Consolidated Results of Operations
The changes in net earnings (losses) and diluted EPS attributable to Altria for the year ended December 31, 2020, from the year ended December 31, 2019, were due primarily to the following:
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(in millions, except per share data)
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Net Earnings (Losses)
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Diluted EPS
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For the year ended December 31, 2019
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$
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(1,293)
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|
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$
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(0.70)
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2019 Asset impairment, exit, implementation and acquisition-related costs
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269
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0.15
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2019 Tobacco and health litigation items
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58
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0.03
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2019 Impairment of JUUL equity securities
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8,600
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4.60
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2019 ABI-related special items (1)
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(303)
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(0.16)
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2019 Cronos-related special items
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640
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0.34
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2019 Tax items
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(99)
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(0.05)
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Subtotal 2019 special items
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9,165
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4.91
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2020 NPM Adjustment Items
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(3)
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—
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2020 Asset impairment, exit, implementation and acquisition-related costs
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(342)
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(0.18)
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2020 Tobacco and health litigation items
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(62)
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(0.03)
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2020 Impairment of JUUL equity securities
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(2,600)
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(1.40)
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2020 JUUL changes in fair value
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100
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0.05
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2020 ABI-related special items
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(603)
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(0.32)
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2020 Cronos-related special items
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(53)
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(0.03)
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2020 COVID-19 special items
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(37)
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(0.02)
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2020 Tax items
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(50)
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(0.03)
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Subtotal 2020 special items
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(3,650)
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(1.96)
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Fewer shares outstanding
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—
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0.02
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Change in tax rate
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(108)
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(0.06)
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Operations
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353
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0.19
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For the year ended December 31, 2020
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$
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4,467
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$
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2.40
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2020 Reported Net Earnings (Losses)
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$
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4,467
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$
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2.40
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2019 Reported Net Earnings (Losses)
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$
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(1,293)
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$
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(0.70)
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% Change
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100%+
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100%+
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2020 Adjusted Net Earnings and Adjusted Diluted EPS
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$
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8,117
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|
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$
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4.36
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2019 Adjusted Net Earnings and Adjusted Diluted EPS (1)
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$
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7,872
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|
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$
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4.21
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% Change
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3.1
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%
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3.6
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%
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(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 special items and other business drivers affecting the comparability of statements of earnings (losses) amounts and reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.
▪Fewer Shares Outstanding: Fewer shares outstanding during 2020 compared with 2019 were due primarily to the timing of shares repurchased by Altria in 2019 under its share repurchase program.
▪Change in Tax Rate: The change in tax rate (which excludes the impact of tax items shown above) was driven primarily by lower dividends from ABI.
▪Operations: The increase of $353 million in operations (which excludes the impact of special items shown above) was due primarily to the following:
▪higher income from the smokeable products and oral tobacco products segments;
partially offset by:
▪lower income from Altria’s equity investments in ABI and Cronos;
▪higher losses in the all other category (primarily driven by reductions in the estimated residual values of certain assets at PMCC in 2020);
▪higher amortization expense;
▪higher interest and other debt expense, net; and
▪lower income from the wine segment.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.
2021 Forecasted Results
Altria forecasts its 2021 full-year adjusted diluted EPS to be in a range of $4.49 to $4.62, representing a growth rate of 3% to 6% over its 2020 full-year adjusted diluted EPS base of $4.36, as shown in the table below. While the 2021 full-year adjusted diluted EPS guidance accounts for a range of scenarios, the external environment remains dynamic. Altria will continue to monitor conditions related to (i) unemployment rates, (ii) fiscal stimulus, (iii) adult tobacco consumer dynamics, including stay-at-home practices, disposable income, purchasing patterns and adoption of non-combustible products, (iv) regulatory and legislative (including excise tax) developments, (v) the timing and breadth of COVID-19 vaccine deployment and (vi) expectations for adjusted earnings contributions from its alcohol assets.
Altria’s 2021 full-year adjusted diluted EPS guidance range includes planned investments in support of its Vision, such as (i) marketplace investments to expand the availability and awareness of Altria’s non-combustible products, (ii) costs associated with building an industry-leading consumer engagement platform that enhances data collection and insights in support of adult tobacco consumer conversion to non-combustible products and (iii) increased non-combustible product research and development expense. Altria expects 2021 adjusted diluted EPS growth to come in the last three quarters of the year, primarily due to prior year comparisons, including one fewer shipping day for the smokeable products segment in the first quarter.
This forecasted growth rate excludes estimated per share charges in the first quarter of 2021 of $0.27 for loss on early extinguishment of debt for the February 2021 Tender Offers and Redemption. For further discussion, see Financial Review - Debt and Liquidity - Debt below.
Altria expects its 2021 full-year adjusted effective tax rate will be in a range of 24.5% to 25.5%.
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Reconciliation of 2020 Reported Diluted EPS to 2020 Adjusted Diluted EPS
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2020 Reported diluted EPS
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$
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2.40
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Asset impairment, exit, implementation and acquisition-related costs
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0.18
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Tobacco and health litigation items
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0.03
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Impairment of JUUL equity securities
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1.40
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JUUL changes in fair value
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(0.05)
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ABI-related special items
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0.32
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Cronos-related special items
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0.03
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COVID-19 special items
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0.02
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Tax items
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0.03
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2020 Adjusted diluted EPS
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$
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4.36
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For a discussion of certain income and expense items excluded from the forecasted results above, see the Consolidated Operating Results section below.
Altria’s full-year adjusted diluted EPS guidance and full-year forecast for its adjusted effective tax rate exclude the impact of certain income and expense items, including those items noted in the Non-GAAP Financial Measures section below, that management believes are not part of underlying operations. Altria’s management cannot estimate on a forward-looking basis the impact of these items on its reported diluted EPS or its reported effective tax rate because these items, which could be significant, may be unusual or infrequent, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding GAAP measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast.
Non-GAAP Financial Measures
While Altria reports its financial results in accordance with GAAP, its management also reviews certain financial results, including OCI, OCI margins, net earnings (losses) attributable to Altria and diluted EPS, on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset impairment charges, acquisition-related costs, COVID-19 special items, equity investment-related special items (including any changes in fair value of the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain non-participating manufacturer (“NPM”) adjustment disputes under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items”). Altria’s management does not view any of these special items to be part of Altria’s underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s adjusted effective tax rate may exclude certain tax items from its reported effective tax rate.
Altria’s management believes that adjusted financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to Altria’s chief operating decision maker (“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.
Discussion and Analysis
Critical Accounting Policies and Estimates
Note 2 includes a summary of the significant accounting policies and methods used in the preparation of Altria’s consolidated financial statements. In most instances, Altria must use an accounting policy or method because it is the only policy or method permitted under GAAP.
The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. If actual amounts are ultimately different from previous estimates, the revisions are included in Altria’s consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between Altria’s estimates and actual amounts in any year have not had a significant impact on its consolidated financial statements.
The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods, used in the preparation of Altria’s consolidated financial statements:
▪Consolidation: The consolidated financial statements include Altria, as well as its wholly owned and majority-owned subsidiaries. Investments in equity securities in which Altria has the ability to exercise significant influence over the operating and financial policies of the investee are accounted for either under the equity method of accounting or the fair value option. Investments in equity securities that Altria does not have the ability to exercise significant influence over the operating and financial policies of the investee are accounted for as an investment in an equity security. All intercompany transactions and balances have been eliminated.
▪Revenue Recognition: Altria’s businesses generate substantially all of their revenue from sales contracts with customers. While Altria’s businesses enter into separate sales contracts with each customer for each product type, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. All performance obligations are satisfied within one year; therefore, costs to obtain contracts are expensed as incurred and unsatisfied performance obligations are not disclosed. There is no financing component because Altria’s businesses expect, at contract inception, that the period between when Altria’s businesses transfer product to the customer and when the customer pays for that product will be one year or less.
Altria’s businesses define net revenues as revenues, which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns (also referred to as returned goods) and sales incentives. Altria’s businesses exclude from the transaction price sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on cigarettes, cigars, smokeless tobacco or wine billed to customers).
Altria’s businesses recognize revenues from sales contracts with customers upon shipment of goods when control of such products is obtained by the customer. Altria’s businesses determine that a customer obtains control of the product upon shipment when title of such product and risk of loss transfers to the customer. Altria’s businesses account for shipping and handling costs as fulfillment costs and such amounts are classified as part of cost of sales in Altria’s consolidated statements of earnings (losses). Altria’s businesses record an allowance for returned goods, based principally on historical volume and return rates, which is included in other accrued liabilities on Altria’s consolidated balance sheets. Altria’s businesses record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction to revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers
and consumers at the end of a period) based principally on historical volume, utilization and redemption rates. Expected payments for sales incentives are included in accrued marketing liabilities on Altria’s consolidated balance sheets.
Payment terms vary depending on product type. Altria’s businesses consider payments received in advance of product shipment as deferred revenue, which is included in other accrued liabilities on Altria’s consolidated balance sheets until revenue is recognized. PM USA receives payment in advance of a customer obtaining control of the product. USSTC receives substantially all payments within one business day of the customer obtaining control of the product. Ste. Michelle receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in receivables on Altria’s consolidated balance sheets.
For further discussion, see Note 3. Revenues from Contracts with Customers to the consolidated financial statements in Item 8.
▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Altria depreciates property, plant and equipment and amortizes its definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
Altria reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria performs undiscounted operating cash flow analyses to determine if an impairment exists. These analyses are affected by general economic conditions and projected growth rates. For purposes of recognition and measurement of an impairment for assets held for use, Altria groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If Altria determines that an impairment exists, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
Altria conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria to perform an interim review. Altria has the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. If necessary, Altria will perform a single step quantitative impairment test. Additionally, Altria has the option to unconditionally bypass the qualitative assessment and perform a single step quantitative assessment. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit, but is limited to the total amount of goodwill allocated to a reporting unit. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the intangible asset is considered impaired and is reduced to fair value in the period identified.
Goodwill by reporting unit and indefinite-lived intangible assets at December 31, 2020 were as follows:
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(in millions)
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Goodwill
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Indefinite-Lived
Intangible Assets
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Cigarettes
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$
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22
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$
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2
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MST and snus products
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5,023
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|
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8,801
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Cigars
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77
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|
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2,640
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Wine
|
—
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|
|
233
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Oral nicotine pouches
|
55
|
|
|
—
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|
|
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|
|
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Total
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$
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5,177
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|
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$
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11,676
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During 2020, Altria completed its annual impairment test of goodwill and indefinite-lived intangible assets performed as of October 1, 2020 and the results of this testing were as follows:
▪no impairment charges were recorded;
▪the estimated fair values of the cigarettes, cigars and oral nicotine pouches reporting units and the indefinite-lived intangible assets within the cigars reporting unit substantially exceeded their carrying values;
▪the estimated fair values of the MST and snus products reporting unit and the indefinite-lived intangible assets within the reporting unit substantially exceeded their carrying values, with the exception of the Skoal trademark. Skoal continues to be impacted by increased competition as well as adult tobacco consumer movement among tobacco products, including oral nicotine pouch products. At December 31, 2020, the estimated fair value of the Skoal trademark exceeded its carrying value of $3.9 billion by approximately 28%, which is an increase from approximately 18% at December 31, 2019. This increase is due primarily to a decrease in the discount rate resulting from changes in market inputs. Altria believes an increase in the future
discount rate in isolation, which could be caused by numerous factors, including changes in market inputs, as well as the specific risks associated with the Skoal business, could have the potential to materially decrease the future estimated fair value of the Skoal trademark. A 1% increase in the discount rate would have resulted in the estimated fair value exceeding its carrying value by approximately 13% at December 31, 2020; and
▪the estimated fair values of the indefinite-lived intangible assets within the wine reporting unit substantially exceeded their carrying values, with the exception of the Patz & Hall trademark, which at December 31, 2020, exceeded its carrying value of $30 million by approximately 6%.
During 2019, Altria’s quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in $74 million of impairment charges. During 2018, Altria’s quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in $54 million of impairment charges. For further discussion on goodwill, see Note 4. Goodwill and Other Intangible Assets, net to the consolidated financial statements in Item 8 (“Note 4”).
In 2020, Altria elected to perform a qualitative assessment for certain of its reporting units and indefinite-lived intangible assets. This qualitative assessment included the review of certain macroeconomic factors and entity-specific qualitative factors to determine if it was more-likely-than-not that the fair values of its reporting units were below carrying value. For certain of its other reporting units and indefinite-lived intangible assets, Altria elected to unconditionally bypass the qualitative assessment and perform a single step quantitative assessment. Altria used an income approach to estimate the fair values of all of its reporting units and indefinite-lived intangible assets. The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. The weighted-average discount rate used in performing the valuations was approximately 10%.
In performing the 2020 discounted cash flow analysis, Altria made various judgments, estimates and assumptions, the most significant of which were volume, income, growth rates and discount rates. The analysis incorporated assumptions used in Altria’s long-term financial forecast, which is used by Altria’s management to evaluate business and financial performance, including allocating resources and evaluating results relative to setting employee compensation targets. The assumptions incorporated the highest and best use of Altria’s indefinite-lived intangible assets and also included perpetual growth rates for periods beyond the long-term financial forecast. The perpetual growth rate used in performing all of the valuations was 2%. Fair value calculations are sensitive to changes in these estimates and assumptions, some of which relate to broader macroeconomic conditions outside of Altria’s control.
Although Altria’s discounted cash flow analysis is based on assumptions that are considered reasonable and based on the best available information at the time that the discounted cash flow analysis is developed, there is significant judgment used in determining future cash flows. The following factors have the most potential to impact expected future cash flows and, therefore, Altria’s impairment conclusions: general economic conditions (such as continued uncertainty from the COVID-19 pandemic); federal, state and local regulatory developments; category growth rates; consumer preferences; success of planned new product expansions; competitive activity; and income and excise taxes. For further discussion of these factors, see Operating Results by Business Segment - Tobacco Space - Business Environment and Operating Results by Business Segment - Wine Segment - Business Environment below.
While Altria’s management believes that the estimated fair values of each reporting unit and indefinite-lived intangible asset at December 31, 2020 are reasonable, actual performance in the short-term or long-term could be significantly different from forecasted performance, which could result in impairment charges in future periods.
For further discussion of goodwill and other intangible assets, see Note 4.
▪Investments in Equity Securities: Altria reviews its equity investments accounted for under the equity method of accounting for impairment by comparing the fair value of each of its investments to their carrying value. If the carrying value of an investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and reduced to fair value, and the impairment is recognized in the period identified. The factors used to make this determination include the duration and magnitude of the fair value decline, the financial condition and near-term prospects of the investee, and Altria’s intent and ability to hold its investment until recovery.
Following Share Conversion in the fourth quarter of 2020, Altria elected to account for its equity investment in JUUL under the fair value option. Under this option, any cash dividends received and any changes in the fair value of the equity investment in JUUL, which is calculated quarterly using level 3 fair value measurements, are included in income (losses) from equity investments in the consolidated statements of earnings (losses). The fair value of the equity investment in JUUL is included in investments in equity securities on the consolidated balance sheet at December 31, 2020. Altria believes the fair value option provides quarterly transparency to investors as to the fair market value of Altria’s investment in JUUL, given the changes and volatility in the e-vapor category since Altria’s initial investment, as well as the lack of publicly available information regarding JUUL’s business or a market-derived valuation.
Prior to Share Conversion, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares did not have a readily determinable fair value, Altria elected to measure its investment in JUUL at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Altria reviewed its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a
quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicated that Altria’s investment in JUUL may be impaired, a quantitative assessment was performed. If the quantitative assessment indicated the fair value of the investment is less than its carrying value, the investment was written down to its fair value, and the impairment was recognized in the period identified. The impairment charges Altria recorded related to its Investment in JUUL are included in impairment of JUUL equity securities in the consolidated statements of earnings (losses).
Investment in ABI
At December 31, 2020, Altria’s investment in ABI consisted of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. The fair value of Altria’s equity investment in ABI is based on: (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets, for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder were to foreclose on the Restricted Shares, the encumbered Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.
The fair value of Altria’s equity investment in ABI at December 31, 2020 and 2019 was $13.8 billion (carrying value of $16.7 billion) and $16.1 billion (carrying value of $18.1 billion), respectively, which was less than its carrying value by approximately 17% and 11%, respectively, at December 31, 2020 and 2019. At February 22, 2021, the fair value of Altria’s investment decreased to approximately $12.8 billion. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value and has not recovered. Altria has evaluated the factors related to the fair value decline, including the recent impact on the fair value of ABI’s shares during the COVID-19 pandemic, which has negatively impacted ABI’s business. Altria has evaluated the duration and magnitude of the fair value decline at December 31, 2020, ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded, both at December 31, 2020 and 2019, that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded. This conclusion was based on the following factors:
▪the fair value of Altria’s equity investment in ABI historically exceeding its carrying value since October 2016, when Altria obtained its ownership interest in ABI, with the exception of certain periods starting in September 2018;
▪a history of significant recovery in stock price during 2019, as well as an increase from March 31, 2020 to February 22, 2021, which Altria believes indicates investor confidence in ABI’s ability to implement its business strategies and deleveraging plans;
▪the continued industry disruption and volatility associated with the COVID-19 pandemic, resulting in stock performance among ABI competitors that Altria does not believe are reflective of actual underlying equity values;
▪ABI’s recent proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative, including the following actions since December 31, 2019: (i) ABI’s 50% reduction to its final 2019 dividend paid in the second quarter of 2020 and its decision to forgo its interim 2020 dividend that would have been paid in the fourth quarter of 2020; (ii) ABI’s completion of the sale of its Australia subsidiary in the second quarter of 2020 for $11 billion in cash proceeds; (iii) ABI’s continuation of its refinancing efforts through issuance and redemption activity, specifically front-end maturities into longer dated maturities; and (iv) ABI’s completion of the sale of a minority stake in its U.S.-based metal container plants in the fourth quarter of 2020 for $3 billion in cash proceeds;
▪ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, new product innovations, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and
▪the strategic plans implemented by ABI in response to the adverse impacts of the COVID-19 pandemic, including its ability to leverage learnings from recovering markets and respond quickly to the evolving environment to better position ABI for a robust recovery. This was evidenced by ABI’s performance in the second half of 2020, which represented improvement over the first half of 2020 and reinforced its confidence in the future potential of the beer category and its business. Additionally, as ABI stated in its year-end 2020 earnings report, it expects financial results in 2021 to improve meaningfully versus 2020. Additionally, ABI states its 2021 outlook reflects among other factors, its current assessment of the scale and magnitude of the COVID-19 pandemic, which is subject to change as it continues to monitor ongoing developments.
Altria will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic and subsequent recovery on ABI’s business and market valuation. If Altria were to conclude that the decline in fair value is other than temporary, Altria would determine and recognize, in the period identified, the impairment of its investment, which could result in a material adverse effect on Altria’s consolidated financial position or earnings.
Investment in JUUL
In 2020, Altria recorded a: (i) non-cash pre-tax impairment charge of $2.6 billion for three months ended September 30, 2020 related to its investment in JUUL and (ii) non-cash pre-tax unrealized gain of $100 million for the fourth quarter and year ended December 31,
2020 as a result of an increase in the fair value of JUUL. The carrying value of Altria’s investment in JUUL was $1.7 billion at December 31, 2020.
In 2019, Altria recorded total non-cash pre-tax impairment charges of $8.6 billion ($4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019) related to its investment in JUUL resulting in a $4.2 billion carrying value of its investment in JUUL at December 31, 2019.
Altria uses an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows. Future cash flows are based on a range of scenarios that consider various potential regulatory and market outcomes.
In determining the fair value of its investment in JUUL in 2020 and 2019, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. The discount rates used in performing the valuations ranged from 13.5% to 16.5% at September 30, 2019, 19.5% to 23.0% at December 31, 2019, and 17.0% to 20.5% at September 30, 2020 and December 31, 2020. The perpetual growth rates used in performing each valuation ranged from (0.5%) to 0.0%. Additionally in determining these significant assumptions, Altria made judgments regarding the: (i) likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, (ii) risk created by the number and types of legal cases pending against JUUL, and (iii) expectations for the future state of the e-vapor category including competitive dynamics.
Although Altria’s discounted cash flow analyses were based on assumptions that Altria’s management considered reasonable and were based on the best available information at the time that the analyses were developed, there is significant judgment used in determining future cash flows. If the following factors, in isolation, significantly deviate from current expectations, Altria believes that they have the potential to materially impact Altria’s significant assumptions of sales volume, operating margins, discount rate, and perpetual growth rate, thus potentially materially decreasing Altria’s valuation of its investment in JUUL:
▪adverse developments related to litigation;
▪a successful challenge by the FTC in its administrative complaint against Altria and JUUL;
▪a substantial increase in state and federal e-vapor excise taxes;
▪adverse publicity due to underage use of e-vapor products and other factors;
▪unanticipated adverse impacts on JUUL’s relationships with employees, customers, suppliers and other third parties;
▪unfavorable financial and market performance, including substantial changes in competitive dynamics;
▪disruption in JUUL’s current and future plans or operations in domestic and international markets; and
▪unfavorable regulatory and legislative developments at the international, federal, state and local levels such as the potential removal of certain e-vapor products from the market as a result of FDA enforcement action or the potential denial of new tobacco product applications for e-vapor products.
If the following factors, in isolation, significantly deviate from current expectations, Altria believes that they have the potential to materially impact Altria’s significant assumptions of sales volume, operating margins, discount rate, and perpetual growth rate, thus potentially materially increasing Altria’s valuation of its investment in JUUL:
▪favorable developments related to litigation;
▪favorable financial and market performance, including substantial changes in competitive dynamics;
▪improvement of public perception around JUUL and the e-vapor category; and
▪favorable regulatory and legislative developments at the international, federal, state and local levels such as FDA authorization of future tobacco product applications for JUUL flavored e-vapor products, which are currently not permitted in the market without authorization.
While Altria’s management believes that the recorded value of its investment in JUUL at December 31, 2020 represents its best estimate of the fair value of the investment, JUUL’s actual performance in the short term or long term could be significantly different from forecasted performance due to changes in the factors noted above. Additionally, the value of Altria’s investment in JUUL could be significantly impacted by changes in the discount rate, which could be caused by numerous factors, including changes in market inputs, as well as risks specific to JUUL and its litigation environment.
Investment in Cronos
The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos
at December 31, 2020 and 2019 was $1.1 billion (carrying value of $1.0 billion) and $1.2 billion (carrying value of $1.0 billion), respectively, which exceeded its carrying value by approximately 8% and 20% at December 31, 2020 and 2019, respectively.
For further discussion of Altria’s investments in ABI, JUUL and Cronos, see Note 6.
▪Marketing Costs: Altria’s businesses promote their products with consumer incentives, trade promotions and consumer engagement programs. These consumer incentive and trade promotion activities, which include discounts, coupons, rebates, in-store display incentives and volume-based incentives, do not create a distinct deliverable and are, therefore, recorded as a reduction of revenues. Consumer engagement program payments are made to third parties. Altria’s businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs in Altria’s consolidated statements of earnings (losses). For interim reporting purposes, Altria’s businesses charge consumer engagement programs and certain consumer incentive expenses to operations as a percentage of sales, based on estimated sales and related expenses for the full year.
▪Contingencies: As discussed in Note 18 and Item 3, 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 UST and its subsidiaries, as well as their respective indemnitees and Altria’s investees. In 1998, PM USA and certain other U.S. tobacco product manufacturers entered into the 1998 Master Settlement Agreement (the “MSA”) with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other U.S. tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). PM USA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. In addition, PM USA, Middleton and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. Payments under the State Settlement Agreements and the FDA user fees are based on variable factors, such as volume, operating income, market share and inflation, depending on the subject payment. Altria’s subsidiaries account for the cost of the State Settlement Agreements and FDA user fees as a component of cost of sales. Altria’s subsidiaries recorded approximately $4.7 billion, $4.5 billion and $4.5 billion of charges to cost of sales for the years ended December 31, 2020, 2019 and 2018, respectively, in connection with the State Settlement Agreements and FDA user fees.
Altria and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed in Note 18 and Item 3: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs in the consolidated statements of earnings (losses).
▪Employee Benefit Plans: Altria provides a range of benefits to certain employees and retired employees, including pension, postretirement health care and postemployment benefits. Altria records annual amounts relating to these plans based on calculations specified by GAAP, which include various actuarial assumptions as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates. Altria reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. Any effect of the modifications is generally amortized over future periods.
Altria recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. The gains or losses and prior service costs or credits recorded as components of other comprehensive earnings (losses) are subsequently amortized into net periodic benefit cost in future years.
Altria’s discount rate assumptions for its pension and postretirement plans obligations decreased to 2.7% and 2.6%, respectively, at December 31, 2020 from 3.4% for both plans at December 31, 2019, resulting from changes in market inputs. Altria presently anticipates net pre-tax pension and postretirement income of $85 million in 2021 versus net pre-tax expense of $3 million in 2020, excluding amounts in each year related to settlement and curtailment. This anticipated change is due primarily to (i) lower interest costs, driven by the impact of lower discount rates; and (ii) higher expected return on plan assets due to the higher fair value of plan assets at December 31, 2020. This decrease is partially offset by higher amortization of unrecognized losses, driven by the impact of lower discount rates. Assuming no change to the shape of the yield curve, a 50 basis point decrease (increase) in Altria’s discount rates would increase (decrease) Altria’s pension and postretirement expense by approximately $10 million. Similarly, a 50 basis point decrease (increase) in the expected return on plan assets would increase (decrease) Altria’s pension and postretirement expense by approximately $40 million.
For additional information see Note 16. Benefit Plans to the consolidated financial statements in Item 8 (“Note 16”).
▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Altria determines the realizability of deferred tax assets based on the weight of available evidence, that it is more-likely-than-not that the deferred tax asset will not be realized. In reaching this determination, Altria considers all available positive and negative evidence, including the character of the loss, carryback and carryforward considerations, future reversals of temporary differences and available tax planning strategies.
Altria recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Altria recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes in its consolidated statements of earnings (losses).
Altria recognized income tax benefits and charges in the consolidated statements of earnings (losses) during 2020, 2019 and 2018 as a result of various tax events, including the impact of the Tax Reform Act.
For additional information on income taxes, see Note 14. Income Taxes to the consolidated financial statements in Item 8 (“Note 14”).
Consolidated Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
(in millions)
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net Revenues:
|
|
|
|
|
|
Smokeable products
|
$
|
23,089
|
|
|
$
|
21,996
|
|
|
$
|
22,297
|
|
Oral tobacco products
|
2,533
|
|
|
2,367
|
|
|
2,262
|
|
Wine
|
614
|
|
|
689
|
|
|
691
|
|
All other
|
(83)
|
|
|
58
|
|
|
114
|
|
Net revenues
|
$
|
26,153
|
|
|
$
|
25,110
|
|
|
$
|
25,364
|
|
Excise Taxes on Products:
|
|
|
|
|
|
Smokeable products
|
$
|
5,162
|
|
|
$
|
5,166
|
|
|
$
|
5,585
|
|
Oral tobacco products
|
130
|
|
|
127
|
|
|
131
|
|
Wine
|
19
|
|
|
21
|
|
|
21
|
|
All other
|
1
|
|
|
—
|
|
|
—
|
|
Excise taxes on products
|
$
|
5,312
|
|
|
$
|
5,314
|
|
|
$
|
5,737
|
|
Operating Income:
|
|
|
|
|
|
Operating companies income (loss):
|
|
|
|
|
|
Smokeable products
|
$
|
9,985
|
|
|
$
|
9,009
|
|
|
$
|
8,408
|
|
Oral tobacco products
|
1,718
|
|
|
1,580
|
|
|
1,431
|
|
Wine
|
(360)
|
|
|
(3)
|
|
|
50
|
|
All other
|
(172)
|
|
|
(16)
|
|
|
(421)
|
|
Amortization of intangibles
|
(72)
|
|
|
(44)
|
|
|
(38)
|
|
General corporate expenses
|
(227)
|
|
|
(199)
|
|
|
(315)
|
|
|
|
|
|
|
|
Corporate asset impairment and exit costs
|
1
|
|
|
(1)
|
|
|
—
|
|
Operating income
|
$
|
10,873
|
|
|
$
|
10,326
|
|
|
$
|
9,115
|
|
As discussed further in Note 15, the CODM reviews 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. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.
The following table provides a reconciliation of adjusted net earnings (losses) attributable to Altria and adjusted diluted EPS attributable to Altria for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of dollars, except per share data)
|
Earnings (Losses) before Income Taxes
|
Provision for Income Taxes
|
Net Earnings (Losses)
|
Net Earnings (Losses) Attributable
to Altria
|
Diluted EPS
|
|
2020 Reported
|
$
|
6,890
|
|
$
|
2,436
|
|
$
|
4,454
|
|
$
|
4,467
|
|
$
|
2.40
|
|
|
NPM Adjustment Items
|
4
|
|
1
|
|
3
|
|
3
|
|
—
|
|
|
|
|
|
|
|
|
|
Asset impairment, exit, implementation and acquisition-related costs
|
431
|
|
89
|
|
342
|
|
342
|
|
0.18
|
|
|
Tobacco and health litigation items
|
83
|
|
21
|
|
62
|
|
62
|
|
0.03
|
|
|
Impairment of JUUL equity securities
|
2,600
|
|
—
|
|
2,600
|
|
2,600
|
|
1.40
|
|
|
JUUL changes in fair value
|
(100)
|
|
—
|
|
(100)
|
|
(100)
|
|
(0.05)
|
|
|
ABI-related special items
|
763
|
|
160
|
|
603
|
|
603
|
|
0.32
|
|
|
Cronos-related special items
|
51
|
|
(2)
|
|
53
|
|
53
|
|
0.03
|
|
|
COVID-19 special items
|
50
|
|
13
|
|
37
|
|
37
|
|
0.02
|
|
|
Tax items
|
—
|
|
(50)
|
|
50
|
|
50
|
|
0.03
|
|
|
2020 Adjusted for Special Items
|
$
|
10,772
|
|
$
|
2,668
|
|
$
|
8,104
|
|
$
|
8,117
|
|
$
|
4.36
|
|
|
|
|
|
|
|
|
|
2019 Reported
|
$
|
766
|
|
$
|
2,064
|
|
$
|
(1,298)
|
|
$
|
(1,293)
|
|
$
|
(0.70)
|
|
|
Asset impairment, exit, implementation and acquisition-related costs
|
331
|
|
62
|
|
269
|
|
269
|
|
0.15
|
|
|
Tobacco and health litigation items
|
77
|
|
19
|
|
58
|
|
58
|
|
0.03
|
|
|
Impairment of JUUL equity securities
|
8,600
|
|
—
|
|
8,600
|
|
8,600
|
|
4.60
|
|
|
ABI-related special items (1)
|
(383)
|
|
(80)
|
|
(303)
|
|
(303)
|
|
(0.16)
|
|
|
Cronos-related special items
|
928
|
|
288
|
|
640
|
|
640
|
|
0.34
|
|
|
Tax items
|
—
|
|
99
|
|
(99)
|
|
(99)
|
|
(0.05)
|
|
|
2019 Adjusted for Special Items
|
$
|
10,319
|
|
$
|
2,452
|
|
$
|
7,867
|
|
$
|
7,872
|
|
$
|
4.21
|
|
|
|
|
|
|
|
|
|
2018 Reported
|
$
|
9,341
|
|
$
|
2,374
|
|
$
|
6,967
|
|
$
|
6,963
|
|
$
|
3.68
|
|
|
NPM Adjustment Items
|
(145)
|
|
(36)
|
|
(109)
|
|
(109)
|
|
(0.06)
|
|
|
Asset impairment, exit, implementation and acquisition-related costs
|
538
|
|
106
|
|
432
|
|
432
|
|
0.23
|
|
|
Tobacco and health litigation items
|
131
|
|
33
|
|
98
|
|
98
|
|
0.05
|
|
|
ABI-related special items (1)
|
(16)
|
|
(3)
|
|
(13)
|
|
(13)
|
|
—
|
|
|
Loss on ABI/SABMiller business combination
|
33
|
|
7
|
|
26
|
|
26
|
|
0.01
|
|
|
Tax items
|
—
|
|
(197)
|
|
197
|
|
197
|
|
0.11
|
|
|
2018 Adjusted for Special Items
|
$
|
9,882
|
|
$
|
2,284
|
|
$
|
7,598
|
|
$
|
7,594
|
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Prior period amounts have been recast to conform with current period presentation for certain ABI mark-to-market adjustments that were not previously identified as special items and that are now excluded from Altria’s adjusted financial measures.
The following special items affected the comparability of statements of earnings (losses) amounts.
▪NPM Adjustment Items: For a discussion of NPM Adjustment Items and a breakdown of these items by segment, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18 and NPM Adjustment Items in Note 15, respectively.
▪Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax asset impairment, exit, implementation and acquisition-related costs were $431 million, $331 million and $538 million for the years ended December 31, 2020, 2019 and 2018, respectively.
For further discussion on asset impairment, exit and implementation costs, including a breakdown of these costs by segment, see Note 5.
For the years ended December 31, 2020 and 2019, Altria also recorded pre-tax acquisition-related costs of $24 million and $115 million, respectively. The 2019 costs were primarily for the write-off of debt issuance costs related to Altria’s short-term borrowings under the term loan agreement that Altria entered into in connection with its investments in Cronos and JUUL.
In December 2018, Altria announced a cost reduction program (which included workforce and third-party spending reductions across the businesses) that delivered approximately $600 million in annual cost savings in 2020 and 2019. The program was completed in 2019.
In October 2016, Altria announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. The consolidation was completed in the first quarter of 2018 and delivered Altria’s goal of approximately $50 million in annualized cost savings as of December 31, 2018.
▪Tobacco and Health Litigation Items: For a discussion of tobacco and health litigation items and a breakdown of these costs by segment, see Note 18 and Tobacco and Health Litigation Items in Note 15, respectively.
▪Impairment of JUUL Equity Securities: For the years ended December 31, 2020 and 2019, Altria recorded non-cash pre-tax impairment charges of $2,600 million and $8,600 million, respectively, reported as impairment of JUUL equity securities in its consolidated statements of earnings (losses). A full tax valuation allowance was recorded in 2020 and 2019 attributable to the tax benefit associated with the impairment charges. For further discussion, see Note 6 and Note 14.
▪JUUL Changes in Fair Value: For the year ended December 31, 2020, Altria recorded a non-cash pre-tax unrealized gain of $100 million reported as (income) losses from equity investments in its consolidated statement of earnings (losses) as a result of an increase in fair value of Altria’s investment in JUUL. A corresponding adjustment was made to the JUUL tax valuation allowance. For further discussion, see Note 6 and Note 14.
▪ABI-Related Special Items: Altria’s losses from its equity investment in ABI for the year ended December 31, 2020 included net pre-tax charges of $763 million, consisting primarily of Altria’s share of ABI’s (i) mark-to-market losses on certain ABI financial instruments associated with its share commitments, (ii) completion of the sale of its Australia subsidiary and (iii) goodwill impairment charge associated with its Africa businesses.
Altria’s earnings from its equity investment in ABI for the year ended December 31, 2019 included net pre-tax income of $383 million, consisting primarily of a gain related to the completion in September 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary and Altria’s share of ABI’s mark-to-market gains on certain ABI financial instruments associated with its share commitments.
Altria’s earnings from its equity investment in ABI for the year ended December 31, 2018 included net pre-tax income of $16 million, consisting primarily of Altria’s share of ABI’s estimated effect of the Tax Reform Act and gains related to ABI’s merger and acquisition activities, partially offset by Altria’s share of ABI’s mark-to-market losses on certain ABI financial instruments associated with its share commitments.
These amounts include Altria’s share of amounts recorded by ABI, and may also include additional adjustments related to (i) conversion from international financial reporting standards to GAAP and (ii) adjustments to Altria’s investment required under the equity method of accounting.
▪Cronos-Related Special Items: For the years ended December 31, 2020 and 2019, Altria recorded net pre-tax losses of $51 million and $928 million, respectively, consisting of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
2019
|
Loss on Cronos-related financial instruments (1)
|
$
|
140
|
|
$
|
1,442
|
|
(Income) losses from equity investments (2)
|
(89)
|
|
(514)
|
|
Total Cronos-related special items - (income) expense
|
$
|
51
|
|
$
|
928
|
|
(1) The 2020 amount and substantially all of the 2019 amount are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction.
(2) Amounts primarily include Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.
For further discussion, see Note 6 and Note 7. Financial Instruments to the consolidated financial statements in Item 8.
▪COVID-19 Special Items: For the year ended December 31, 2020, Altria recorded net pre-tax charges totaling $50 million directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic. These net pre-tax charges included premium pay, personal protective equipment and health screenings, partially offset by certain employment tax credits. The COVID-19 special items do not include the charges associated with the wine business strategic reset, which are included in asset, impairment, exit, implementation and acquisition-related costs discussed above. These implementation costs were due to increased inventory levels, which were further negatively impacted by government restrictions and economic uncertainty surrounding the COVID-19 pandemic.
▪Tax Items: For the year ended December 31, 2020, Altria recorded net tax expense of $50 million, due primarily to net tax expense of $27 million for adjustments resulting from amended returns and audit adjustments related to prior years, and tax expense of $23 million for a tax basis adjustment to Altria’s investment in ABI.
For the year ended December 31, 2019, Altria recorded net tax benefits of $99 million, due primarily to tax benefits of $105 million for adjustments as a result of amended returns and tax benefits of $100 million for the reversal of tax accruals no longer required, partially offset by tax expense of $84 million for a tax basis adjustment to Altria’s equity investment in ABI and $38 million for a valuation allowance on foreign tax credits not realizable.
For the year ended December 31, 2018, Altria recorded net tax expense of $197 million, which included $188 million related to the Tax Reform Act as follows: (i) tax expense of $140 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017; (ii) tax expense of $34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017; and (iii) tax expense of $14 million for an adjustment to the provisional estimates for the repatriation tax recorded in 2017.
For further discussion, see Note 14.
2020 Compared with 2019
Net revenues, which include excise taxes billed to customers, increased $1,043 million (4.2%), due to higher net revenues in the smokeable products and oral tobacco products segments, partially offset by lower net revenues in the all other category (primarily driven by reductions in the estimated residual value of certain assets at PMCC in 2020) and the wine segment.
Cost of sales increased $733 million (10.3%), due primarily to the inventory-related charges in the wine segment in 2020 (as discussed above), higher per unit settlement charges and COVID-19 special items in 2020.
Marketing, administration and research costs decreased $72 million (3.2%), due primarily to lower spending in the smokeable products segment, partially offset by higher amortization expense and higher spending in the all other category.
Operating income increased $547 million (5.3%), 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 and the all other category (primarily driven by reductions in the estimated residual value of certain assets at PMCC in 2020) and higher amortization expense.
Interest and other debt expense, net, decreased $71 million (5.5%), due primarily to the write-off of debt issuance costs in 2019 associated with the JUUL and Cronos transactions, partially offset by lower interest income due to lower interest rates.
(Income) losses from equity investments decreased $1,836 million (100.0%+), which were negatively impacted by ABI and Cronos special items and the impact of the COVID-19 pandemic on ABI’s ongoing operations, partially offset by a non-cash unrealized gain resulting from an increase in the estimated fair value of Altria’s investment in JUUL in the fourth quarter of 2020.
Altria’s income tax rate decreased 234.1 percentage points to 35.4%, due primarily to changes in valuation allowances attributable to the tax benefits associated with the impairments of JUUL equity securities in 2020 and 2019, and the increase in the estimated fair value of JUUL in the fourth quarter of 2020. For further discussion, see Note 14.
Reported net earnings (losses) attributable to Altria of $4,467 million increased $5,760 million (100.0%+), due primarily to the 2019 impairment of JUUL equity securities, lower loss on Cronos-related financial instruments, higher operating income, and the write-off of debt issuance costs in 2019 associated with the JUUL and Cronos transactions, partially offset by the 2020 impairment of JUUL equity securities, losses from Altria’s equity investments and higher income taxes. Reported diluted and basic EPS attributable to Altria of $2.40, increased by 100.0%+, due to higher net earnings (losses) attributable to Altria and fewer shares outstanding.
Adjusted net earnings attributable to Altria of $8,117 million increased $245 million (3.1%), due primarily to higher adjusted OCI in the smokeable products and oral tobacco products segments, partially offset by lower adjusted earnings from Altria’s equity investments, higher adjusted losses in the all other category (primarily driven by reductions in the estimated residual value of certain assets at PMCC in 2020), higher income taxes, higher amortization expense, higher interest and other debt expense, net and lower adjusted OCI in the wine segment. Adjusted diluted EPS attributable to Altria of $4.36 increased by 3.6%, due to higher adjusted net earnings attributable to Altria and fewer shares outstanding.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, decreased $254 million (1.0%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the oral tobacco products segment.
Cost of sales decreased $288 million (3.9%), due primarily to lower shipment volume in the smokeable products segment and lower costs as a result of Altria’s decision in 2018 to refocus its innovative product efforts, partially offset by favorable NPM Adjustment Items in 2018 and higher per unit settlement costs.
Excise taxes on products decreased $423 million (7.4%), due primarily to lower smokeable products shipment volume.
Marketing, administration and research costs decreased $530 million (19.2%), due primarily to lower spending as a result of the cost reduction program and Altria’s decision in 2018 to refocus its innovative product efforts, acquisition-related costs to effect the investment in JUUL in 2018 and lower tobacco and health litigation items.
Operating income increased $1,211 million (13.3%), due primarily to higher operating results from the smokeable and oral tobacco products segments (which included lower spending as a result of the cost reduction program) and lower spending as a result of Altria’s decision in 2018 to refocus its innovative product efforts (which included lower asset impairment, exit and implementation costs) and acquisition-related costs to effect the investment in JUUL in 2018.
Interest and other debt expense, net, increased $615 million (92.5%), due primarily to higher interest costs and debt issuance costs for borrowings associated with the Cronos and JUUL transactions.
(Income) losses from equity investments, which increased $835 million (93.8%), were positively impacted by special items related to Altria’s equity investments in Cronos and ABI.
Altria’s income tax rate increased 244.1 percentage points to 269.5%, due primarily to a valuation allowance on a deferred tax asset recorded in 2019 attributable to Altria’s impairment of its investment in JUUL equity securities. For further discussion, see Note 14.
Reported net losses attributable to Altria of $1,293 million as compared with 2018 net earnings attributable to Altria of $6,963 million changed by $8,256 million (100.0%+), due primarily to the 2019 impairment of JUUL equity securities, 2019 loss on Cronos-related financial instruments and higher interest and other debt expense, net, partially offset by higher operating income, higher earnings from Altria’s equity investments in Cronos and ABI and favorable tax items. Reported diluted and basic net losses per share attributable to Altria of $0.70, each decreased by 100.0%+, due to lower net earnings attributable to Altria, partially offset by fewer shares outstanding.
Adjusted net earnings attributable to Altria of $7,872 million increased $278 million (3.7%), due primarily to higher adjusted OCI in the smokeable products and oral tobacco products segments, lower spending as a result of Altria’s decision in 2018 to refocus its innovative products efforts and higher adjusted earnings related to Altria’s equity investment in ABI, partially offset by higher interest and other debt expense, net. Adjusted diluted EPS attributable to Altria of $4.21 increased by 4.7%, due to higher adjusted net earnings attributable to Altria and fewer shares outstanding.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The 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 in Note 18, Item 1A and Item 3, include:
▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the FSPTCA, and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;
▪additional restrictions on the advertising and promotion of tobacco products;
▪other actual and proposed tobacco-related legislation and regulation; and
▪governmental investigations;
▪the diminishing prevalence of cigarette smoking;
▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products;
▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower-priced tobacco products;
▪the highly competitive nature of all tobacco categories, including, without limitation, competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation and the proliferation of innovative tobacco products, including e-vapor and oral nicotine pouch products;
▪illicit trade in tobacco products;
▪potential adverse changes in prices, availability and quality of tobacco, other raw materials and components; and
▪the COVID-19 pandemic.
In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences pose challenges for Altria’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. Adult smokers continue to convert from cigarettes to exclusive use of non-combustible tobacco product alternatives. Up until the second half of 2019, the e-vapor category had experienced significant growth, and the number of adults who exclusively used e-vapor products also increased during that time which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes and MST. While growth of oral nicotine pouches has continued (including the introduction of unregulated synthetic nicotine pouches), growth in the e-vapor category has been negatively impacted by the legislative and regulatory activities discussed below. The e-vapor category has also become increasingly competitive. Altria and its tobacco subsidiaries believe the innovative tobacco products categories (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.
Domestic cigarette industry volume for 2020 was unchanged versus the prior year, which Altria believes was the result of stay-at-home practices due to the COVID-19 pandemic and higher tobacco discretionary spending. Due to the expected continued market volatility as a result of various factors relating to the COVID-19 pandemic and cross-category movement, Altria is not providing a cigarette industry volume forecast at this time. Altria believes the degree of ongoing cross-category movement will be influenced by several factors, including adult consumer perceptions of the relative risks of non-combustible products compared to cigarettes, FDA determinations on product applications and legislative actions.
Economic conditions also impact adult tobacco consumer purchase behavior. Prior economic downturns have resulted in adult tobacco consumers choosing discount products and other lower-priced tobacco products. Although the current economic downturn resulting from the COVID-19 pandemic has not meaningfully increased the growth of discount and lower priced tobacco products, in part due to stimulus payments, adult tobacco consumers may still increasingly choose these products as economic conditions remain unfavorable. See Executive Summary in Item 7 above for further discussion.
Altria 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, its implementing regulations and its 2016 deeming regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions:
▪impose restrictions on the advertising, promotion, sale and distribution of tobacco products (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 the public health; and
▪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 promotion restrictions for cigarettes and smokeless tobacco(1) products (the “Final Tobacco Marketing Rule”). The May
(1)“Smokeless tobacco,” as used in this section of this Form 10-K, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives, but do not include any component or part that is not made or derived from tobacco.
The Final Tobacco Marketing Rule, as amended, among other things:
▪restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;
▪prohibits sampling of all tobacco products except that sampling of smokeless tobacco products is permitted in qualified adult-only facilities;
▪prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos;
▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and
▪requires the development by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and gives the FDA the authority to require new warnings for any type of tobacco product (see FDA Regulatory Actions - Graphic Warnings below).
Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products and in August 2016 for all other tobacco products.
▪Rulemaking and Guidance: From time to time, the FDA issues proposed rules or guidance, which may be issued in draft or final form, generally involve public comment and may include scientific review. The FDA also may request comments on broad topics through an ANPRM. Altria’s tobacco subsidiaries actively engage 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 PMTA, Substantial Equivalence (“SE”) or SE Exemption pathways.
The FDA pre-market authorization enforcement policy varies based on product type and date of availability in the market; specifically:
▪All tobacco products on the market as of February 15, 2007, and not subsequently modified, are Grandfathered Products and exempt from the pre-market authorization requirement;
▪Cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health; and
▪Tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Grandfathered Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020.
Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, also can trigger the FDA’s pre-market review process.
Provisional Products: Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are Provisional Products. Altria’s subsidiaries timely submitted SE reports for these Provisional Products. PM USA and USSTC have received SE determinations on certain Provisional Products. Those that were found to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent.
In addition, the FDA has communicated that it will not review a certain subset of Provisional Product SE reports and that the products that are the subject of those reports can generally continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products.
While Altria’s cigarette and smokeless tobacco subsidiaries believe their current Provisional Products meet the statutory requirements of the FSPTCA, they cannot predict how the FDA will ultimately apply law, regulation and guidance to their various SE reports. Should Altria’s cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any SE reports currently pending with the FDA, they believe they can replace the vast majority of their respective product volumes with other FDA authorized products or with Grandfathered Products.
Non-Provisional Products: Cigarette and smokeless tobacco products introduced into the market or modified after March 22, 2011 are “Non-Provisional Products” and must receive a marketing order from the FDA prior to being offered for sale. Marketing orders for Non-Provisional Products may be obtained by filing an SE report, PMTA or using another pre-market pathway established by the FDA.
Products Regulated in 2016: Manufacturers of products first regulated by the FDA in 2016, including cigars, oral nicotine pouches and e-vapor products, that were on the market as of August 8, 2016 and not subsequently modified must have filed an SE report or PMTA by the filing deadline of September 9, 2020 in order for their products to remain on the market. At the FDA’s discretion, these products can remain on the market during FDA review for up to one year from the date of the application with additional case-by-case discretion to remain on the market after that time, so long as the report or application was timely filed with the FDA. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing the product.
Helix submitted PMTAs for on! oral nicotine pouches on May 15, 2020, which are presently under review by the FDA. If the FDA does not authorize one or more on! PMTAs, the FDA may require Helix to remove the affected products from the market which could have a material adverse effect on Helix’s business. Middleton has received market orders or exemptions that cover over 97% of its cigar product volume and filed SE reports for its remaining cigar product volume by the filing deadline.
In December 2013, Altria’s subsidiaries entered into a series of agreements with PMI, including an agreement that grants Altria an exclusive right to commercialize certain of PMI’s heated tobacco products in the United States, subject to FDA authorization of the applicable products. PMI submitted a PMTA and a modified risk tobacco product application with the FDA for its electronically heated tobacco products comprising the IQOS Tobacco Heating System. In April 2019, the FDA authorized the PMTA for the IQOS Tobacco Heating System and in July 2020, the FDA authorized the marketing of this system as a modified risk tobacco product with a reduced exposure claim. The IQOS electronic device heats but does not burn tobacco. In December 2020, the FDA authorized the PMTA for IQOS 3, an updated version of the IQOS Tobacco Heating System. The Modified Risk Tobacco Products authorization (“MRTP”) for the original IQOS electronic device currently does not apply to the IQOS 3 device. PMI has disclosed that it plans to seek an MRTP for the IQOS 3 electronic device in the future.
Post-Market Surveillance: Manufacturers that receive product authorizations through the PMTA process must submit to the FDA post-market records and reports, as detailed in market orders. The FDA may withdraw a market order based on this information if, among other reasons, it determines that the continued marketing of the product is no longer appropriate for the protection of the public health.
Effect of Adverse FDA Determinations: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. Failure of manufacturers to submit applications by the applicable deadline, an unfavorable determination on an application or the withdrawal by the FDA of a prior marketing order could result in the removal of products from the market. These manufacturers would have the option of marketing products that have received FDA pre-market authorization or Grandfathered Products. A “not substantially equivalent” determination, a denial of a PMTA or a marketing order withdrawal by the FDA on one or more products could have a material adverse impact on the business and consolidated results of operations of our tobacco subsidiaries and investees, and the cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪FDA Regulatory Actions
▪Graphic Warnings: In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting the negative health consequences of smoking on cigarette packaging and advertising. The final rule requires that the graphic health warnings (i) be located beneath the cellophane and comprise the top 50% of the front and rear panels of cigarette packages and (ii) occupy 20% of a cigarette advertisement and be located at the top of the advertisement. As a result of a court order related to the COVID-19 pandemic and an additional court ruling in December 2020 resulting from a lawsuit brought by R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and others against the FDA, the final rule will be effective January 14, 2022. PM USA and other cigarette manufacturers have filed lawsuits challenging the final rule on substantive and procedural grounds.
In the preamble to the final rule, the FDA stated that it would not exempt HeatSticks, a heated tobacco product used with the IQOS electronic device, as part of the rulemaking, but would consider the HeatSticks marketing order, and other marketing orders, on a case-by-case basis.
▪Underage Access and Use of Certain Tobacco Products: The FDA announced regulatory actions in September 2018 to address underage access and use of e-vapor products. Altria has engaged with the FDA on this topic and has reaffirmed to the FDA its ongoing and long-standing commitment to preventing underage use. For example, during 2019, Altria advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage use, which is now federal law. See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for further discussion.
In March 2019, the FDA issued draft guidance further proposing restrictions to address youth e-vapor use. This guidance, which the FDA finalized in January 2020, states that the FDA intends to prioritize enforcement action against:
▪cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and
▪all e-vapor products (in any format or flavor):
▪for which a manufacturer has failed or is failing to take adequate measures to prevent access by those under the age of 21 (referred to in the FDA guidance as “minors”);
▪targeted to minors and the marketing for which is likely to promote use of such products by minors; or
▪offered for sale after the court-ordered filing deadline and for which the manufacturer has either not submitted a PMTA or for which an application was timely filed but an adverse decision on the application was issued by the FDA.
E-vapor product manufacturers, however, may continue to file PMTAs for flavored tobacco products. FDA enforcement action could result in tobacco products being removed from the market unless and until these products receive pre-market authorization from the FDA. JUUL ceased its sales of all cartridge-based, flavored e-vapor products (other than tobacco and menthol) in 2019. If FDA enforcement action is taken against currently marketed JUUL e-vapor products, and a significant number of those products are removed from the market or if the FDA does not ultimately allow for the reintroduction of flavors other than tobacco and menthol, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
The January 2020 guidance effectively permits the continued sale (subject to the exceptions discussed above) of certain flavored e-vapor products, including flavored disposable e-vapor products. If, as a result, these flavored e-vapor products are sold in higher volumes than JUUL’s e-vapor products, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
▪Potential Product Standards
▪Nicotine in cigarettes and other combustible tobacco products: In March 2018, the FDA issued an ANPRM seeking comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels. Among other issues, the FDA sought comments on (i) whether smokers would compensate by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) whether the proposed rule would create an illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars. Were the FDA to develop and finalize a product standard for nicotine in combustible products, and if the standard was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries.
▪Flavors in tobacco products: As discussed above under FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation, the FDA indicated that it is considering proposing rulemaking for a product standard that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, and that it intends to propose a product standard that would ban
characterizing flavors in all cigars, including Grandfathered Products and those that have received SE determinations from the FDA - an intention reiterated in the FDA’s January 2020 guidance. In March 2018, the FDA issued an ANPRM seeking comments on the role, if any, that flavors (including menthol) in tobacco products may play in attracting youth and in helping some smokers switch to potentially less harmful forms of nicotine delivery. In the context of litigation, the FDA has stated its intention to issue a response by April 29, 2021 to a 2013 citizen petition requesting FDA prohibit menthol as a characterizing flavor in cigarettes.
While the FDA has yet to define “characterizing flavors” with respect to cigars, most of Middleton’s cigar products contain added flavors and may be subject to any action by the FDA to ban flavors in cigars. The FDA also may ban characterizing flavors in all other tobacco products, including oral nicotine pouches. If these regulations become final and are appealed and upheld in the courts, it could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪NNN in Smokeless Tobacco: In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. If the proposed rule, in present form, were to become final and was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and USSTC.
▪Good Manufacturing Practices: The FSPTCA requires that the FDA promulgate good manufacturing practice regulations (referred to by the FDA as “Requirements for Tobacco Product Manufacturing Practice”) for tobacco product manufacturers, but does not specify a timeframe for such regulations. Compliance with any such regulations could result in increased costs, which may have a material adverse effect on the financial position of Altria, its tobacco subsidiaries and its investees, including adversely affecting the value of Altria’s investment in JUUL.
▪Impact on Our Business; Compliance Costs and User Fees: FDA regulatory actions under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries in various ways. For example, actions by the FDA could:
▪impact the consumer acceptability of tobacco products;
▪delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products;
▪limit adult tobacco consumer choices;
▪impose restrictions on communications with adult tobacco consumers;
▪create a competitive advantage or disadvantage for certain tobacco companies;
▪impose additional manufacturing, labeling or packaging requirements;
▪impose additional restrictions at retail;
▪result in increased illicit trade in tobacco products; and/or
▪otherwise significantly increase the cost of doing business.
The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including inflation, market share and industry volume. For a discussion of the impact of the FDA user fee payments on Altria, see Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below. In addition, compliance with the FSPTCA’s regulatory requirements has resulted, and will continue to result, in additional costs for Altria’s tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter or year to date period but could become material, either individually or in the aggregate, to one or more of Altria’s tobacco subsidiaries.
▪Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. Investigations or enforcement actions could result in significant costs or otherwise have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
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 February 22, 2021, the weighted-average state cigarette excise tax increased from $0.36 to $1.87 per pack. As of February 22, 2021, one state, Maryland, has enacted new legislation increasing cigarette excise taxes in 2021, but various increases are under consideration or have been proposed.
A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria’s subsidiaries support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of February 22, 2021, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST.
An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As of February 22, 2021, 28 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, 10 states and the District of Columbia have enacted legislation to tax oral nicotine pouches. Tax increases could have an adverse impact on the sales of these products.
Tax increases are expected to continue to have an adverse impact on sales of cigarettes and MST products of Altria’s tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments, or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of cigarettes and MST products of Altria’s tobacco subsidiaries.
International Treaty on Tobacco Control
The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of February 22, 2021, 181 countries, as well as the European Community, have become parties to the FCTC. While the U.S. is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues.
There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the U.S., either indirectly or as a result of the U.S. becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 18, during 1997 and 1998, PM USA and other major domestic cigarette 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 18. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). The State Settlement Agreements also place restrictions on the use of brand name sponsorships and brand name non-tobacco products and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.
Other International, Federal, State and Local Regulation and Governmental and Private Activity
▪International, Federal, State and Local Regulation: A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including cigarettes, smokeless tobacco, cigars, e-vapor products and oral nicotine pouches), such as legislation that (1) prohibits the sale of tobacco product categories, such as e-vapor, (2) prohibits the sale of tobacco products with certain characterizing flavors, such as menthol cigarettes, (3) requires the disclosure of health information separate from or in addition to federally mandated health warnings and (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 February 22, 2021, 19 states and the District of Columbia have proposed legislation to ban flavors in one or more tobacco products, and five states, California, Massachusetts, New Jersey, Utah and New York, have passed such legislation. Some of these states, such as New York and Utah, exempt certain products that have received FDA market authorization through the PMTA pathway. The legislation in California bans the sale of most tobacco products with characterizing flavors, including menthol, mint and wintergreen. Following enactment of the flavor ban in August 2020, several registered California voters filed a referendum against the legislation. In January 2021 the requisite number of registered California voters (over 600,000 registered voters were required) signed a petition to place the question of whether the legislation should be affirmed or overturned on the next statewide general election ballot, which will likely take place in 2022 unless a special statewide election is called earlier. As a result, the implementation of the legislation is delayed until after a vote on the referendum occurs. Altria’s tobacco operating companies, in conjunction with other companies, funded this referendum 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 passed legislation capping the amount of nicotine in e-vapor products. Similar legislation is pending in three other states.
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 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. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful.
It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL.
▪Governmental Investigations: From time to time, Altria, its subsidiaries and investees are subject to governmental investigations on a range of matters. For example: (i) the FTC issued a Civil Investigative Demand (“CID”) to Altria while conducting its antitrust review of Altria’s investment in JUUL seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee; (ii) the U.S. Securities and Exchange Commission (“SEC”) commenced an investigation relating to Altria’s acquisition, disclosures and accounting controls in connection with the JUUL investment; and (iii) the New York State Office of the Attorney General issued a subpoena to Altria seeking documents relating to Altria’s investment in and provision of services to JUUL. Additionally, JUUL is currently under investigation by various federal and state agencies, including the SEC, the FDA and the FTC, and state attorneys general. Such investigations vary in scope but at least some appear to include JUUL’s marketing practices; particularly as such practices relate to youth, and Altria may be asked in the context of those investigations to provide information concerning its investment in JUUL or relating to its marketing of Nu Mark LLC e-vapor products.
Private Sector Activity on E-Vapor
A number of retailers, including national chains, have discontinued the sale of e-vapor products. Reasons for the discontinuation include reported illnesses related to e-vapor product use and the uncertain regulatory environment. It is possible that this private sector activity could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on the businesses of Altria, its tobacco subsidiaries and investees. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the U.S. that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our tobacco subsidiaries’ and investees’ products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment Altria’s tobacco subsidiaries and investees have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes; imposing legislative or regulatory requirements that may adversely impact Altria’s consolidated results of operations and cash flows, including adversely affecting the value of Altria’s investment in JUUL, and the businesses of its tobacco subsidiaries and investees; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold.
Altria’s tobacco subsidiaries communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect their trademarks.
Price, Availability and Quality of Tobacco, Other Raw Materials and Component Parts
Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, 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.
With respect to tobacco, as with other agricultural commodities, crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Additionally, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand. Economic conditions, including the economic effects of the COVID-19 pandemic, are unpredictable, which, among other economic factors, may result in changes in the patterns of demand for agricultural products and the cost of tobacco production which could impact tobacco leaf prices and tobacco supply. Tobacco production in certain countries also is
subject to a variety of controls, including government-mandated prices and production control programs. Moreover, certain types of tobacco are only available in limited geographies, including geographies experiencing political instability or government prohibitions on the import or export of tobacco, and loss of their availability could impair our subsidiaries’ ability to continue marketing existing products or impact adult tobacco consumer product acceptability.
The COVID-19 pandemic also may limit access to and increase the cost of raw materials, component parts and personal protective equipment as U.S. and global suppliers temporarily shut down facilities in order to address exposure to the virus or as a result of a government mandate.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Operating Results
Smokeable Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the smokeable products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results
|
|
For the Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Net revenues
|
$
|
23,089
|
|
|
$
|
21,996
|
|
|
$
|
22,297
|
|
Excise taxes
|
(5,162)
|
|
|
(5,166)
|
|
|
(5,585)
|
|
Revenues net of excise taxes
|
$
|
17,927
|
|
|
$
|
16,830
|
|
|
$
|
16,712
|
|
|
|
|
|
|
|
Reported OCI
|
$
|
9,985
|
|
|
$
|
9,009
|
|
|
$
|
8,408
|
|
NPM adjustment items
|
4
|
|
|
—
|
|
|
(145)
|
|
Asset impairment, exit and implementation costs
|
2
|
|
|
92
|
|
|
83
|
|
Tobacco and health litigation items
|
79
|
|
|
72
|
|
|
103
|
|
COVID-19 special items
|
41
|
|
|
—
|
|
|
—
|
|
Adjusted OCI
|
$
|
10,111
|
|
|
$
|
9,173
|
|
|
$
|
8,449
|
|
|
|
|
|
|
|
Reported OCI margins (1)
|
55.7
|
%
|
|
53.5
|
%
|
|
50.3
|
%
|
Adjusted OCI margins (1)
|
56.4
|
%
|
|
54.5
|
%
|
|
50.6
|
%
|
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
2020 Compared with 2019
Net revenues, which include excise taxes billed to customers, increased $1,093 million (5.0%), due primarily to higher pricing ($1,152 million), which includes higher promotional investments.
Reported OCI increased $976 million (10.8%), due primarily to higher pricing ($1,134 million), which includes higher promotional investments, lower costs ($153 million) and lower asset impairment, exit and implementation costs ($90 million), partially offset by higher per unit settlement charges, COVID-19 special items ($41 million) and lower shipment volume ($35 million).
Adjusted OCI increased $938 million (10.2%), due primarily to higher pricing, which includes higher promotional investments, and lower costs, partially offset by higher per unit settlement charges and lower shipment volume.
Marketing, administration and research costs for the smokeable products segment include PM USA’s cost of administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, including the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For further discussion on these matters, see Note 18 and Item 3. For the years ended December 31, 2020 2019 and 2018, product liability defense costs for PM USA were $110 million, $151 million and $179 million, respectively. The COVID-19 pandemic resulted in fewer trials in 2020, which is the primary factor for the reduced costs in 2020 compared to prior years. While this trend may continue in 2021, PM USA expects product liability defense costs to return to amounts similar to 2019 and 2018 once regular trial activity resumes.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, decreased $301 million (1.3%), due primarily to lower shipment volume ($1,780 million), partially offset by higher pricing ($1,497 million), which includes lower promotional investments.
Reported OCI increased $601 million (7.1%), due primarily to higher pricing, which includes lower promotional investments, and lower costs ($420 million), partially offset by lower shipment volume ($996 million), 2018 NPM Adjustment Items ($145 million) and higher per unit settlement charges.
Adjusted OCI increased $724 million (8.6%), due primarily to higher pricing, which includes lower promotional investments, and lower costs ($389 million), partially offset by lower shipment volume and higher per unit settlement charges.
Shipment Volume and Retail Share Results
The following table summarizes the smokeable products segment shipment volume performance:
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|
|
|
|
|
|
|
|
|
|
Shipment Volume
|
|
For the Years Ended December 31,
|
(sticks in millions)
|
2020
|
|
2019
|
|
2018
|
Cigarettes:
|
|
|
|
|
|
Marlboro
|
88,858
|
|
|
88,473
|
|
|
94,770
|
|
Other premium
|
4,566
|
|
|
4,869
|
|
|
5,552
|
|
Discount
|
8,001
|
|
|
8,457
|
|
|
9,469
|
|
Total cigarettes
|
101,425
|
|
|
101,799
|
|
|
109,791
|
|
Cigars:
|
|
|
|
|
|
Black & Mild
|
1,790
|
|
|
1,641
|
|
|
1,590
|
|
Other
|
10
|
|
|
10
|
|
|
11
|
|
Total cigars
|
1,800
|
|
|
1,651
|
|
|
1,601
|
|
Total smokeable products
|
103,225
|
|
|
103,450
|
|
|
111,392
|
|
Note: Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament, Benson & Hedges and Nat’s; and Discount brands, which include L&M, Basic and Chesterfield. Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.
The following table summarizes cigarettes retail share performance:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Share
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cigarettes:
|
|
|
|
|
|
Marlboro
|
43.0
|
%
|
|
43.3
|
%
|
|
43.4
|
%
|
Other premium
|
2.3
|
|
|
2.5
|
|
|
2.6
|
|
Discount
|
3.9
|
|
|
4.0
|
|
|
4.3
|
|
Total cigarettes
|
49.2
|
%
|
|
49.8
|
%
|
|
50.3
|
%
|
Note: Retail share results for cigarettes are based on data from IRI/Management Science Associates, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service.
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.
2020 Compared with 2019
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 0.4%, driven primarily by retail share losses and other factors, partially offset by trade inventory movements and calendar differences. When adjusted for trade inventory movements and calendar differences, the smokeable products segment’s domestic cigarettes shipment volume decreased by an estimated 2%. When adjusted for trade inventory movements, calendar differences and other factors, total estimated domestic cigarette industry volumes were
unchanged versus the prior year.
Shipments of premium cigarettes accounted for 92.1% of the smokeable products segment’s reported domestic cigarettes shipment volume for 2020, versus 91.7% for 2019.
Total cigarettes industry discount category retail share increased 0.3 share points to 24.5% in 2020 versus 2019.
Reported cigar shipment volume increased 9.0%.
2019 Compared with 2018
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 7.3%, driven primarily by the industry’s rate of decline, retail share losses, trade inventory movements and other factors. When adjusted for trade inventory movements and other factors, the smokeable products segment’s domestic cigarettes shipment volume decreased by an estimated 7%. When adjusted for trade inventory movements and other factors, total domestic cigarette industry volumes declined by an estimated 5.5%.
Shipments of premium cigarettes accounted for 91.7% of the smokeable products segment’s reported domestic cigarettes shipment volume for 2019, versus 91.4% for 2018.
Total cigarettes industry discount category retail share was 24.2% in 2019, an increase of 0.4 percentage points versus 2018.
Reported cigar shipment volume increased 3.1%.
Pricing Actions
PM USA and Middleton executed the following pricing and promotional allowance actions during 2020, 2019 and 2018:
▪Effective November 1, 2020 PM USA increased the list price on all of its cigarette brands by $0.13 per pack.
▪Effective June 21, 2020, PM USA increased the list price on all of its cigarette brands by $0.11 per pack.
▪Effective February 16, 2020, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.
▪Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.08 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 September 23, 2018, PM USA increased the list price on Marlboro and L&M by $0.10 per pack and Parliament and Virginia Slims by $0.15 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.50 per pack.
▪Effective May 6, 2018, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.11 per five-pack.
▪Effective March 25, 2018, PM USA increased the list price on all of its cigarette brands by $0.09 per pack.
In addition:
▪Effective January 24, 2021 PM USA increased the list price on all of its cigarette brands by $0.14 per pack.
▪Effective January 10, 2021, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.07 per five-pack.
Oral Tobacco Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the oral tobacco products segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results
|
|
For the Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Net revenues
|
$
|
2,533
|
|
|
$
|
2,367
|
|
|
$
|
2,262
|
|
Excise taxes
|
(130)
|
|
|
(127)
|
|
|
(131)
|
|
Revenues net of excise taxes
|
$
|
2,403
|
|
|
$
|
2,240
|
|
|
$
|
2,131
|
|
|
|
|
|
|
|
Reported OCI
|
$
|
1,718
|
|
|
$
|
1,580
|
|
|
$
|
1,431
|
|
Asset impairment, exit, implementation and acquisition-related costs
|
(3)
|
|
|
26
|
|
|
23
|
|
Tobacco and health litigation items
|
—
|
|
|
—
|
|
|
10
|
|
COVID-19 special items
|
9
|
|
|
—
|
|
|
—
|
|
Adjusted OCI
|
$
|
1,724
|
|
|
$
|
1,606
|
|
|
$
|
1,464
|
|
|
|
|
|
|
|
Reported OCI margins (1)
|
71.5
|
%
|
|
70.5
|
%
|
|
67.2
|
%
|
Adjusted OCI margins (1)
|
71.7
|
%
|
|
71.7
|
%
|
|
68.7
|
%
|
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
2020 Compared with 2019
Net revenues, which include excise taxes billed to customers, increased $166 million (7.0%), due primarily to higher pricing ($128 million), which includes higher promotional investments (including investments in on!), and higher shipment volume ($33 million).
Reported OCI increased $138 million (8.7%), due primarily to higher pricing, which includes higher promotional investments, higher shipment volume ($22 million) and 2019 asset impairment, exit, implementation and acquisition-related costs ($26 million), partially offset by higher costs (including investments in on!).
Adjusted OCI increased $118 million (7.3%), due primarily to higher pricing, which includes higher promotional investments, and higher shipment volume, partially offset by higher costs (including investments in on!).
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, increased $105 million (4.6%), due primarily to higher pricing ($197 million), which includes lower promotional investments, partially offset by lower shipment volume ($98 million).
Reported OCI increased $149 million (10.4%), due primarily to higher pricing, which includes lower promotional investments, and lower costs, partially offset by lower shipment volume ($87 million).
Adjusted OCI increased $142 million (9.7%), due primarily to higher pricing, which includes lower promotional investments, and lower costs, partially offset by lower shipment volume.
Shipment Volume and Retail Share Results
Oral tobacco products segment’s shipment volumes and estimated industry shipment volumes for the current and comparable periods include MST, snus and oral nicotine pouch products. The following table summarizes oral tobacco products segment shipment volume performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipment Volume
|
|
For the Years Ended December 31,
|
(cans and packs in millions)
|
2020
|
|
|
2019
|
|
|
2018
|
|
Copenhagen
|
522.4
|
|
|
522.2
|
|
|
531.7
|
|
Skoal
|
208.5
|
|
|
217.8
|
|
|
231.1
|
|
Other (includes Red Seal and on!)
|
88.7
|
|
|
69.7
|
|
|
69.8
|
|
Total oral tobacco products
|
819.6
|
|
|
809.7
|
|
|
832.6
|
|
Note: Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is
currently not material to the oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.
In the first quarter of 2020, Altria’s smokeless products segment was renamed the oral tobacco products segment. Prior to 2020, the smokeless products segment retail share performance and category industry volume estimates included MST and snus products, but excluded oral nicotine pouch products. Altria has restated prior period retail share performance data and estimated category industry volume to reflect the inclusion of oral nicotine pouch products. The following table summarizes oral tobacco products segment retail share performance (excluding international volume):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Share
|
|
For the Years Ended December 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Copenhagen
|
31.9
|
%
|
|
33.9
|
%
|
|
34.4
|
%
|
Skoal
|
13.8
|
|
|
15.0
|
|
|
15.9
|
|
Other (includes Red Seal and on!)
|
4.1
|
|
|
3.6
|
|
|
3.4
|
|
Total oral tobacco products
|
49.8
|
%
|
|
52.5
|
%
|
|
53.7
|
%
|
Note: Retail share results for oral tobacco products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Oral tobacco products is defined by IRI as MST, snus and oral nicotine pouches. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.
For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.
2020 Compared with 2019
The oral tobacco products segment’s reported domestic shipment volume increased 1.2%, driven primarily by the industry’s growth rate, calendar differences and other factors, partially offset by retail share losses (primarily due to the growth of oral nicotine pouches) and trade inventory movements. When adjusted for calendar differences, trade inventory movements and other factors, the oral tobacco products segment’s reported domestic shipment volume increased by an estimated 1%.
The oral tobacco products category industry volume increased an estimated 6% over the six months ended December 31, 2020, primarily driven by growth in oral nicotine pouches.
The oral tobacco products segment’s retail share was 49.8% for 2020, and Copenhagen continued to be the leading oral tobacco brand with retail share of 31.9% for 2020. Share losses for both the segment and Copenhagen were due to the growth of oral nicotine pouches.
on! is now available in approximately 78,000 stores as of the end of 2020, which is more than five times the store count from the end of 2019. In stores with distribution, on! achieved a retail share of 2.4 percentage points of the oral tobacco category for full-year 2020. Helix expects unconstrained on! manufacturing capacity for the U.S. market by mid-year 2021.
2019 Compared with 2018
The oral tobacco products segment’s reported domestic shipment volume declined 2.8%, driven primarily by retail share losses, calendar differences, and other factors, partially offset by industry growth and trade inventory movements. When adjusted for trade inventory movements and calendar differences, the oral tobacco products segment’s domestic shipment volume declined 2.5%.
The oral tobacco products category industry volume increased an estimated 3% over the six months ended December 31, 2019, primarily driven by growth in oral nicotine pouches.
Pricing Actions
USSTC executed the following pricing actions during 2020, 2019 and 2018:
▪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.
▪Effective November 20, 2018, USSTC increased the list price on its Skoal X-TRA products and select Copenhagen products by $0.17 per can. USSTC also increased the list price on its Husky brand and on the balance of its Copenhagen and Skoal products by $0.07 per can. In addition, USSTC decreased the price on its Red Seal brand by $0.08 per can.
▪Effective June 5, 2018, USSTC increased the list price on all its brands by $0.07 per can.
In addition:
▪Effective March 2, 2021, USSTC increased the list price on its Skoal Blend products by $0.16 per can. USSTC also increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.08 per can.
Wine Segment
Business Environment
Ste. Michelle is a producer and supplier of premium varietal and blended table wines and of sparkling wines. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle and 14 Hands, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley, Patz & Hall in Sonoma and Erath in Oregon. In addition, Ste. Michelle imports and markets Antinori wine and Champagne Nicolas Feuillatte products in the United States. Ste. Michelle works to meet evolving adult consumer preferences over time by developing, marketing and distributing products through innovation.
Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors.
Adult consumer preferences among alcohol categories and within the wine category can shift due to a variety of factors, including changes in taste preferences, demographics or social trends, and changes in leisure, dining and beverage consumption patterns and economic conditions. Evolving adult consumer preferences pose strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increases in inventory levels in recent periods. Ste. Michelle has been experiencing product volume demand uncertainty, which was further negatively impacted in 2020 by the COVID-19 pandemic (including economic uncertainty and government actions that restrict direct-to-consumer sales and on-premise sales).
As a result of wine inventory levels significantly exceeding forecasted demand in 2020, Ste. Michelle recorded pre-tax charges of $411 million in 2020. The charges primarily included (i) a $292 million inventory write off in the first quarter of 2020, (ii) estimated losses of $100 million on future non-cancelable grape purchase commitments recorded in the first quarter of 2020 and (iii) inventory disposal costs and other charges of $19 million in 2020. For further discussion see Asset Impairment, Exit and Implementation Costs in Note 5. Evolving adult consumer preferences, the current economic downturn, an extended disruption in on-premise sales or facility shutdowns, either voluntary or government-mandated, could result in a further slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business, the consolidated results of operations, cash flows or financial position of Ste. Michelle.
As with other agricultural commodities, grape quality and availability can be influenced by plant disease and infestation, as well as by variations in weather patterns, such as fires and smoke damage from fires, including those caused by climate change. For example, in 2019, freezing temperatures reduced grape production and resulted in fewer grapes being available to Ste. Michelle. Additionally, Ste. Michelle experienced some impact from the fires in the western United States during 2020.
Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages could have an adverse effect on Ste. Michelle’s wine business.
Operating Results
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
|
|
For the Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Net revenues
|
$
|
614
|
|
|
$
|
689
|
|
|
$
|
691
|
|
Excise taxes
|
(19)
|
|
|
(21)
|
|
|
(21)
|
|
Revenues net of excise taxes
|
$
|
595
|
|
|
$
|
668
|
|
|
$
|
670
|
|
|
|
|
|
|
|
Reported OCI (Loss)
|
$
|
(360)
|
|
|
$
|
(3)
|
|
|
$
|
50
|
|
Asset impairment, exit and implementation costs
|
411
|
|
|
76
|
|
|
54
|
|
Adjusted OCI
|
$
|
51
|
|
|
$
|
73
|
|
|
$
|
104
|
|
|
|
|
|
|
|
Reported OCI margins (1)
|
(60.5)
|
%
|
|
(0.4)
|
%
|
|
7.5
|
%
|
Adjusted OCI margins (1)
|
8.6
|
%
|
|
10.9
|
%
|
|
15.5
|
%
|
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
2020 Compared with 2019
Net revenues, which include excise taxes billed to customers, decreased $75 million (10.9%), due primarily to lower shipment volume, partially offset by higher pricing, which includes lower promotional investments.
Reported OCI decreased $357 million (100.0%+), due primarily to 2020 inventory-related charges discussed above (included in implementation costs and charged to cost of sales) and lower shipment volume, partially offset by 2019 impairment of wine segment goodwill and higher pricing, which includes lower promotional investments.
Adjusted OCI decreased $22 million (30.1%), due primarily to lower shipment volume, partially offset by higher pricing, which includes lower promotional investments.
For 2020, Ste. Michelle’s reported wine shipment volume of 7,300 thousand cases decreased 12.0%.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, were essentially unchanged as higher promotional investments were mostly offset by higher shipment volume and favorable premium mix.
Reported OCI (Loss) decreased $53 million (100.0%+), due primarily to the 2019 impairment of the wine segment goodwill ($74 million), higher costs and higher promotional investments, partially offset by the 2018 impairment of the Columbia Crest trademark ($54 million).
Adjusted OCI decreased $31 million (29.8%), due primarily to higher costs and higher promotional investments.
For 2019, Ste. Michelle’s reported wine shipment volume of 8,294 thousand cases increased 0.6%.
Financial Review
Cash Provided by/Used in Operating Activities
During 2020, net cash provided by operating activities was $8.4 billion compared with $7.8 billion during 2019. This increase was due primarily to the following:
▪higher net revenues in the smokeable products and oral tobacco products segments;
▪lower payments as a result of savings from the cost reduction program announced in December 2018; and
▪lower payments for tobacco and health litigation items;
partially offset by:
▪higher income tax payments;
▪higher long-term debt interest payments; and
▪lower dividends received from ABI in 2020.
During 2019, net cash provided by operating activities was $7.8 billion compared with $8.4 billion during 2018. This decrease was due primarily to the following:
▪lower payments of settlement charges in 2018;
▪lower dividends received from ABI; and
▪higher payments of interest on long-term debt in 2019;
partially offset by:
▪lower costs as a result of the cost reduction program announced in December 2018, net of cash paid under this program in 2019; and
▪lower federal income tax payments in 2019.
Altria had a working capital deficit at December 31, 2020 and 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.
Cash Provided by/Used in Investing Activities
During 2020, net cash used in investing activities was $0.1 billion compared with $2.4 billion during 2019. This decrease was due primarily to the investment in Cronos in 2019 and Helix’s 2019 acquisition of the Burger Group.
During 2019, net cash used in investing activities was $2.4 billion compared with $13.0 billion during 2018. This decrease was due primarily to the following:
▪Altria’s $12.8 billion investment in JUUL in 2018;
partially offset by:
▪Altria’s $1.9 billion investment in Cronos in 2019; and
▪Helix’s acquisition of the Burger Group in 2019.
Capital expenditures for 2020 decreased 6.1% to $231 million. Capital expenditures for 2021 are expected to be in the range of $200 million to $250 million, and are expected to be funded from operating cash flows.
Cash Provided by/Used in Financing Activities
During 2020, net cash used in financing activities was $5.4 billion compared with $4.7 billion during 2019. This increase was due primarily to the following:
▪proceeds of $16.3 billion from the issuance of long-term senior unsecured notes in 2019; and
▪higher dividends paid in 2020;
partially offset by:
▪repayments of $12.8 billion of short-term borrowings in 2019;
▪proceeds of $2.0 billion from the issuance of long-term senior unsecured notes in 2020;
▪repurchases of common stock in 2019; and
▪lower repayments of long-term debt at maturity in 2020.
During 2019, net cash used in financing activities was $4.7 billion compared with net cash provided by financing activities of $4.7 billion during 2018. This change was due primarily to the following:
▪proceeds of $12.8 billion from short-term borrowings in 2018;
▪repayments of $12.8 billion of short-term borrowings in 2019;
▪higher dividends paid during 2019; and
▪higher repayments of long-term debt at maturity in 2019;
partially offset by:
▪proceeds of $16.3 billion from the issuance of long-term senior unsecured notes during 2019; and
▪lower repurchases of common stock during 2019.
Debt and Liquidity
Source of Funds - Altria is a holding company. As a result, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria receives cash dividends on its interest in ABI and will continue to do so as long as ABI pays dividends.
Credit Ratings - Altria’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under Altria’s Credit Agreement is discussed in Note 8. Short-Term Borrowings and Borrowing Arrangements to the consolidated financial statements in Item 8 (“Note 8”).
At December 31, 2020, the credit ratings and outlook for Altria’s indebtedness by major credit rating agencies were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Debt
|
|
Long-term Debt
|
|
Outlook
|
Moody’s Investors Service, Inc. (“Moody’s”)
|
P-2
|
|
A3
|
|
Stable (1)
|
Standard & Poor’s Ratings Services (“Standard & Poor’s”)
|
A-2
|
|
BBB
|
|
Stable
|
Fitch Ratings Ltd. (“Fitch”)
|
F2
|
|
BBB
|
|
Stable
|
(1) On May 1, 2020, Moody’s changed the outlook for Altria to Stable from Negative.
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.
Altria’s Credit Agreement, which is used for general corporate purposes, had $3.0 billion available at December 31, 2020.
At December 31, 2020, Altria was in compliance with its covenants associated with the Credit Agreement, and expects to continue to meet its covenants associated with the Credit Agreement.
For further details on short-term borrowings, see Note 8.
Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA. For further discussion, see Supplemental Guarantor Financial Information below and Note 9. Long-Term Debt to the consolidated financial statements in Item 8 (“Note 9”).
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.
Investment in ABI - In 2020, ABI’s proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative included a 50% reduction to its final 2019 dividend paid in the second quarter of 2020 and a decision to forgo its interim 2020 dividend that would have been paid in the fourth quarter of 2020. Altria does not expect changes in cash dividends it receives from ABI to have a material impact on its consolidated financial position, liquidity or earnings.
COVID-19 Pandemic - Due to the 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 maintained a higher than normal cash balance during 2020 to preserve its financial flexibility. Altria took the following actions to increase its cash position:
▪issued $2.0 billion of long-term senior unsecured notes in May 2020; and
▪did not repurchase any shares during 2020 (in April 2020, the Board of Directors rescinded the $500 million remaining in the $1.0 billion share repurchase program).
In January 2021, the Board of Directors authorized a new $2.0 billion share repurchase program, which Altria expects to complete by June 30, 2022. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.
Debt - At December 31, 2020 and 2019, Altria’s total debt was $29.5 billion and $28.0 billion, respectively. The increase in debt was primarily due to Altria’s May 2020 issuance of long-term senior unsecured notes in the aggregate principal amount of $2.0 billion and the changes in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate, partially offset by the repayment in full of $1.0 billion of senior unsecured notes at scheduled maturity in January 2020.
All of Altria’s long-term debt outstanding at December 31, 2020 and 2019 was fixed-rate debt. The weighted-average coupon interest rate on total long-term debt was approximately 4.1% and 4.2% at December 31, 2020 and 2019, respectively.
On February 1, 2021, Altria commenced a series of debt-related transactions to reduce the near-term maturity towers and extend the weighted average maturity of its debt. The transactions are described in further detail below.
▪Tender Offers - On February 1, 2021, Altria commenced cash tender offers (the “Tender Offers”) for an aggregate purchase price of up to $3.65 billion in respect of certain of its outstanding long-term senior unsecured notes (the “Tender Notes”). On February 16, 2021, the Tender Offers were amended to increase the aggregate purchase price. The Tender Offers will expire on March 1, 2021, unless extended or earlier terminated. The results of the Tender Offers are discussed below.
On February 18, 2021, Altria paid approximately $4.6 billion to purchase the Tender Notes (aggregate principal amount of approximately $4.0 billion) validly tendered and not validly withdrawn at or prior to February 12, 2021 that it had accepted for purchase in the Tender Offers. Altria does not intend to accept any additional Tender Notes for purchase in the Tender Offers.
The principal amounts of Tender Notes purchased by Altria were:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Principal Amount of Tender Notes Purchased
|
2.850% Notes due 2022
|
|
|
|
$
|
795
|
|
2.950% Notes due 2023
|
|
|
|
132
|
|
4.000% Notes due 2024
|
|
|
|
624
|
|
3.800% Notes due 2024
|
|
|
|
655
|
|
4.400% Notes due 2026
|
|
|
|
430
|
|
4.800% Notes due 2029
|
|
|
|
1,094
|
|
9.950% Notes due 2038
|
|
|
|
65
|
|
10.200% Notes due 2039
|
|
|
|
18
|
|
6.200% Notes due 2059
|
|
|
|
229
|
|
|
|
|
|
$
|
4,042
|
|
▪Issuance of New Notes - On February 4, 2021, Altria issued long-term senior unsecured notes in the aggregate principal amount of $5.5 billion (the “Notes”). The net proceeds from the issuance of the Notes were used (i) to fund the purchase of the Tender Notes accepted for purchase in the Tender Offers and the payment of related fees and expenses, (ii) to fund the Redemption described below and (iii) for other general corporate purposes.
Altria’s obligations under the Notes are fully and unconditionally guaranteed by PM USA. The Notes contain the following terms:
▪$1.75 billion at 2.450%, due 2032, interest payable semiannually beginning August 4, 2021;
▪$1.50 billion at 3.400%, due 2041, interest payable semiannually beginning August 4, 2021;
▪$1.25 billion at 3.700%, due 2051, interest payable semiannually beginning August 4, 2021; and
▪$1.00 billion at 4.000%, due 2061, interest payable semiannually beginning August 4, 2021.
▪Redemption of Notes - On February 4, 2021, Altria exercised its optional redemption rights to redeem all of its outstanding 3.490% Notes due 2022 in an aggregate principal amount of $1.0 billion (the “Redemption”). Altria paid the Redemption on February 19, 2021.
Altria will record a one-time, pre-tax charge against reported earnings in the first quarter of 2021 of approximately $645 million, or an estimated $0.27 per share, reflecting the loss on early extinguishment of debt related to the Tender Offers and the Redemption, which includes estimated premiums and fees, and write-off of unamortized debt discounts and debt issue costs.
For further details on long-term debt, see Note 9.
In October 2020, Altria filed a registration statement on Form S-3 with the SEC, under which Altria may offer debt securities or warrants to purchase debt securities from time to time over a three-year period from the date of filing.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below.
Guarantees and Other Similar Matters - As discussed in Note 18, Altria and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at December 31, 2020. From time to time, subsidiaries of Altria also issue lines of credit to affiliated entities. In addition, as discussed below in Supplemental Guarantor Financial Information and in Note 9, PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under the Credit Agreement and amounts outstanding under the 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 the Debt and Liquidity section above.
Aggregate Contractual Obligations - The following table summarizes Altria’s contractual obligations at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
(in millions)
|
Total
|
|
2021
|
|
2022 - 2023
|
|
2024 - 2025
|
|
2026 and Thereafter
|
Long-term debt (1)
|
$
|
29,701
|
|
|
$
|
1,500
|
|
|
$
|
4,777
|
|
|
$
|
4,066
|
|
|
$
|
19,358
|
|
Interest on borrowings (2)
|
17,774
|
|
|
1,191
|
|
|
2,200
|
|
|
1,932
|
|
|
12,451
|
|
Operating leases (3)
|
182
|
|
|
45
|
|
|
56
|
|
|
20
|
|
|
61
|
|
Purchase obligations: (4)
|
|
|
|
|
|
|
|
|
|
Inventory and production costs
|
3,997
|
|
|
1,095
|
|
|
1,363
|
|
|
650
|
|
|
889
|
|
Other
|
665
|
|
|
538
|
|
|
127
|
|
|
—
|
|
|
—
|
|
|
4,662
|
|
|
1,633
|
|
|
1,490
|
|
|
650
|
|
|
889
|
|
Other long-term liabilities (5)
|
2,047
|
|
|
79
|
|
|
150
|
|
|
168
|
|
|
1,650
|
|
|
$
|
54,366
|
|
|
$
|
4,448
|
|
|
$
|
8,673
|
|
|
$
|
6,836
|
|
|
$
|
34,409
|
|
(1) Amounts represent the expected cash payments of Altria’s long-term debt and exclude changes resulting from the debt transactions in February 2021 discussed above.
(2) Amounts represent the expected cash payments of Altria’s interest expense on its long-term debt. Interest on Altria’s long-term debt, which was all fixed-rate debt at December 31, 2020, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts and debt issuance costs, the amortization of loan fees and fees for lines of credit that would be included in interest, other debt expense, net in the consolidated statements of earnings (losses) and changes resulting from the debt transactions in February 2021 discussed above.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and services, contract manufacturing, packaging, storage and distribution) are commitments for projected needs to be used in the normal course of business. Other purchase obligations include commitments for marketing, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities primarily consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table above for accrued pension costs consist of the actuarially determined anticipated minimum funding requirements for each year from 2021 through 2025. Contributions beyond 2025 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals. Altria is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee payments, and payments for FDA user fees, as discussed below and in Note 18, are excluded from the table above, as the payments are subject to adjustment for several factors, including inflation, operating income, market share and industry volume. Litigation escrow deposits, as discussed below and in Note 18, are also excluded from the table above since these deposits will be returned to PM USA should it prevail on appeal.
Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 18, PM USA has entered into State Settlement Agreements with the states and territories of the United States that call for certain payments. In addition, PM USA, Middleton and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. Altria’s subsidiaries recorded approximately $4.7 billion, $4.5 billion and $4.5 billion of charges to cost of sales for each of the years ended December 31, 2020, 2019 and 2018, respectively, in connection with the State Settlement Agreements and FDA user fees. For further discussion of the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the MSA, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18.
Based on current agreements, 2020 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 each year for the next three years. These amounts exclude the potential impact of any NPM Adjustment Items.
The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.
Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of December 31, 2020, PM USA had posted appeal bonds totaling $61 million, which have been collateralized with restricted cash that is included in assets on the consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST or Altria in a particular fiscal quarter or fiscal year, as more
fully disclosed in Note 18, Item 3 and Item 1A, management expects cash flow from operations, together with Altria’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 11. Stock Plans to the consolidated financial statements in Item 8, during 2020 Altria granted an aggregate of 1.2 million restricted stock units and 0.3 million performance stock units to eligible employees.
At December 31, 2020, the number of shares to be issued upon vesting of restricted stock units and performance stock units was not significant.
Dividends paid in 2020 and 2019 were approximately $6.3 billion and $6.1 billion, respectively, an increase of 3.6%, 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 $3.44 per share. Altria has a long-term objective of a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of the Board.
For a discussion of Altria’s share repurchase programs, see Note 10. Capital Stock to the consolidated financial statements in Item 8 and Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Form 10-K.
New Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of issued accounting guidance applicable to, but not yet adopted by, Altria.
Contingencies
See Note 18 and Item 3 for a discussion of contingencies.
Supplemental Guarantor Financial Information
PM USA (the “Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (the “Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor.
Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees:
▪received less than reasonably equivalent value or fair consideration therefor; and
▪either:
▪was insolvent or rendered insolvent by reason of such occurrence;
▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or
▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if:
▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation;
▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
▪it could not pay its debts as they become due.
To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent.
The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor;
▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of the Parent’s long-term senior unsecured debt by Standard & Poor’s of A or higher.
The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP.
Summarized Balance Sheets
(in millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Parent
|
Guarantor
|
Assets
|
|
|
|
|
|
Due from Non-Guarantor Subsidiaries
|
|
$
|
112
|
|
|
$
|
199
|
|
|
Other current assets
|
|
4,896
|
|
|
734
|
|
|
Total current assets
|
|
$
|
5,008
|
|
|
$
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from Non-Guarantor Subsidiaries
|
|
$
|
4,790
|
|
|
$
|
—
|
|
|
Other assets
|
|
16,883
|
|
|
1,983
|
|
|
Total non-current assets
|
|
$
|
21,673
|
|
|
$
|
1,983
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Due to Non-Guarantor Subsidiaries
|
|
$
|
1,169
|
|
|
$
|
656
|
|
|
Other current liabilities
|
|
3,688
|
|
|
4,539
|
|
|
Total current liabilities
|
|
$
|
4,857
|
|
|
$
|
5,195
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
$
|
30,958
|
|
|
$
|
1,268
|
|
|
Summarized Statements of Earnings (Losses)
(in millions of dollars)
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|
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|
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|
|
|
|
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For the Year Ended December 31, 2020
|
|
|
Parent (1)
|
Guarantor
|
Net revenues
|
|
$
|
—
|
|
|
$
|
22,094
|
|
|
Gross profit
|
|
—
|
|
|
10,693
|
|
|
Net earnings (losses)
|
|
(1,061)
|
|
|
6,947
|
|
|
|
|
|
|
|
|
(1) For the year ended December 31, 2020, net earnings (losses) includes $228 million of intercompany interest income from non-guarantor subsidiaries.