%), due primarily to lower shipment volume, and higher costs, partially offset by higher pricing, which includes lower promotional investments, and favorable mix. Adjusted OCI margins decreased 1.1 percentage pointslower costs.

Net revenues, which include excise taxes billed to 9.2%


Forcustomers, for the three months ended March 31,September 30, 2020 decreased $10 million (6.0%), due primarily to lower shipment volume. Reported OCI for the three months ended September 30, 2020 increased $3 million (18.8%), due primarily to lower selling, general and administrative costs, partially offset by lower shipment volume.

Adjusted OCI for the three months ended September 30, 2020 increased $4 million (25.0%), due primarily to lower selling, general and administrative costs, partially offset by lower shipment volume.

For the nine and three months ended September 30, 2020, Ste. Michelle’s reported wine shipment volume of 1,7155,182 and 1,885 thousand cases, decreased 10.2%.11.4% and 3.9%, respectively.


Financial Review

Cash Provided by/Used in Operating Activities

During the first threenine months of 2020, net cash provided by operating activities was $3,129$5,844 million compared with $2,289$5,274 million during the first threenine months of 2019. This increase was due primarily to higher net revenues in the smokablesmokeable products and oral tobacco products segments, and 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, timing of long-term debt interest payments.payments, and lower dividends received from ABI in 2020.

Altria had a working capital deficit at March 31,September 30, 2020 and December 31, 2019. Altria’s management believes that Altria has the ability to fund working capital deficits with cash provided by operating activities and borrowings through its access to credit and capital markets, as discussed in the Debt and Liquidity section below.

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Cash Provided by/Used in Investing Activities

During the first threenine months of 2020, net cash used in investing activities was $52$107 million compared with $1,950$2,412 million during the first threenine months of 2019. This decrease was due primarily to the investment in Cronos in 2019.2019 and Helix’s third quarter 2019 acquisition of Burger Söhne Holding and its subsidiaries as well as certain affiliated companies.

Cash Provided by/Used in Financing Activities

During the first threenine months of 2020, net cash provided byused in financing activities was $427$3,713 million compared with $1,683$2,650 million during the first threenine months of 2019. This decreaseincrease was due primarily to the following:

▪proceeds of $16.3 billion from the issuance of long-term senior unsecured notes in 2019; and
▪repayment of $1.0 billion in full of Altria senior unsecured notes at scheduled maturity in January 2020; and
▪higher dividends paid in 2020;

partially offset by:
▪repayments of $12.8 billion of short-term borrowings in 2019; and
▪proceeds of $3.0$2.0 billion from short-term borrowingsthe issuance of long-term senior unsecured notes in 2020.2020;
▪repayment of $1.1 billion in full of Altria senior unsecured notes at scheduled maturity in August 2019; and
▪repurchases of common stock in 2019.

Debt and Liquidity

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 the Credit Agreement is discussed below.

At March 31,September 30, 2020, the credit ratings and outlook for Altria’s indebtedness by major credit rating agencies were:
Short-term DebtLong-term DebtOutlook
Moody’s Investors Service, Inc. (“Moody’s”) P-2 A3Negative Stable
Standard & Poor’s Ratings Services (“Standard & Poor’s”) A-2BBB Stable
Fitch Ratings Ltd. F2BBB Stable

Credit Lines - From time to time, Altria has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs.

The Credit Agreement, which is used for general corporate purposes, provides for borrowings up to an aggregate principal amount of $3.0 billion.

On In March 23, 2020, Altria provided notice to JPMorgan Chase Bank, N.A., as administrative agent under the Credit Agreement, to borrow the entire available amount ($3.0 billion) under the Credit Agreement and, as of March 31, 2020, $3.0 billion was outstanding under the Credit Agreement. Altria typically accesses the commercial paper market early in the second quarter to help fund payments relateddue to the 1998 Master Settlement Agreement (the “MSA”) and shareholder dividends. In light ofuncertainty at the current uncertaintytime in the global capital markets including(including the commercial paper markets,markets) resulting from the COVID-19 pandemic, Altria elected to borrowborrowed the entire amountfull $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 used a portion ofrepaid the proceeds from the borrowingfull amount outstanding under the Credit Agreement to help fund these payments and for other general corporate purposes.


All borrowingscurrently has $3.0 billion available under the Credit Agreement mature on August 1, 2023, unless extended. The Credit Agreement includes an option, subject to certain conditions, for Altria to extend the expiration date for two additional one-year periods. Altria may repay the borrowings under the Credit Agreement at any time without penalty. Altria has the intent and ability to repay the entire outstanding balance under the Credit Agreement within one year and believes it has adequate liquidity and access to financial resources to meet its anticipated obligations in the foreseeable future. As a result, Altria has classified the full amount of the borrowings as a current liability on its condensed consolidated balance sheet at March 31, 2020.Agreement. For further discussion, including interest and covenants in the Credit Agreement, see Note 10. Debt to the condensed consolidated financial statements in Item 1 (“Note 10”).

Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 12. Condensed Consolidating Financial Information to the condensed consolidated financial statements in Item 1 (“Note 12”).USA.

Financial Market Environment - Altria believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria monitors the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group.

COVID-19
- Due to the uncertainty 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 expectscontinues to maintain a higher than normal cash balance in order to preserve its financial flexibility. As a result,In addition to the borrowing under the Credit Agreement discussed above, Altria tookhas taken the following actions to increase its cash position:
borrowed the full $3.0▪issued $2.0 billion available under the Credit Agreement as discussed above;of long-term senior unsecured notes; and
did▪has not repurchaserepurchased any shares during the first quarter of 2020 under its current $1.0 billion share repurchase program, and in(in April 2020, the Board of Directors rescinded the $500 million remaining in theits $1.0 billion share repurchase program;program).
as permitted under recent federal government COVID-19 tax relief, deferred approximately $450 million
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as permitted under recent state governments COVID-19 tax relief, deferred approximately $65 million of estimated state income tax payments from April 2020 to July 2020 and will defer future payments as allowable; and
deferred federal excise tax payments of approximately $450 million from April 2020 to July 2020 and will continue to defer payments previously due in May 2020 and June 2020 by 90 days to August 2020 and September 2020, respectively.

At March 31,September 30, 2020, Altria’s receivables primarily reflect sales of wine produced and/or distributed by Ste. Michelle. Altria’s businesses anticipate that the COVID-19 pandemic may present challenges in ensuring timely payment and collection of accounts receivable for some of its customers. Altria will closely monitor these situations and will record an allowance for doubtful accounts against such receivables, if such conditions arise. As of the date of this filing,Form 10-Q, Altria was not aware of any such conditions.

In addition, in April 2020, ABI announced that it would reduce its next dividend payment by 50% to preserve financial flexibility during this period of significant volatility and uncertainty. This action will result in a reduction to Altria’s cash dividends received from ABI of approximately $100 million in the second quarter of 2020.

Debt - At March 31,September 30, 2020 and December 31, 2019, Altria’s total debt was $30.0$29.3 billion and $28.0 billion, respectively. The increase in debt was due to Altria’s borrowingsMay 2020 issuance of $3.0USD denominated long-term senior unsecured notes in the aggregate principal amount of $2.0 billion, the proceeds from which were used for general corporate purposes, which included repayment of the full amount borrowed under the Credit Agreement discussed above,in the first quarter of 2020, partially offset by the repayment in full of $1.0 billion of Altria senior unsecured notes at scheduled maturity in January 2020.

For further details on short-term borrowings and long-term debt, see Note 10.

Guarantees and Other Similar Matters - As discussed in Note 11,12, Altria and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at March 31,September 30, 2020. From time to time, subsidiaries of Altria also issue lines of credit to affiliated entities. In addition, as discussed in Note 12,Supplemental Guarantor Financial Information below, PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under itsthe Credit Agreement and amounts outstanding under itsthe commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria’s liquidity. For further discussion regarding Altria’s liquidity, see theDebt and Liquiditysection above.


Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 11,12, PM USA and Nat Sherman havehas entered into State Settlement Agreements with the states and territories of the United States that call for certain payments. In addition, PM USA, Middleton Nat Sherman and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. Altria’s subsidiaries recorded $1.1$3.6 billion and $1.0$3.4 billion of charges to cost of sales for the nine months ended September 30, 2020 and 2019, respectively, and $1.3 billion and $1.2 billion of charges to cost of sales for the three months ended March 31,September 30, 2020 and 2019, respectively, in connection with the State Settlement Agreements and FDA user fees. For further discussion of the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the MSA, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 11.12.

Based on current agreements, 2019 market share and estimated annual industry volume decline rates, the estimated amounts that Altria’s subsidiaries may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees approximate $4.5 billion in 2020, $4.3 billion in 2021 and $4.4$4.2 billion each year thereafter. These amounts exclude the potential impact of any NPM Adjustment Items.

The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.

Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of March 31,September 30, 2020, PM USA had posted appeal bonds totaling $48$61 million, which have been collateralized with restricted cash that is included in assets on the condensed consolidated balance sheet.

Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST LLC (“UST”) or Altria in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 11 and in Cautionary Factors That May Affect Future Results,12, management expects cash flow from operations, together with Altria’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.


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Equity and Dividends

OnIn February 26, 2020, Altria granted an aggregate of 0.9 million restricted stock units “(“(“RSUs”) and 0.2 million performance stock units (“PSUs”) to eligible employees. The service restrictions for the RSUs and the PSUs lapse in the first quarter of 2023. In addition, the vesting of the PSUs depends first on Altria’s performance on certain financial metrics over the three-year vesting period. The payout resulting from the performance metrics is then scaled up or down by a total shareholder return (“TSR”) performance multiplier, which depends on Altria’s relative TSR against a predetermined peer group. The market value per share of the RSUs and the PSUs granted on February 26, 2020 was $42.61 and $43.28, respectively, on the date of grant.

During the threenine months ended March 31,September 30, 2020, 0.50.6 million shares of RSUs and PSUs vested. The total fair value of RSUs and PSUs that vested during the threenine months ended March 31,September 30, 2020 was $23$27 million. The weighted-average grant date fair value per share of these awards was $66.76.$66.62.

Dividends paid during the first threenine months of 2020 and 2019 were $1,563$4,690 million and $1,502$4,498 million, respectively, an increase of 4.1%4.3%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria in 2019 under its share repurchase programs.

In July 2020, the Board of Directors declared a 2.4% increase in the quarterly dividend rate to $0.86 per share of Altria common stock versus the previous rate of $0.84 per share. The current annualized dividend rate is $3.36$3.44 per shareshare. Altria has a long-term objective of Altria common stock. In 2020, Altria expects to recommend a quarterly dividend rate to the Board of Directors that reflects, among other things, its strong cash generation and the strength of its balance sheet. Altria’s objective remains a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of the Board of Directors.

For a discussion of Altria’s share repurchase programs, see Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Item 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.1.

New Accounting Guidance Not Yet Adopted

See Note 13. New Accounting Guidance Not Yet Adopted to the condensed consolidated financial statements in Item 1 for a discussion of issued accounting guidance applicable to, but not yet adopted by, Altria.

Contingencies

See Note 1112 for a discussion of contingencies.

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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 therefore; and
▪either:
▪was insolvent or rendered insolvent by reason of such occurrence;
▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or
▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be.

The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if:
▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation;
▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
▪it could not pay its debts as they become due.

To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent.

The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.

The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of:

▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor;
▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of the Parent’s long-term senior unsecured debt by Standard & Poor’s Ratings Services 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
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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)
ParentGuarantor
September 30, 2020December 31, 2019September 30, 2020December 31, 2019
Assets
Due from Non-Guarantor Subsidiaries$98 $88 $158 $158 
Other current assets4,130 2,155 867 831 
Total current assets$4,228 $2,243 $1,025 $989 
Due from Non-Guarantor Subsidiaries$4,790 $4,790 $— $— 
Other assets16,903 18,129 1,915 1,743 
Total non-current assets$21,693 $22,919 $1,915 $1,743 
Liabilities
Due to Non-Guarantor Subsidiaries$1,121 $846 $664 $514 
Other current liabilities3,430 3,141 4,131 4,288 
Total current liabilities$4,551 $3,987 $4,795 $4,802 
Total non-current liabilities$30,813 $30,422 $1,154 $1,165 


Summarized Statements of Earnings
(in millions of dollars)
Parent 1
Guarantor
For the Nine Months Ended
September 30, 2020		For the Year Ended December 31, 2019For the Nine
Months Ended
September 30, 2020		For the Year Ended December 31, 2019
Net revenues$— $— $16,783 $21,065 
Gross profit— — 8,148 9,957 
Net earnings (losses)(892)132 5,314 6,344 
1 For the nine months ended September 30, 2020 and for the year ended December 31, 2019, net earnings (losses) includes $139 million and $124 million, respectively, of intercompany interest income from non-guarantor subsidiaries.
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Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

We may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the SEC, reports to security holders, press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements and whether to invest in or remain invested in Altria’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in, or implied by, any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these important factors and the risks we face throughout this Form 10-Q, particularly in Item 1A and in the “Business Environment” sections preceding our discussion of the operating results of our subsidiaries’ businesses, and in our publicly filed reports, including our 2019 Form 10-K.10-K, our Quarterly Report on Form 10-Q for the period ended March 31, 2020 (“First Quarter 2020 Form 10-Q”) and our Quarterly Report on Form 10-Q for the period ended June 30, 2020 (“Second Quarter 2020 Form 10-Q”). These factors include the following:
▪the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial performance and financial condition and on our subsidiaries’ and investees’ ability to continue manufacturing and distributing products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession;
▪unfavorable litigation outcomes, including risks associated with adverse jury and judicial determinations, courts and arbitrators reaching conclusions at variance with our, our subsidiaries’ or our investees’ understanding of applicable law, bonding requirements in the jurisdictions that do not limit the dollar amount of appeal bonds, and certain challenges to bond cap statutes;
▪government (including FDA) and private sector actions that impact adult tobacco consumer acceptability of, or access to, tobacco products;
▪the growth of the e-vapor category and other innovative tobacco products contributing to reductions in cigarette and MST consumption levels and sales volume;
▪tobacco product taxation, including lower tobacco product consumption levels and potential shifts in adult consumer purchases as a result of federal, state and local excise tax increases;
▪the failure by our tobacco and wine subsidiaries to compete effectively in their respective markets;
▪our tobacco and wine subsidiaries’ continued ability to promote brand equity successfully; to anticipate and respond to evolving adult consumer preferences; to develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, and investments in third parties); to improve productivity; and to protect or enhance margins through cost savings and price increases;
▪changes, including in economic conditions, that result in adult consumers choosing lower-priced brands including discount brands;
▪the unsuccessful commercialization of adjacent products or processes by our tobacco subsidiaries and investees, including innovative tobacco products that may reduce the health risks associated with cigarettes and other traditional tobacco products, and that appeal to adult tobacco consumers;
▪significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic;
▪the risks related to the reliance by our tobacco and wine subsidiaries on a few significant facilities and a small number of key suppliers, and the risk of an extended disruption at a facility or of service by a supplier of our tobacco or wine subsidiaries or investees including as a result of the COVID-19 pandemic;
▪required or voluntary product recalls as a result of various circumstances such as product contamination or FDA or other regulatory action;
▪the failure of our information systems or service providers’ information systems to function as intended, or cyber-attacks or security breaches;
▪unfavorable outcomes of any government investigations of Altria, our subsidiaries or investees;
▪unfavorable litigation outcomes, including risks associated with adverse jury and judicial determinations, courts and arbitrators reaching conclusions at variance with our, our subsidiaries’ or our investees’ understanding of applicable law, bonding requirements in the jurisdictions that do not limit the dollar amount of appeal bonds, and certain challenges to bond cap statutes;
▪government (including FDA) and private sector actions that impact adult tobacco consumer acceptability of, or access to, tobacco products;
▪tobacco product taxation, including lower tobacco product consumption levels and potential shifts in adult consumer purchases as a result of federal, state and local excise tax increases;
▪unfavorable outcomes of any government investigations of Altria, our subsidiaries or investees;
▪a successful challenge to our tax positions;
▪the risks related to our and our investees’ international business operations, including failure to prevent violations of various U.S. and foreign laws and regulations such as laws prohibiting bribery and corruption;
▪the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial performance and financial condition and on our subsidiaries’ and investees’ ability to continue manufacturing and distributing products, and the impact of health epidemics and pandemics on general economic conditions (including any resulting recession or other economic crisis) and, in turn, adult consumer purchasing behavior which may be further impacted by any changes in government stimulus or unemployment payments;
▪the failure of our tobacco and wine subsidiaries and our investees to compete effectively in their respective markets;
▪the growth of the e-vapor category and other innovative tobacco products contributing to reductions in cigarette and MST consumption levels and sales volume;
▪our tobacco and wine subsidiaries’ and our investees’ continued ability to promote brand equity successfully; to anticipate and respond to evolving adult consumer preferences; to develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, and investments in third parties); to improve productivity; and to protect or enhance margins through cost savings and price increases;
▪changes, including in economic conditions (due to the COVID-19 pandemic or otherwise), that result in adult consumers choosing lower-priced brands including discount brands;
▪the unsuccessful commercialization of adjacent products or processes by our tobacco subsidiaries and investees, including innovative tobacco products that may reduce the health risks associated with cigarettes and other traditional tobacco products, and that appeal to adult tobacco consumers;
▪significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic;
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▪the risks related to the reliance by our tobacco and wine subsidiaries on a few significant facilities and a small number of key suppliers and distributors, and the risk of an extended disruption at a facility of, or of service by, a supplier or distributor of our tobacco or wine subsidiaries or investees, including as a result of the COVID-19 pandemic;
▪required or voluntary product recalls as a result of various circumstances such as product contamination or FDA or other regulatory action;
▪the failure of our information systems or service providers’ information systems to function as intended, or cyber-attacks or security breaches;
▪our inability to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions;
▪the adverse effect of acquisitions, investments, dispositions or other events on our credit rating;
▪our inability to acquire attractive businesses or make attractive investments on favorable terms, or at all, or to realize the anticipated benefits from an acquisition or investment and our inability to dispose of businesses or investments on favorable terms or at all;
▪the risks related to disruption and uncertainty in the credit and capital markets, including risk of access to these markets both generally and at current prevailing rates, which may adversely affect our earnings or dividend rate or both;
▪impairment losses as a result of the write down of intangible assets, including goodwill;
▪the risks related to Ste. Michelle’s wine business, including competition, unfavorable changes in grape supply, and changes in adult consumer preferences that have resulted and may continue to result in increased inventory levels and inventory write offs, and governmental regulations;
▪the risk that any challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction;
▪the risks generally related to our investments in JUUL and Cronos, including our inability to realize the expected benefits of our investments in the expected time frames, or at all, due to the risks encountered by our investees in their businesses, such as operational, compliance and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity; potential disruptions to our investees’ management or current or future plans and operations; domestic or international litigation developments, government investigations, tax disputes or otherwise; and impairment of our investments;
▪the risks related to our inability to acquire a controlling interest in JUUL as a result of standstill restrictions or to control the material decisions of JUUL, restrictions on our ability to sell or otherwise transfer our shares of JUUL until December 20, 2024, and non-competition restrictions for the same time period subject to certain exceptions;
▪the adverse effects of risks encountered by ABI in its business, including effects of the COVID-19 pandemic, foreign currency exchange rates and the impact of movements in ABI’s stock price on our equity investment in ABI, including on our reported earnings from and carrying value of our investment in ABI, which could result in impairment of our investment, and the dividends paid by ABI on the shares we own;
▪the risks related to our inability to transfer our equity securities in ABI until October 10, 2021, and, if our ownership percentage decreases below certain levels, the adverse effects of additional tax liabilities, a reduction in the number of directors that we have the right to have appointed to the ABI board of directors, and our potential inability to use the equity method of accounting for our investment in ABI;
▪the risk of challenges to the tax treatment of the consideration we received in the ABI/SABMiller business combination and the tax treatment of our equity investment; and
▪the risks, including criminal, civil or tax liability for Altria, related to Cronos’s or Altria’s failure to comply with applicable laws, including cannabis laws.

▪a successful challenge to our tax positions;
▪the risks related to our and our investees’ international business operations, including failure to prevent violations of various U.S. and foreign laws and regulations such as laws prohibiting bribery and corruption;
▪our inability to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions;
▪the adverse effect of acquisitions, investments, dispositions or other events on our credit rating;
▪our inability to acquire attractive businesses or make attractive investments on favorable terms, or at all, or to realize the anticipated benefits from an acquisition or investment and our inability to dispose of businesses or investments on favorable terms or at all;
▪the risks related to disruption and uncertainty in the credit and capital markets, including risk of access to these markets both generally and at current prevailing rates which may adversely affect our earnings or dividend rate or both;
▪impairment losses as a result of the write down of intangible assets, including goodwill;
▪the risks related to Ste. Michelle’s wine business, including competition, unfavorable changes in grape supply, and changes in adult consumer preferences that have resulted and may continue to result in increased inventory levels and inventory write offs, and governmental regulations;
▪the risk that any challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction;
▪the risks generally related to our investments in JUUL and Cronos, including our inability to realize the expected benefits of our investments in the expected time frames, or at all, due to the risks encountered by our investees in their businesses, such as operational, compliance and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity; potential disruptions to our investees’ management or current or future plans and operations; domestic or international litigation developments, government investigations, tax disputes or otherwise; and impairment of our investments;
▪the risks related to our inability to acquire a controlling interest in JUUL as a result of standstill restrictions or to control the material decisions of JUUL, restrictions on our ability to sell or otherwise transfer our shares of JUUL until December 20, 2024, and non-competition restrictions for the same time period subject to certain exceptions;
▪the adverse effects of risks encountered by ABI in its business, including effects of the COVID-19 pandemic, foreign currency exchange rates and the impact of movements in ABI’s stock price on our equity investment in ABI, including on our reported earnings from and carrying value of our investment in ABI, which could result in impairment of our investment, and the dividends paid by ABI on the shares we own;
▪the risks related to our inability to transfer our equity securities in ABI until October 10, 2021, and, if our ownership percentage decreases below certain levels, the adverse effects of additional tax liabilities, a reduction in the number of directors that we have the right to have appointed to the ABI board of directors, and our potential inability to use the equity method of accounting for our investment in ABI;
▪the risk of challenges to the tax treatment of the consideration we received in the ABI/SABMiller business combination and the tax treatment of our equity investment; and
▪the risks, including criminal, civil or tax liability for Altria, related to Cronos’s or Altria’s failure to comply with applicable laws, including cannabis laws.

You should understand that it is not possible to predict or identify all factors and risks. Consequently, you should not consider the foregoing list to be complete. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest RatesRate Risk

At March 31,September 30, 2020 and December 31, 2019, the fair value of Altria’s long-term debt, all of which is fixed-rate debt, was $28.3$33.8 billion and $30.7 billion, respectively. The fair value of Altria’s long-term debt is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at March 31,September 30, 2020 and December 31, 2019 would decrease the fair value of Altria’s long-term debt by $2.2$2.7 billion and $2.4 billion, respectively. A 1% decrease in market interest rates at March 31,September 30, 2020 and December 31, 2019 would increase the fair value of Altria’s long-term debt by $2.5$3.0 billion and $2.7 billion, respectively.

At March 31, 2020, the fair value of Altria’s short-termInterest rates on borrowings under the Credit Agreement was $3.0 billion. Altria had no short-term borrowings at December 31, 2019. Interestare expected to be based on the outstanding borrowings under the Credit Agreement at March 31, 2020 was based on London Interbank Offered Rate (“LIBOR”), or a mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s and Standard & Poor’s. The applicable percentage based on Altria’s long-term senior unsecured debt ratings at March 31,September 30, 2020 for borrowings under the Credit Agreement was 1.0%. At MarchSeptember 30, 2020 and December 31, 2020, the interest rate for Altria’s current borrowing2019, Altria had no borrowings under the Credit Agreement was 2.23%.Agreement.

Equity Price Risk

The estimated fair values of the Fixed-price Preemptive Rights and the Cronos warrant are subject to equity price risk. The Fixed-price Preemptive Rights and warrant are recorded at fair value, which is estimated using Black-Scholes option-pricing models. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are subject to fluctuations resulting from changes in the quoted market price of Cronos shares, the underlying equity security.

At March 31,September 30, 2020, the fair values of the Fixed-price Preemptive Rights and Cronos warrant were $34$15 million and $132$86 million, respectively. At December 31, 2019, the fair values of the Fixed-price Preemptive Rights and Cronos warrant were $69 million and $234 million, respectively. A 10% increase or decrease in the quoted market price of Cronos shares at March 31,September 30, 2020 would increase or decrease the fair values of the Fixed-price Preemptive Rights and Cronos warrant by approximately $7$4 million and $23$17 million, respectively. A 10% increase or decrease in the quoted market price of Cronos shares at December 31, 2019 would increase or decrease the fair values of the Fixed-price Preemptive Rights and Cronos warrant by approximately $13 million and $37 million, respectively.

Item 4. Controls and Procedures.

Altria carried out an evaluation, with the participation of Altria’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Form 10-Q. Based upon that evaluation, Altria’s Chief Executive Officer and Chief Financial Officer concluded that Altria’s disclosure controls and procedures are effective.

There have been no changes in Altria’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 1112 for a discussion of legal proceedings pending against Altria and its subsidiaries. See also Exhibits 99.1 and 99.2 to this Form 10-Q.

Item 1A. Risk Factors.

Information regarding Risk Factors appears in Part I, Item 1A. Risk Factors of the 2019 Form 10-K.10-K and in Part II, Item 1A. Risk Factors of the First Quarter 2020 Form 10-Q and the Second Quarter 2020 Form 10-Q. Except as set forth below, there have been no material changes to the risk factors previously disclosed in the 2019 Form 10-K:10-K, the First Quarter 2020 Form 10-Q and the Second Quarter 2020 Form 10-Q.

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.

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Altria’s, its subsidiaries’ and its investees’ business and financial results, consolidated resultsThe expected benefits of operations, cash flows or financial position could be negatively impacted by health epidemics, pandemics and similar outbreaks. The recent and rapidly spreading COVID-19 pandemic could have negative impacts, such as (i) a global or U.S. recession or other economic crisis including a financial crisis, (ii) credit and capital markets volatility (and access to these markets, including by thosethe JUUL transaction may not materialize in the distribution and supply chains), (iii) significant volatilityexpected manner or timeframe or at all.

Regardless of whether antitrust clearance is obtained, the expected benefits of the JUUL transaction may not materialize in demand for our tobacco and wine subsidiaries’ and investees’ products, (iv) changes in adult consumer accessibility to those productsthe expected manner or timeframe or at all, including due to government action; (v) changesthe risks encountered by JUUL in adult consumer behaviorits business, such as operational risks and preferences,regulatory and legislative risks at the international, federal, state and local levels, including trading down to lower-priced products or cessation of product useactions by the FDA, and adverse publicity due to public health actionsunderage 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 concernscurrent or future plans and (vi) extendedoperations; or multiple disruptionsdomestic or international litigation developments, investigations, or otherwise. As discussed in our subsidiaries’ Note 12, JUUL and Altria and/or investees’ manufacturing operations, orits subsidiaries, including PM USA, are named as defendants in their distributionvarious individual and supply chains. In addition, our subsidiaries’class action lawsuits. JUUL also is named in a significant number of additional individual 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 unableclass action lawsuits 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 and actions taken to containwhich neither Altria nor its spread and mitigate the public health effects. In the first quarter of 2020, due to these uncertainties, and the potential adverse impact of an economic downturn or recession due to the pandemic, including on our earnings from ABI, we withdrew our 2020 full-year adjusted diluted EPS guidance and our three-year adjusted diluted EPS growth objective. We cannot at this time predict the impact of the COVID-19 pandemic on our or our investees’ future financial or operational results, but the impact could be material over time.subsidiaries is a party. See the third risk factor below for risks related to extended disruptions at a facility, of a distributor or in service by a service provider and the sixth risk factor below for risks related to our investment in ABI and the earnings from and carrying value of that investment. For further discussion on the impact of the COVID-19 pandemic on the tobacco and wine businesses, seeTobacco Segment - Business Environment and Wine SegmentSpace - Business Environment in Item 2.

Significant changes in price, availability or quality2 for a discussion of tobacco, other raw materials or component parts could have an adverse effect oncertain FDA-related regulatory risks applicable to the profitability and businesse-vapor category, including the potential removal of Altria’s tobacco subsidiaries and investees.

Any significant change in prices, quality or availability of tobacco, other raw materials or component parts, particularlycertain e-vapor products from the market as a result of FDA enforcement action and the COVID-19 pandemic,potential denial of new tobacco product applications for e-vapor products. Failure to realize the expected benefits of our JUUL investment could adversely affect the value of the investment.

As discussed in Note 4, in 2019, as part of the preparation of our tobacco subsidiaries’financial statements for the periods ended September 30, 2019, December 31, 2019 and September 30, 2020, we performed valuations of 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, seeinvestment in JUUL. As a result, we determined that our investment in JUUL was impaired and recorded total non-cash pre-tax impairment charges of $11.2 billion. Of this amount, Altria recorded non-cash pre-tax charges of $4.5 billion in the third quarter of 2019, $4.1 billion in the fourth quarter of 2019, and $2.6 billion in the third quarter of 2020.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.The fourth quarter 2019 impairment charge resulted substantially from increased discount rates applied to future cash flow projections, due to the increase in the number and type of legal cases pending against JUUL during the fourth quarter of 2019.The third quarter 2020 impairment charge resulted substantially from our projections of (i) a delay in JUUL’s international market expansion plans resulting in lower JUUL e-vapor sales volume and operating margin performance and (ii) JUUL experiencing downward pressure on revenues and gross margins due to our observed increase in competition in the U.S. e-vapor market. While we believe the September 30, 2020 valuation of $1.6 billion is the appropriate current fair value of our investment, the risks identified in this paragraph, some of which are also further discussed in Note 12 and in Item 2. Tobacco Space - Business Environment - Price, Availability and Qualityof Tobacco, Other Raw Materials and Component Parts in Item 2.

Altria’s subsidiaries rely on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers. An extended disruption at a facility or in service by a supplier, distributor or distribution chain service provider could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria and its tobacco and wine subsidiaries and investees.

Altria’s subsidiaries face risks inherent in reliance on a few significant manufacturing facilities and a small number of key suppliers, distributors and distribution chain service providers. A natural or man-made disaster or other disruption that affects the manufacturing operations of any of Altria’s tobacco or wine subsidiaries or investees, the operations of any key supplier, distributor or distribution chain service provider of any of Altria’s tobacco or wine subsidiaries or investees or any other disruption in the supply or distribution of goods or services (including a key supplier’s inability to comply with government regulations or unwillingness to supply goods or services to a tobacco company) could adversely impact the operations of the affected subsidiaries and investees. For example, in March 2020, the COVID-19 pandemic resulted in a temporary suspension of operations at PM USA’s Richmond, Virginia manufacturing facility, which is the primary facility for manufacturing PM USA cigarettes. Some state governors also have issued executive orders requiring that certain businesses temporarily suspend operations for varying periods of time while the COVID-19 pandemic persists. Operations of our subsidiaries, suppliers, distributors and distribution chain service providers and those of our investees could be suspended temporarily once or multiple times, or closed permanently, depending on various factors, including how long the COVID-19 pandemic persists and the extent to which state, local and federal governments, as well as foreign countries, impose restrictions on the operation of facilities or otherwise place limits on the supply and distribution chains. An extended disruption in operations experienced by one or more of Altria’s subsidiaries, investees or in the supply or distribution of goods or services by one or more key suppliers, distributors or distribution chain service providers could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria and its tobacco and wine subsidiaries and investees.


Competition, changes in adult consumer preferences, unfavorable changes in grape supply and new governmental regulations or revisions to existing governmental regulations could adversely affect Ste. Michelle’s wine business.

Ste. Michelle’s business is impacted by evolving adult consumer preferences. Shifts away from the wine category to other alcohol categories or shifts to lower-priced wines have resulted, and could continue to result, in slowing growth in Ste. Michelle’s sales and increased inventory levels and have an adverse effect on Ste. Michelle’s wine business. As discussed in Asset Impairment, Exit and Implementation Costs in Note 3, in the first quarter of 2020, Ste. Michelle recorded pre-tax charges of $392 million in cost of sales, including a $292 million inventory write off and $100 million in estimated losses on future non-cancelable grape purchase commitments as a result of inventory levels significantly exceeding long-term forecasted demand. Ste. Michelle expects to record additional charges up to approximately $25 million during the remainder of 2020, consisting of inventory disposal costs and other charges. Evolving adult consumer preferences, an economic downturn or recession or other factors could result in afurther slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business. The adequacy of Ste. Michelle’s grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington. Supply shortages or surpluses related to any one or more of these factors could impact production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle’s sales. In addition, Ste. Michelle’s business is subject to significant competition, including from many large, well-established domestic and international companies. Federal, state and local governmental agencies also regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business. For further discussion see Wine Segment - Business Environment in Item 2.

A challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction.

A challenge to our investment in JUUL, if successful, could result in a broad range of resolutions such as divestiture of the investment or rescission of the transaction. In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act, and substantially lessened competition in violation of Section 7 of the Clayton Act. The FTC seeks a broad range of remedies including divestiture of Altria’s minority investment in JUUL, rescission of the transaction and prohibition against any officer or director of either Altria or JUUL serving on the other’s board of directors or attending meetings. The administrative trial will take place before an FTC administrative law judge and is currently scheduled to begin March 11, 2021. Any ruling by the FTC is subject to review by the FTC Commissioners and subsequently, by a federal appellate court.

Additionally, on October 1, 2019, the FTC issued a Civil Investigative Demand to Altria seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee. The FTC administrative complaint, referenced above, contains no allegations relating to this issue and the FTC has raised no further questions about it.

Also as of April 27, 2020, three putative class action lawsuits were filed against Altria and JUUL in the United States District Court for the Northern District of California. The lawsuits cite the FTC administrative complaint referenced above and allege claims similar to those made by the FTC. For further discussion see Note 11.

Neither the FTC nor the private plaintiffs has sought to preliminarily enjoin Altria from converting Altria’s non-voting JUUL shares to voting shares or appointing directors to the JUUL board of directors.

A successful challenge by the FTC or the plaintiffs in the lawsuits to the investment would adversely affect us, including by substantially limiting our rights, are ongoing with respect to our investment in JUUL.

Altria’s reported earnings from and carrying value of its equity investment in ABI and the dividends paid by ABI on shares owned by Altria may be adversely affected by various factors, including foreign currency exchange rates and ABI’s business results, including as a result of the COVID-19 pandemic, and stock price.

For purposes of financial reporting, the earnings from and carrying value of our equity investment in ABI are translated into U.S. dollars (“USD”) from various local currencies. In addition, ABI pays dividends in euros, which we convert into USD. During times of a strengthening USD against these currencies, our reported earnings from and carrying value of our equity investment in ABI will be reduced because these currencies will translate into fewer USD and the dividends that we receive

from ABI will convert into fewer USD. Dividends and earnings from and carrying value of our equity investment in ABI are also subject toIf the risks encountered by ABI in its business, its business outlook, cash flow requirements and financial performance, the state of the market and the general economic climate, including the impact of the COVID-19 pandemic. For example, in April 2020, as a result of the uncertainty, volatility and impact of the COVID-19 pandemic on ABI’s business, ABI announced a proposed 50% reduction to its upcoming dividend, which would result in a reduction of cash dividends Altria will receive from ABI. ABI previously announced a 50% rebase to its dividends in October 2018. In addition, if the carryingfair 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 andJUUL continues to decrease, it could have a material adverse effect on Altria’s consolidated financial position or earnings. We cannot provide any assurance that ABI will successfully execute its business plans and strategies. Earnings from and carrying value of our equity investment in ABI are also subject to fluctuations in ABI’s stock price.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In July 2019, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2019 share repurchase program”).program. In April 2020, the Board of Directors rescinded the $500 million remaining in the July 2019this share repurchase program.

Altria’s share repurchase activity for each of the three months in the period ended March 31,September 30, 2020, was as follows:

Period
Total Number of Shares Purchased (1)
Average Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
July 1-31, 2020235 $41.06 — $— 
August 1-31, 2020— $— — $— 
September 1-30, 202011,035 $43.74 — $— 
11,270 $43.68 — 

(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.


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Period 
Total Number of Shares Purchased (1) 
 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
         
January 1 - 31, 2020 —
 $—
 —
 $500,000,064
February 1 - 29, 2020 192,652
 $46.18
 —
 $500,000,064
March 1 - 31, 2020 —
 $—
 —
 $500,000,064
For the Quarter Ended March 31, 2020 192,652
 $—
 —
  
(1)The total number of shares purchased represents shares withheld by Altria in an amount equal to the statutory withholding taxes for holders who vested in stock-based awards.

Table of Contents    

Item 6. Exhibits.

2.1
Amendment No. 1 to Relationship Agreement, dated as of January 28, 2020, by and among JUUL Labs, Inc. and Altria Group, Inc. and Altria Enterprises LLC. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January
22.1    Guarantor Subsidiary of the Registrant. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 (File No. 1-08940).

31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1     Certain Litigation Matters.

99.2    Trial Schedule for Certain Cases.

2.2
Amendment No. 1 to Class C-1 Common Stock Purchase Agreement, dated as of January 28, 2020, by and among JUUL Labs, Inc., Altria Group, Inc. and Altria Enterprises LLC. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 30, 2020 (File No. 1-08940).

3.1
Amended and Restated By-Laws of Altria Group, Inc., effective as of April 16, 2020. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on April 17, 2020 (File No. 1-08940).

10.1
Form of Restricted Stock Unit Agreement (2020).

10.2
Form of Performance Stock Unit Agreement (2020).

31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1
Certain Litigation Matters.

99.2
Trial Schedule for Certain Cases.
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema.
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF XBRL Taxonomy Extension Definition Linkbase.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).


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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALTRIA GROUP, INC.

/s/ SALVATORE MANCUSO
Salvatore Mancuso
Executive Vice President and
Chief Financial Officer
AprilOctober 30, 2020

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