Consolidated Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net revenues:
|
|
|
|
|
|
|
|
Smokeable products
|
$
|
17,275
|
|
|
$
|
17,522
|
|
|
$
|
5,975
|
|
|
$
|
6,313
|
|
Oral tobacco products
|
1,945
|
|
|
1,901
|
|
|
626
|
|
|
640
|
|
Wine
|
494
|
|
|
434
|
|
|
177
|
|
|
157
|
|
All other
|
44
|
|
|
(8)
|
|
|
8
|
|
|
13
|
|
Net revenues
|
$
|
19,758
|
|
|
$
|
19,849
|
|
|
$
|
6,786
|
|
|
$
|
7,123
|
|
Excise taxes on products:
|
|
|
|
|
|
|
|
Smokeable products
|
$
|
3,620
|
|
|
$
|
3,950
|
|
|
$
|
1,218
|
|
|
$
|
1,407
|
|
Oral tobacco products
|
98
|
|
|
98
|
|
|
32
|
|
|
33
|
|
Wine
|
14
|
|
|
14
|
|
|
5
|
|
|
5
|
|
All other
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Excise taxes on products
|
$
|
3,733
|
|
|
$
|
4,063
|
|
|
$
|
1,255
|
|
|
$
|
1,445
|
|
Operating income:
|
|
|
|
|
|
|
|
OCI:
|
|
|
|
|
|
|
|
Smokeable products
|
$
|
7,901
|
|
|
$
|
7,609
|
|
|
$
|
2,753
|
|
|
$
|
2,789
|
|
Oral tobacco products
|
1,269
|
|
|
1,297
|
|
|
405
|
|
|
436
|
|
Wine
|
21
|
|
|
(347)
|
|
|
(24)
|
|
|
19
|
|
All other
|
(56)
|
|
|
(63)
|
|
|
(30)
|
|
|
(7)
|
|
Amortization of intangibles
|
(53)
|
|
|
(54)
|
|
|
(18)
|
|
|
(17)
|
|
General corporate expenses
|
(255)
|
|
|
(150)
|
|
|
(135)
|
|
|
(60)
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
8,827
|
|
|
$
|
8,292
|
|
|
$
|
2,951
|
|
|
$
|
3,160
|
|
As discussed further in Note 9, the CODM reviews OCI to evaluate the performance of, and allocate resources to, the segments. 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 nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of dollars, except per share data)
|
|
Earnings (Losses) before Income Taxes
|
Provision (Benefit) for Income Taxes
|
Net Earnings (Losses)
|
Net Earnings (Losses) Attributable
to Altria
|
Diluted EPS
|
|
2021 Reported
|
|
$
|
1,544
|
|
$
|
693
|
|
$
|
851
|
|
$
|
851
|
|
$
|
0.46
|
|
|
NPM Adjustment Items
|
|
(76)
|
|
(19)
|
|
(57)
|
|
(57)
|
|
(0.03)
|
|
|
Implementation, acquisition and disposition-related costs
|
|
117
|
|
22
|
|
95
|
|
95
|
|
0.05
|
|
|
Tobacco and health and certain other
litigation items
|
|
148
|
|
35
|
|
113
|
|
113
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
ABI-related special items
|
|
6,111
|
|
1,283
|
|
4,828
|
|
4,828
|
|
2.60
|
|
|
Cronos-related special items
|
|
200
|
|
(5)
|
|
205
|
|
205
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
649
|
|
153
|
|
496
|
|
496
|
|
0.27
|
|
|
Tax items
|
|
—
|
|
5
|
|
(5)
|
|
(5)
|
|
—
|
|
|
2021 Adjusted for Special Items
|
|
$
|
8,693
|
|
$
|
2,167
|
|
$
|
6,526
|
|
$
|
6,526
|
|
$
|
3.52
|
|
|
|
|
|
|
|
|
|
|
2020 Reported
|
|
$
|
4,349
|
|
$
|
1,817
|
|
$
|
2,532
|
|
$
|
2,543
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
Implementation and acquisition-related costs
|
|
415
|
|
101
|
|
314
|
|
314
|
|
0.17
|
|
|
Tobacco and health and certain other
litigation items
|
|
76
|
|
19
|
|
57
|
|
57
|
|
0.03
|
|
|
Impairment of JUUL equity securities
|
|
2,600
|
|
—
|
|
2,600
|
|
2,600
|
|
1.40
|
|
|
ABI-related special items
|
|
689
|
|
145
|
|
544
|
|
544
|
|
0.29
|
|
|
Cronos-related special items
|
|
144
|
|
1
|
|
143
|
|
143
|
|
0.08
|
|
|
COVID-19 special items
|
|
50
|
|
13
|
|
37
|
|
37
|
|
0.02
|
|
|
Tax items
|
|
—
|
|
(38)
|
|
38
|
|
38
|
|
0.02
|
|
|
2020 Adjusted for Special Items
|
|
$
|
8,323
|
|
$
|
2,058
|
|
$
|
6,265
|
|
$
|
6,276
|
|
$
|
3.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of adjusted net earnings (losses) attributable to Altria and adjusted diluted EPS attributable to Altria for the three months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of dollars, except per share data)
|
|
Earnings (Losses) before Income Taxes
|
Provision (Benefit) for Income Taxes
|
Net Earnings (Losses)
|
Net Earnings (Losses) Attributable
to Altria
|
Diluted EPS
|
|
2021 Reported
|
|
$
|
(3,302)
|
|
$
|
(582)
|
|
$
|
(2,720)
|
|
$
|
(2,722)
|
|
$
|
(1.48)
|
|
|
NPM Adjustment Items
|
|
(44)
|
|
(11)
|
|
(33)
|
|
(33)
|
|
(0.02)
|
|
|
Implementation, acquisition and disposition-related costs
|
|
61
|
|
9
|
|
52
|
|
52
|
|
0.03
|
|
|
Tobacco and health and certain other
litigation items
|
|
105
|
|
25
|
|
80
|
|
80
|
|
0.04
|
|
|
JUUL changes in fair value
|
|
(100)
|
|
—
|
|
(100)
|
|
(100)
|
|
(0.05)
|
|
|
ABI-related special items
|
|
6,200
|
|
1,301
|
|
4,899
|
|
4,899
|
|
2.65
|
|
|
Cronos-related special items
|
|
89
|
|
—
|
|
89
|
|
89
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Tax items
|
|
—
|
|
8
|
|
(8)
|
|
(8)
|
|
—
|
|
|
2021 Adjusted for Special Items
|
|
$
|
3,009
|
|
$
|
750
|
|
$
|
2,259
|
|
$
|
2,257
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
2020 Reported
|
|
$
|
(324)
|
|
$
|
632
|
|
$
|
(956)
|
|
$
|
(952)
|
|
$
|
(0.51)
|
|
|
|
|
|
|
|
|
|
|
Implementation and acquisition-related costs
|
|
12
|
|
4
|
|
8
|
|
8
|
|
—
|
|
|
Tobacco and health and certain other
litigation items
|
|
34
|
|
9
|
|
25
|
|
25
|
|
0.01
|
|
|
Impairment of JUUL equity securities
|
|
2,600
|
|
—
|
|
2,600
|
|
2,600
|
|
1.40
|
|
|
ABI-related special items
|
|
513
|
|
108
|
|
405
|
|
405
|
|
0.22
|
|
|
Cronos-related special items
|
|
143
|
|
1
|
|
142
|
|
142
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Tax items
|
|
—
|
|
13
|
|
(13)
|
|
(13)
|
|
(0.01)
|
|
|
2020 Adjusted for Special Items
|
|
$
|
2,978
|
|
$
|
767
|
|
$
|
2,211
|
|
$
|
2,215
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following special items affected the comparability of statements of earnings (losses) amounts for the nine and three months ended September 30, 2021 and 2020:
▪NPM Adjustment Items: For a discussion of NPM Adjustment Items and a breakdown of these items by segment, see Health Care Cost Recovery Litigation in Note 12. Contingencies to the condensed consolidated financial statements in Item 1 (“Note 12”) and NPM Adjustment Items in Note 9, respectively.
▪Implementation, Acquisition and Disposition-Related Costs: Pre-tax implementation, acquisition and disposition-related charges were $117 million and $61 million for the nine and three months ended September 30, 2021, respectively. Pre-tax implementation and acquisition-related costs were $415 million and $12 million for the nine and three months ended September 30, 2020, respectively. For a discussion of implementation, acquisition and disposition-related costs, see Note 9.
▪Tobacco and Health and Certain Other Litigation Items: For a discussion of tobacco and health and certain other litigation items and a breakdown of these costs by segment, see Note 12 and Tobacco and Health and Certain Other Litigation Items in Note 9, respectively.
▪Impairment of JUUL Equity Securities: For the nine and three months ended September 30, 2020, Altria recorded a non-cash, pre-tax impairment charge of $2,600 million, reported as impairment of JUUL equity securities in its condensed consolidated statements of earnings (losses). A full tax valuation allowance was recorded in 2020 attributable to the tax benefit associated with the impairment charge. For further discussion, see Note 4 and Note 11. Income Taxes to the condensed consolidated financial statements in Item 1 (“Note 11”).
▪JUUL Changes in Fair Value: For the three months ended September 30, 2021, Altria recorded a non-cash, pre-tax unrealized gain of $100 million, reported as (income) losses from equity investments in its condensed consolidated statements of earnings (losses) as a result of changes in the estimated fair value of Altria’s investment in JUUL. A corresponding adjustment was made to the JUUL tax valuation allowance. At September 30, 2021, the estimated fair value of Altria’s investment in JUUL was $1,705 million, unchanged from its December 31, 2020 estimated fair value. For further discussion, see Note 4.
▪ABI-Related Special Items: Altria’s losses from its equity investment in ABI for the nine and three months ended September 30, 2021 included net pre-tax charges of $6,111 million and $6,200 million, respectively, substantially all of which related to an impairment of Altria’s equity investment in ABI. For further discussion, see Note 4.
Altria’s losses from its equity investment in ABI for the nine months ended September 30, 2020 included net pre-tax charges of $689 million, consisting primarily of (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 charges associated with its Africa businesses.
Altria’s losses from its equity investment in ABI for the three months ended September 30, 2020 included net pre-tax charges of $513 million, consisting primarily of ABI’s completion of the sale of its Australia subsidiary and goodwill impairment charges associated with its Africa businesses.
These amounts include Altria’s respective share of amounts recorded by ABI and may also include additional adjustments related to (i) conversion from international financial reporting standards to GAAP and (ii) adjustments to Altria’s investment required under the equity method of accounting.
▪Cronos-Related Special Items: For the nine and three months ended September 30, 2021 and 2020, Altria recorded net pre-tax (income) expense consisting of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
(Gain) loss on Cronos-related financial instruments (1)
|
$
|
128
|
|
|
$
|
202
|
|
|
$
|
135
|
|
|
$
|
105
|
|
(Income) losses from equity investments (2)
|
72
|
|
|
(58)
|
|
|
(46)
|
|
|
38
|
|
Total Cronos-related special items - (income) expense
|
$
|
200
|
|
|
$
|
144
|
|
|
$
|
89
|
|
|
$
|
143
|
|
(1)Amounts are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction.
(2)Amounts include Altria’s share of special items recorded by Cronos and may also include adjustments to Altria’s investment required under the equity method of accounting.
For further discussion, see Note 4 and Note 5. Financial Instruments to the condensed consolidated financial statements in Item 1.
▪Loss on Early Extinguishment of Debt: During the first quarter of 2021, Altria recorded pre-tax losses of $649 million as a result of the completed debt tender offers and redemption of certain long-term senior unsecured notes. For further discussion, see Note 10. Debt to the condensed consolidated financial statements in Item 1 (“Note 10”).
▪COVID-19 Special Items: For the nine months ended September 30, 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. For further discussion and a breakdown of these costs by segment, see COVID-19 Special Items in Note 9.
▪Tax Items: Tax items for the nine months ended September 30, 2020 included net tax expense of $38 million, due primarily to tax expense of $17 million for a tax basis adjustment to Altria’s investment in ABI and net tax expense of $12 million for adjustments resulting from amended returns and audit adjustments related to prior years. Tax items for the three months ended September 30, 2020 included tax benefits of $13 million, due primarily to tax benefits of $17 million for a tax basis adjustment of Altria’s investment in ABI.
Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, decreased $91 million (0.5%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the wine and oral tobacco products segments and the financial services business.
Cost of sales decreased $561 million (9.5.%), due primarily to the inventory-related charges in the wine segment in 2020 (as discussed in Note 9), lower shipment volume in the smokeable products segment, NPM Adjustment Items in 2021 and COVID-19 special items in 2020, partially offset by higher per unit settlement charges, higher manufacturing costs and higher shipment volume in the wine segment.
Excise taxes on products decreased $330 million (8.1%), due primarily to lower shipment volume in the smokeable products segment.
Marketing, administration and research costs increased $265 million (16.7%), due primarily to higher general corporate expenses, higher spending in the oral tobacco products (including higher acquisition-related costs - as discussed in Note 9) and
smokeable products segments, the charge associated with the Ste. Michelle Transaction and higher spending associated with the retail expansion of IQOS and Marlboro HeatSticks.
Operating income increased $535 million (6.5%), due primarily to higher operating results in the wine and smokeable products segments, partially offset by higher general corporate expenses and lower operating results in the oral tobacco products segment.
Net periodic benefit income, excluding service cost, increased by $94 million (100.0%+), due primarily to lower interest cost resulting from a decrease in discount rates and amendments to its salaried retiree healthcare plans during the second quarter of 2021. For further discussion, see Note 6. Benefit Plans to the condensed consolidated financial statements in Item 1 (“Note 6”).
Income (losses) from equity investments, which decreased $5,483 million (100.0%+), were negatively impacted by unfavorable special items from Altria’s equity investments in ABI (primarily due to the impairment of Altria’s equity investment in ABI in 2021) and Cronos (as shown above).
Altria’s income tax rate increased 3.1 percentage points to 44.9%. For further discussion, see Note 11.
Reported net earnings (losses) attributable to Altria of $851 million decreased $1,692 million (66.5%), due primarily to higher losses from equity investments and the loss on early extinguishment of debt, partially offset by the 2020 impairment of JUUL equity securities, higher operating income, lower loss on Cronos-related financial instruments and favorable net periodic benefit income, excluding service cost. Reported basic and diluted EPS attributable to Altria of $0.46, decreased by 66.4% and 66.2%, respectively, due to lower reported net earnings (losses) attributable to Altria, partially offset by fewer shares outstanding.
Adjusted net earnings attributable to Altria of $6,526 million increased $250 million (4.0%), due primarily to higher smokeable products segment OCI, favorable net periodic benefit income, excluding service cost, and higher income from Altria’s investment in ABI, partially offset by a higher income tax rate. Adjusted diluted EPS attributable to Altria of $3.52 increased by 4.5%, due to higher adjusted net earnings attributable to Altria and fewer shares outstanding.
Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, decreased $337 million (4.7%), due primarily to lower net revenues in the smokeable products segment.
Cost of sales decreased $103 million (5.3%), due primarily to lower shipment volume in the smokeable products segment and NPM Adjustment Items in 2021, partially offset by higher per unit settlement charges and higher manufacturing costs.
Excise taxes on products decreased $190 million (13.1%), due primarily to lower shipment volume in the smokeable products segment.
Marketing, administration and research costs increased $165 million (29.6%), due primarily to higher general corporate expenses, the charge associated with the Ste. Michelle Transaction, higher spending associated with the retail expansion of IQOS and Marlboro HeatSticks and higher spending in the oral tobacco products segment.
Operating income decreased $209 million (6.6%), due primarily to lower operating results in all reportable segments and higher general corporate expenses.
Interest and other debt expense, net decreased $44 million (14.2%), due primarily to lower interest costs in 2021 as a result of debt refinancing activities and interest income associated with NPM Adjustment Items in 2021.
Net periodic benefit income, excluding service cost, increased by $60 million (100.0%+), due primarily to lower interest cost resulting from a decrease in discount rates and amendments to its salaried retiree healthcare plans during the second quarter of 2021. For further discussion, see Note 6.
Income (losses) from equity investments, which decreased $5,443 million (100.0%+), were negatively impacted by unfavorable special items from Altria’s equity investment in ABI (primarily due to the impairment of Altria’s equity investment in ABI in 2021), partially offset by an increase in the estimated fair value of Altria’s investment in JUUL and Cronos’s special items (as shown above).
Altria’s income tax rate increased 212.7 percentage points to 17.6%. For further discussion, see Note 11.
Reported net earnings (losses) attributable to Altria of $(2,722) million decreased $1,770 million (100.0%+), due primarily to higher losses from equity investments and lower operating income, partially offset by the 2020 impairment of JUUL equity securities, favorable net periodic benefit income, excluding service cost, and lower interest and other debt expense, net. Reported basic and diluted EPS attributable to Altria of $(1.48), each decreased by 100.0%+, due to lower reported net earnings (losses) attributable to Altria, partially offset by fewer shares outstanding.
Adjusted net earnings attributable to Altria of $2,257 million increased $42 million (1.9%), due primarily to higher income from Altria’s equity investment in ABI, favorable net periodic income, excluding service cost, a lower income tax rate and
lower interest and other debt expense, net, partially offset by lower OCI. Adjusted diluted EPS attributable to Altria of $1.22 increased by 2.5%, 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 12, in Part I, Item 1A. Risk Factors of our 2020 Form 10-K, in Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the period ended June 30, 2021 (“Second Quarter 2021 Form 10-Q”) and in Part II, Item 1A. Risk Factors of this Form 10-Q, include:
▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”), and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the United States Food and Drug Administration (the “FDA”);
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of tobacco products with 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;
▪reductions in cigarette and MST consumption levels due to growth of innovative tobacco products;
▪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 are continuing to impact the tobacco industry. Altria’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. Adult smokers continue to transition from cigarettes to exclusive use of smoke-free tobacco product alternatives, which aligns with Altria’s Vision.
Until the second half of 2019, the e-vapor category 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. Over the past two years, the legislative and regulatory activities discussed below negatively impacted growth in the e-vapor category. While these activities continue to impact the e-vapor category, the category has recently been experiencing a moderate rate of growth and has become increasingly competitive.
Oral nicotine pouch retail share of the total oral tobacco category has grown significantly over the past year from 7.7% year to date as of September 30, 2020 to 14.5% year to date as of September 30, 2021. The oral nicotine pouch category is also becoming increasingly competitive.
We are monitoring the introduction of unregulated synthetic nicotine products, which may lead to further competition for regulated tobacco products, including oral nicotine pouches and e-vapor products, and may result in underage use of these unregulated products.
Altria and its tobacco subsidiaries believe the innovative tobacco products categories (in particular, e-vapor) will continue to be dynamic due to adult tobacco consumer exploration of a variety of tobacco product options, adult consumer perceptions of the relative risks of smoke-free products compared to cigarettes, FDA determinations on product applications and legislative actions.
In the nine months ended September 30, 2021, we estimate that, when adjusted for trade inventory movements, calendar differences and other factors, domestic cigarette industry volume declined by 5%. Altria expects 2021 cigarette industry volume trends to continue to be most influenced by (i) changes to adult smoker stay-at-home practices, disposable income, purchasing patterns and adoption of smoke-free products, (ii) the economy (including unemployment rates, the impact of increased inflation and gasoline prices), (iii) fiscal stimulus, (iv) cross-category movement, (v) the timing and extent of COVID-19 vaccine administration and the impact of COVID-19 variants, (vi) adult smoker purchasing behavior of those who receive the vaccine and (vii) regulatory and legislative (including excise tax) developments.
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 economic impact 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 increasingly choose these products if economic conditions do not continue to improve. 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 John Middleton Co. (“Middleton”), the Department of Justice, on behalf of the FDA, informed Middleton that the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to bring another lawsuit.
▪Final Tobacco Marketing Rule: As required by the FSPTCA, in March 2010 the FDA promulgated a wide range of advertising and promotion restrictions for cigarettes and smokeless tobacco (1) products (the “Final Tobacco Marketing Rule”). The May 2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives, but do not include any component or part that is not made or derived from tobacco.
The Final Tobacco Marketing Rule, as amended, among other things:
▪restricts the use of 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;
(1)“Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
▪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, including e-vapor and oral nicotine pouch products containing tobacco-derived nicotine.
▪Rulemaking and Guidance: From time to time, the FDA issues proposed regulations and 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 Advanced Notice of Proposed Rulemaking (“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 pre-market tobacco product application (“PMTA”), Substantial Equivalence (“SE”) or SE Exemption pathways. Subsequent FDA rules also provide a Supplemental PMTA pathway designed to increase the efficiency of submission and review for modified versions of previously authorized products.
The FDA pre-market authorization enforcement policy varies based on product type and date of availability in the market, specifically:
▪all tobacco products on the market as of February 15, 2007, and not subsequently modified, are Grandfathered Products and exempt from the pre-market authorization requirement;
▪cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health; and
▪tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Grandfathered Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020.
Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, could trigger the FDA’s pre-market or SE review processes. Through these processes, a
manufacturer could receive (i) a “not substantially equivalent” determination, (ii) a denial of a PMTA or (iii) a marketing order withdrawal by the FDA on one or more products, which would require the removal of the product or products from the market. Such actions 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.
Provisional Products: Most cigarette and smokeless tobacco products currently marketed by Philip Morris USA Inc. (“PM USA”) and U.S. Smokeless Tobacco Company LLC (“USSTC”) are “Provisional Products”. Altria’s subsidiaries timely submitted SE reports for these Provisional Products. PM USA and USSTC have received SE determinations on certain Provisional Products. Those products that were found by the FDA to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent.
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 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. Altria’s cigarette and smokeless tobacco subsidiaries may not be able to obtain a marketing order for non-provisional products because the FDA may determine that any such product does not meet the statutory requirements for approval.
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. These products can remain on the market during FDA review through court-allowed, case-by-case discretion, so long as the report or application was timely filed with the FDA. Due to the large number of applications received by September 9, 2020, the FDA did not complete its review of all submitted applications by September 9, 2021; although it has issued various marketing denial orders on over 90% of the applications and issued marketing granted orders on a few applications for tobacco flavor e-vapor products. For those products still under FDA review, it is uncertain when and for how long the FDA may permit continued marketing and sale of those products pursuant to its case-by-case discretion. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing and selling the product.
Helix Innovations LLC (“Helix”) submitted PMTAs for on! oral nicotine pouches in May 2020. JUUL submitted PMTAs to the FDA for its e-vapor device and the related tobacco and menthol flavors in July 2020. As of October 25, 2021, the FDA has not issued marketing order decisions for any on! or JUUL products. In addition, as of October 25, 2021, Middleton has received market orders or exemptions that cover over 98% of its cigar product volume and has pending timely filed SE reports for its remaining cigar product volume.
In December 2013, Altria’s subsidiaries entered into a series of agreements with Philip Morris International Inc. (“PMI”), including an agreement that grants Altria an exclusive right to commercialize certain of PMI’s heated tobacco products in the United States, subject to FDA 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 (“MRTP”) with a reduced exposure claim. The IQOS electronic device heats but does not burn tobacco. In December 2020, the FDA authorized the PMTA for IQOS 3, an updated version of the IQOS electronic device. The MRTP authorization for the original IQOS electronic device currently does not apply to the IQOS 3 device. PMI submitted an MRTP application for the IQOS 3 electronic device in March 2021, which is currently under review by the FDA.
In September 2021, in connection with a patent dispute, the United States International Trade Commission (“ITC”) issued a cease and desist order banning (i) the importation of the IQOS electronic device, HeatSticks and infringing components into the
United States and (ii) the sale, marketing and distribution of such imported products in the United States. As a result, PM USA announced plans to begin removing the product from the marketplace. For a further discussion of the ITC decision, see Note 12.
In October 2021, the FDA authorized the marketing and sale of four of USSTC’s Verve oral nicotine products, including Green Mint and Blue Mint varieties, representing the first flavored product authorizations issued by the FDA for newly deemed products. These products are not currently marketed or sold.
Post-Market Surveillance: Manufacturers that receive product authorizations through the PMTA process must submit to the FDA post-market records and reports, as detailed in market orders. This includes notification of all marketing activities. The IQOS Tobacco Heating System is subject to this post-market surveillance requirement. The FDA may amend requirements of a market order or withdraw the market order based on this information if, among other reasons, it determines that the continued marketing of the products is no longer appropriate for the protection of the public health.
Effect of Adverse FDA Determinations: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. Failure of manufacturers to submit applications by the 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 (which would require the removal of the product or products from the market) 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. Also, an adverse FDA determination on one or more innovative tobacco products could impede our ability to achieve our Vision.
▪FDA Regulatory Actions
▪Graphic Warnings: In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting certain negative health consequences of smoking on cigarette packaging and advertising. As a result of a March 2021 court order related to the COVID-19 pandemic and subsequent court orders resulting from a lawsuit brought by R.J. Reynolds Tobacco Company and others against the FDA, the final rule will be effective October 11, 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. To date, the FDA has not taken any action to exempt HeatSticks from the graphic health warnings requirements.
▪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.
Additionally, in March 2019, the FDA issued draft guidance further proposing restrictions to address underage e-vapor use. This guidance, which the FDA finalized in January 2020 and then revised in April 2020, states that the FDA intends to prioritize enforcement action against certain product categories, including cartridge-based, flavored e-vapor products and products targeted to minors.
▪Flavored Electronic Nicotine Delivery System (“ENDS”) Products: Some e-vapor product manufacturers filed PMTAs for flavored tobacco products. As of October 25, 2021, many of these manufacturers received marketing denial orders for failure to provide sufficiently strong product-specific scientific evidence to demonstrate that the benefit of their products to adult smokers overcomes the risk that their products pose to youth. FDA has communicated in these marketing denial orders that vapor products with non-tobacco flavors present unique questions relevant to the FDA’s “Appropriate for the Protection of Public Health” standard and that successful applications will require strong, product-specific evidence. A number of manufacturers are appealing the marketing denial orders for their products. If the FDA does not ultimately allow for the reintroduction of flavors other than tobacco, it could adversely affect the value of Altria’s investment in JUUL.
Some ENDS manufacturers, including some that have received marketing denial orders, have indicated their intention to market ENDS products containing synthetically-derived nicotine, which is not currently FDA-regulated. If these products are sold in higher volumes, and marketed outside of FDA oversight, it could adversely affect the value of
Altria’s investment in JUUL, have a material adverse effect on Altria’s consolidated financial position or earnings and impede our ability to achieve our Vision.
▪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, in April 2021, the FDA issued a response to a 2013 citizen petition requesting that the FDA prohibit menthol as a characterizing flavor in cigarettes. In the response, the FDA announced it intends to develop and propose two product standards within one year that would (i) ban menthol as a characterizing flavor in cigarettes and (ii) ban all characterizing flavors (including menthol) in cigars. While the FDA has yet to define “characterizing flavors” with respect to cigars, most of Middleton’s cigar products contain added flavors and may be subject to any action by the FDA to ban flavors in cigars.
If any such product standards 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 could 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 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. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies.
Congress is currently considering legislation that would significantly increase the federal excise tax for all tobacco products and create a new tax for e-vapor products and other products containing nicotine that are not currently subject to a tobacco federal excise tax. Additionally, e-vapor products and oral nicotine products not currently taxed would be subject to a federal excise tax that would vary based on the nicotine content.
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 October 25, 2021, the weighted-average state cigarette excise tax increased from $0.36 to $1.89 per pack. As of October 25, 2021, one state, Maryland, has enacted new legislation increasing cigarette excise taxes in 2021.
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 October 25, 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 October 25, 2021, 30 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, 11 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 product sales of Altria’s tobacco subsidiaries and JUUL 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. Lower sales volume and reported share performance of Altria’s tobacco subsidiaries’ products could have a material adverse effect on Altria’s consolidated financial position or earnings. In addition, excise taxes on e-vapor and oral nicotine products may negatively impact adult smokers’ transition to these products, which could impede our ability to achieve our Vision.
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 October 25, 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 12, 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. Increases in inflation can increase our financial liability under the State Settlement Agreements. The State Settlement Agreements’ inflation calculations require us to apply the higher of 3% or the United States Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (“CPI-U”) percentage rate as published in January of each year. For 2021, based on the latest CPI-U data, the inflation calculation may be above 3%, but Altria does not believe the increase would result in a material financial impact.
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 12. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). 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 (i) prohibits the sale of all tobacco products or certain tobacco categories, such as e-vapor, (ii) prohibits the sale of tobacco products with characterizing flavors, such as menthol cigarettes and flavored e-vapor products, (iii) requires the disclosure of health information separate from or in addition to federally mandated health warnings and (iv) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products. The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As of October 25, 2021, three states are considering legislation to ban flavors in one or more tobacco products, and six states (California, Massachusetts, New Jersey, Utah, New York and Illinois) and the District of Columbia have passed such legislation. Some of these states, such as New York, Utah and Illinois, 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 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.
Massachusetts passed legislation capping the amount of nicotine in e-vapor products. Similar legislation is pending in one other state.
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. Such action also could negatively impact adult smokers’ transition to these products, which could adversely affect our ability to achieve our Vision.
▪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. As of October 25, 2021, 39 states, the District of Columbia and Puerto Rico have enacted laws increasing the legal age to purchase tobacco products to 21. Although an increase in the minimum age to purchase tobacco products may have a negative impact on sales volume of our tobacco businesses, as discussed above under Underage Access and Use of Certain Tobacco Products, Altria supported raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, reflecting its longstanding commitment to combat underage tobacco use.
▪Health Effects of Tobacco Products, Including E-vapor Products: 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, including e-vapor 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, during the COVID-19 pandemic, state and local governments required additional health and safety requirements of all businesses, including tobacco manufacturing and other facilities. State and local governments also mandated the temporary closure of some businesses. While many restrictions have eased, it is possible that tobacco manufacturing and other facilities and the facilities of our suppliers, our suppliers’ suppliers and our trade partners could be subject to additional government-mandated temporary closures and restrictions. In September 2021, the President of the United States issued an Executive Order charging OSHA with developing an emergency temporary standard requiring almost all employers to mandate certain COVID-19 vaccination and testing requirements in the workplace. This mandate could have an adverse impact on worker availability at Altria’s subsidiaries’ or investees’ manufacturing, salesforce and administrative operations, or in their distribution and supply chains.
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 U.S. Federal Trade Commission (the “FTC”) issued a Civil Investigative Demand (“CID”) to Altria while conducting its antitrust review of Altria’s investment in JUUL seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee (see Note 12 for a description of the FTC’s administrative complaint against Altria and JUUL); (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, Ingredients and Component Parts
Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, production control programs, economic trade sanctions, import duties and tariffs, international trade disruptions, inflation, geopolitical instability, climate and environmental changes and disruptions due to man-made or natural disasters may increase the cost or reduce the supply or quality of tobacco or other raw materials or ingredients or component parts used to manufacture our companies’ and our investees’ products. Any significant change in the price, availability or quality of tobacco, other raw materials, ingredients or component parts used to manufacture our products and those of our investees could restrict our subsidiaries’ and investees’ ability to continue manufacturing and marketing existing products or impact adult consumer product acceptability and adversely affect our subsidiaries’ and investees’ profitability and businesses.
With respect to tobacco, as with other agricultural commodities, crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Additionally, the price and availability of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand. Economic conditions, including the economic effects of the COVID-19 pandemic, are unpredictable, which, among other factors, may result in changes in the patterns of demand for agricultural products and the cost of tobacco production which could impact tobacco leaf prices and tobacco supply. In addition, as consumer demand increases for smoke-free products and decreases for combustible products, the volume of
tobacco leaf required for production may decrease. The reduced demand for tobacco leaf may result in the reduced supply and availability of domestic tobacco as growers divert resources to other crops.
Tobacco production in certain countries also is subject to a variety of controls, including government-mandated prices and production control programs. 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 may temporarily shut down facilities or use different production schedules with lower productivity in order to address exposure to the virus or as a result of a government mandate. In addition, current labor market dynamics indicate labor shortages, with employers in a number of industries having difficulty employing workers. These shortages have led to certain increases in raw material, ingredient and component part prices and may lead to disruptions in the supply chain; however, to date, the impact has been immaterial. The effects of the COVID-19 pandemic and labor market dynamics outlined above may continue after the pandemic wanes as a result of the developing commercial and economic environment, including increased government spending. This environment has led to an increased rate of inflation that, to date, has not had a material impact on our businesses, revenues or profitability.
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 Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(in millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Net revenues
|
$
|
17,275
|
|
|
$
|
17,522
|
|
|
(1.4)
|
%
|
|
$
|
5,975
|
|
|
$
|
6,313
|
|
|
(5.4)
|
%
|
Excise taxes
|
(3,620)
|
|
|
(3,950)
|
|
|
|
|
(1,218)
|
|
|
(1,407)
|
|
|
|
Revenues net of excise taxes
|
$
|
13,655
|
|
|
$
|
13,572
|
|
|
|
|
$
|
4,757
|
|
|
$
|
4,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported OCI
|
$
|
7,901
|
|
|
$
|
7,609
|
|
|
3.8
|
%
|
|
$
|
2,753
|
|
|
$
|
2,789
|
|
|
(1.3)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
NPM Adjustment Items
|
(53)
|
|
|
—
|
|
|
|
|
(21)
|
|
|
—
|
|
|
|
Tobacco and health and certain other litigation items
|
72
|
|
|
73
|
|
|
|
|
29
|
|
|
34
|
|
|
|
COVID-19 special items
|
—
|
|
|
41
|
|
|
|
|
—
|
|
|
—
|
|
|
|
Adjusted OCI
|
$
|
7,920
|
|
|
$
|
7,723
|
|
|
2.6
|
%
|
|
$
|
2,761
|
|
|
$
|
2,823
|
|
|
(2.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported OCI margins (1)
|
57.9
|
%
|
|
56.1
|
%
|
|
1.8 pp
|
|
57.9
|
%
|
|
56.8
|
%
|
|
1.1 pp
|
Adjusted OCI margins (1)
|
58.0
|
%
|
|
56.9
|
%
|
|
1.1 pp
|
|
58.0
|
%
|
|
57.5
|
%
|
|
0.5 pp
|
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, decreased $247 million (1.4%), due primarily to lower shipment volume ($1,539 million), partially offset by higher pricing ($1,284 million).
Reported OCI increased $292 million (3.8%), due primarily to higher pricing ($1,273 million), NPM Adjustment Items in 2021 ($53 million) and COVID-19 special items in 2020 ($41 million), partially offset by lower shipment volume ($923 million), higher per unit settlement charges and higher marketing, administration and research costs ($27 million).
Adjusted OCI increased $197 million (2.6%), due primarily to higher pricing, partially offset by lower shipment volume, higher per unit settlement charges and higher marketing, administration and research costs.
Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, decreased $338 million (5.4%), due primarily to lower shipment volume ($925 million), partially offset by higher pricing ($570 million), which includes lower promotional investments.
Reported OCI decreased $36 million (1.3%), due primarily to lower shipment volume ($546 million) and higher per unit settlement charges, partially offset by higher pricing ($567 million), which includes lower promotional investments and NPM Adjustment Items in 2021 ($21 million).
Adjusted OCI decreased $62 million (2.2%), due primarily to lower shipment volume and higher per unit settlement charges, partially offset by higher pricing, which includes lower promotional investments.
Shipment Volume and Retail Share Results
The following table summarizes the smokeable products segment shipment volume performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipment Volume
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(sticks in millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Cigarettes:
|
|
|
|
|
|
|
|
|
|
|
|
Marlboro
|
63,122
|
|
|
67,890
|
|
|
(7.0)
|
%
|
|
21,368
|
|
|
24,258
|
|
|
(11.9)
|
%
|
Other premium
|
3,180
|
|
|
3,496
|
|
|
(9.0)
|
%
|
|
1,042
|
|
|
1,231
|
|
|
(15.4)
|
%
|
Discount
|
5,068
|
|
|
6,205
|
|
|
(18.3)
|
%
|
|
1,640
|
|
|
2,130
|
|
|
(23.0)
|
%
|
Total cigarettes
|
71,370
|
|
|
77,591
|
|
|
(8.0)
|
%
|
|
24,050
|
|
|
27,619
|
|
|
(12.9)
|
%
|
Cigars:
|
|
|
|
|
|
|
|
|
|
|
|
Black & Mild
|
1,356
|
|
|
1,317
|
|
|
3.0
|
%
|
|
424
|
|
|
468
|
|
|
(9.4)
|
%
|
Other
|
5
|
|
|
8
|
|
|
(37.5)
|
%
|
|
1
|
|
|
3
|
|
|
(66.7)
|
%
|
Total cigars
|
1,361
|
|
|
1,325
|
|
|
2.7
|
%
|
|
425
|
|
|
471
|
|
|
(9.8)
|
%
|
Total smokeable products
|
72,731
|
|
|
78,916
|
|
|
(7.8)
|
%
|
|
24,475
|
|
|
28,090
|
|
|
(12.9)
|
%
|
Note: Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament, Benson & Hedges and Nat’s; and Discount brands, which include L&M, Basic and Chesterfield. Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.
The following table summarizes cigarettes retail share performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Share
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
|
2021
|
|
2020
|
|
Percentage Point Change
|
|
2021
|
|
2020
|
|
Percentage Point Change
|
Cigarettes:
|
|
|
|
|
|
|
|
|
|
|
|
Marlboro
|
43.2
|
%
|
|
42.8
|
%
|
|
0.4
|
|
|
43.2
|
%
|
|
43.2
|
%
|
|
—
|
|
Other premium
|
2.3
|
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
2.3
|
|
|
—
|
|
Discount
|
3.5
|
|
|
4.0
|
|
|
(0.5)
|
|
|
3.4
|
|
|
3.8
|
|
|
(0.4)
|
|
Total cigarettes
|
49.0
|
%
|
|
49.1
|
%
|
|
(0.1)
|
|
|
48.9
|
%
|
|
49.3
|
%
|
|
(0.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 8.0%, driven primarily by the industry’s rate of decline, trade inventory movements, calendar differences and other factors. When adjusted for trade inventory movements, calendar differences and other factors, the smokeable products segment’s reported domestic cigarettes shipment volume decreased by an estimated 5%. When adjusted for trade inventory movements, calendar differences and other factors, total estimated domestic cigarette industry volume decreased by an estimated 5%.
Shipments of premium cigarettes accounted for 92.9% and 92.0% of the smokeable products segment’s reported domestic cigarettes shipment volume for the nine months ended September 30, 2021 and 2020, respectively.
Total cigarettes industry discount category retail share increased 0.3 share points to 25.2%.
Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020
The smokeable products segment’s reported domestic cigarettes shipment volume decreased 12.9%, driven primarily by the industry’s rate of decline and trade inventory movements. When adjusted for trade inventory movements, the smokeable products segment’s reported domestic cigarettes shipment volume decreased by an estimated 7%. When adjusted for trade inventory movements and other factors, total estimated domestic cigarette industry volume decreased by an estimated 6.5%.
Shipments of premium cigarettes accounted for 93.2% and 92.3% of the smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended September 30, 2021 and 2020, respectively.
Total cigarettes industry discount category retail share increased 0.6 share points sequentially to 25.3%.
Pricing Actions
PM USA and Middleton executed the following pricing and promotional allowance actions during 2021 and 2020:
▪Effective August 15, 2021, PM USA increased the list price of Marlboro, L&M and Chesterfield by $0.14 per pack. In addition, PM USA increased the list price of all of its other cigarette brands by $0.17 per pack.
▪Effective January 24, 2021, PM USA increased the list price on all of its cigarette brands by $0.14 per pack.
▪Effective January 10, 2021, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.07 per five-pack.
▪Effective November 1, 2020, 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.
Oral Tobacco Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the oral tobacco products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(in millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Net revenues
|
$
|
1,945
|
|
|
$
|
1,901
|
|
|
2.3
|
%
|
|
$
|
626
|
|
|
$
|
640
|
|
|
(2.2)
|
%
|
Excise taxes
|
(98)
|
|
|
(98)
|
|
|
|
|
(32)
|
|
|
(33)
|
|
|
|
Revenues net of excise taxes
|
$
|
1,847
|
|
|
$
|
1,803
|
|
|
|
|
$
|
594
|
|
|
$
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported OCI
|
$
|
1,269
|
|
|
$
|
1,297
|
|
|
(2.2)
|
%
|
|
$
|
405
|
|
|
$
|
436
|
|
|
(7.1)
|
%
|
Acquisition-related costs
|
37
|
|
|
6
|
|
|
|
|
—
|
|
|
4
|
|
|
|
COVID-19 special items
|
—
|
|
|
9
|
|
|
|
|
—
|
|
|
—
|
|
|
|
Adjusted OCI
|
$
|
1,306
|
|
|
$
|
1,312
|
|
|
(0.5)
|
%
|
|
$
|
405
|
|
|
$
|
440
|
|
|
(8.0)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported OCI margins (1)
|
68.7
|
%
|
|
71.9
|
%
|
|
(3.2) pp
|
|
68.2
|
%
|
|
71.8
|
%
|
|
(3.6) pp
|
Adjusted OCI margins (1)
|
70.7
|
%
|
|
72.8
|
%
|
|
(2.1) pp
|
|
68.2
|
%
|
|
72.5
|
%
|
|
(4.3) pp
|
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, increased $44 million (2.3%), due primarily to higher pricing ($72 million), which includes higher promotional investments in on!, partially offset by lower shipment volume ($29 million), including unfavorable shipment volume mix between the segment’s MST and oral nicotine pouch products.
Reported OCI decreased $28 million (2.2%) due primarily to higher costs ($51 million), which includes higher acquisition-related costs and COVID-19 special items in 2020, and lower shipment volume ($45 million), including unfavorable shipment volume mix), partially offset by higher pricing ($72 million), which includes higher promotional investments in on!.
Adjusted OCI was essentially unchanged as lower volume, including unfavorable shipment volume mix, and higher costs were mostly offset by higher pricing, which includes higher promotional investments in on!. Adjusted OCI margins declined by 2.1 percentage point to 70.7%, due to changes in shipment volume mix between the segment’s MST and oral nicotine pouch products.
Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, decreased $14 million (2.2%), due primarily to lower shipment volume ($33 million), including unfavorable shipment volume mix, partially offset by higher pricing ($20 million), which includes higher promotional investments in on!.
Reported OCI decreased $31 million (7.1%), due primarily to lower shipment volume ($35 million), including unfavorable shipment volume mix and higher costs ($13 million), including lower acquisition-related costs, partially offset by higher pricing, which includes higher promotional investments in on!.
Adjusted OCI decreased $35 million (8.0%), due primarily to lower shipment volume, including unfavorable shipment volume mix, and higher costs, partially offset by higher pricing, which includes higher promotional investments in on!. Adjusted OCI margins declined by 4.3 percentage points to 68.2%, due to changes in shipment volume mix between the segment’s MST and oral nicotine pouch products.
Shipment Volume and Retail Share Results
The following table summarizes oral tobacco products segment shipment volume performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipment Volume
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(cans and packs in millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Copenhagen
|
378.4
|
|
|
395.0
|
|
|
(4.2)
|
%
|
|
121.4
|
|
|
131.1
|
|
|
(7.4)
|
%
|
Skoal
|
148.2
|
|
|
157.2
|
|
|
(5.7)
|
%
|
|
47.7
|
|
|
52.3
|
|
|
(8.8)
|
%
|
Other (includes Red Seal and on!)
|
87.7
|
|
|
65.0
|
|
|
34.9
|
%
|
|
29.7
|
|
|
23.3
|
|
|
27.5
|
%
|
Total oral tobacco products
|
614.3
|
|
|
617.2
|
|
|
(0.5)
|
%
|
|
198.8
|
|
|
206.7
|
|
|
(3.8)
|
%
|
Note: Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is currently not material to the oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.
The following table summarizes oral tobacco products segment retail share performance (excluding international volume):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Share
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
|
2021
|
|
2020
|
|
Percentage Point Change
|
|
2021
|
|
2020
|
|
Percentage Point Change
|
Copenhagen
|
29.8
|
%
|
|
32.1
|
%
|
|
(2.3)
|
|
|
29.2
|
%
|
|
31.8
|
%
|
|
(2.6)
|
|
Skoal
|
12.7
|
|
|
14.1
|
|
|
(1.4)
|
|
|
12.5
|
|
|
13.7
|
|
|
(1.2)
|
|
Other (includes Red Seal and on!)
|
5.4
|
|
|
3.9
|
|
|
1.5
|
|
|
6.1
|
|
|
4.5
|
|
|
1.6
|
|
Total oral tobacco products
|
47.9
|
%
|
|
50.1
|
%
|
|
(2.2)
|
|
|
47.8
|
%
|
|
50.0
|
%
|
|
(2.2)
|
|
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.
Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020
The oral tobacco products segment’s reported domestic shipment volume decreased 0.5%, driven primarily by retail share losses (primarily due to the growth of oral nicotine pouches) and calendar differences, partially offset by industry growth and trade inventory movements. When adjusted for trade inventory movements and calendar differences, the oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 0.5%.
Total oral tobacco products category industry volume increased by an estimated 3% over the six months ended September 30, 2021, driven by growth in oral nicotine pouches.
Retail share losses in the oral tobacco products segment, including Copenhagen, were due to the growth of oral nicotine pouches.
Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020
The oral tobacco products segment’s reported domestic shipment volume decreased 3.8%, driven primarily by retail share losses (primarily due to the growth of oral nicotine pouches) and trade inventory movements, partially offset by industry growth, calendar differences and other factors. When adjusted for trade inventory movements and calendar differences, the oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 2.5%.
The oral tobacco products segment’s retail share was 47.8% and Copenhagen continued to be the leading oral tobacco brand with retail share of 29.2%. Share losses in the oral tobacco products segment, including Copenhagen, were due to the growth of oral nicotine pouches.
Total U.S. oral tobacco category share for on! was 3.0% in the third quarter, an increase of 1.0 percentage point sequentially and an increase of 1.9 percentage points from the end of 2020.
As of September 30, 2021, Helix had broadened the U.S. distribution of on! to over 110,000 stores.
Pricing Actions
USSTC executed the following pricing actions during 2021 and 2020:
▪Effective October 26, 2021, USSTC increased the list price on its Copenhagen and Skoal brands by $0.08 per can. USSTC also increased the list price on its Husky brand by $0.12 per can. In addition, USSTC decreased the price on its Red Seal brand by $0.17 per can.
▪Effective June 29, 2021, USSTC increased the list price on its Skoal Blend products by $0.46 per can. USSTC also increased the list price on its Red Seal and Copenhagen brands and the balance of its Skoal products by $0.05 per can. In addition, USSTC decreased the price on its Husky brand by $1.65 per can.
▪Effective March 2, 2021, USSTC increased the list price on its Skoal Blend products by $0.16 per can. USSTC also increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by $0.08 per can.
▪Effective October 20, 2020, USSTC increased the list price on its Skoal Blend products by $0.15 per can. USSTC also increased the list price on its 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.
Wine Segment
Operating Results
Financial Results and Shipment Volume
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the wine segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results
|
|
For the Nine Months Ended September 30,
|
|
For the Three Months Ended September 30,
|
(in millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Net revenues
|
$
|
494
|
|
|
$
|
434
|
|
|
13.8
|
%
|
|
$
|
177
|
|
|
$
|
157
|
|
|
12.7
|
%
|
Excise taxes
|
(14)
|
|
|
(14)
|
|
|
|
|
(5)
|
|
|
(5)
|
|
|
|
Revenues net of excise taxes
|
$
|
480
|
|
|
$
|
420
|
|
|
|
|
$
|
172
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported OCI (Loss)
|
$
|
21
|
|
|
$
|
(347)
|
|
|
100.0%+
|
|
$
|
(24)
|
|
|
$
|
19
|
|
|
(100.0)%+
|
Implementation and disposition-related costs
|
52
|
|
|
395
|
|
|
|
|
51
|
|
|
1
|
|
|
|
Adjusted OCI
|
$
|
73
|
|
|
$
|
48
|
|
|
52.1
|
%
|
|
$
|
27
|
|
|
$
|
20
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported OCI margins (1)
|
4.4
|
%
|
|
(82.6)
|
%
|
|
87.0 pp
|
|
(14.0)
|
%
|
|
12.5
|
%
|
|
(26.5) pp
|
Adjusted OCI margins (1)
|
15.2
|
%
|
|
11.4
|
%
|
|
3.8 pp
|
|
15.7
|
%
|
|
13.2
|
%
|
|
2.5 pp
|
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, increased $60 million (13.8%), due to higher shipment volume, improved mix and higher pricing.
Reported OCI increased $368 million (100%+), due primarily to 2020 inventory-related charges discussed in Note 9 (included in implementation costs and charged to cost of sales), higher shipment volume, improved mix and higher pricing, partially offset by disposition-related charges recorded in the third quarter of 2021 related to the Ste. Michelle Transaction.
Adjusted OCI increased $25 million (52.1%), due primarily to higher shipment volume, improved mix and higher pricing.
For the nine months ended September 30, 2021, Ste. Michelle’s reported wine shipment volume increased 5.1% to 5,446 thousand cases.
Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020
Net revenues, which include excise taxes billed to customers, increased $20 million (12.7%), due primarily to improved mix and higher pricing.
Reported OCI decreased $43 million (100.0%+), due primarily to disposition-related charges related to the Ste. Michelle Transaction, partially offset by higher pricing and improved mix.
Adjusted OCI increased $7 million (35.0%), due primarily to higher pricing and improved mix.
For the three months ended September 30, 2021, Ste. Michelle’s reported wine shipment volume decreased 2.6% to 1,836 thousand cases.
Financial Review
Cash Provided by/Used in Operating Activities
During the first nine months of 2021, net cash provided by operating activities was $5,742 million compared with $5,844 million during the first nine months of 2020. This decrease was due primarily to higher settlement and income tax payments, partially offset by lower excise tax payments due to lower volume.
Altria had a working capital deficit at September 30, 2021 and December 31, 2020. Altria’s management believes that Altria has the ability to fund working capital deficits with cash provided by operating activities and borrowings through its access to credit and capital markets, as discussed in the Debt and Liquidity section below.
Cash Provided by/Used in Investing Activities
During the first nine months of 2021, net cash used in investing activities was $42 million compared with $107 million during the first nine months of 2020. This decrease was due primarily to lower capital expenditures.
Capital expenditures for 2021 are expected to be in the range of $150 million to $200 million, a reduction from the previous 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 the first nine months of 2021, net cash used in financing activities was $7,668 million compared with $3,713 million during the first nine months of 2020. This change was due primarily to the following:
▪repayment of $5.0 billion of Altria senior unsecured notes in connection with the 2021 debt tender offers and redemption and the premiums and fees in connection with the debt tender offers described below and in Note 10;
▪proceeds of $2.0 billion from the issuance of long-term senior unsecured notes in 2020;
▪repayment of $1.5 billion in full of Altria senior unsecured notes at scheduled maturity in May 2021;
▪repurchases of common stock in 2021;
▪higher dividends paid in 2021; and
▪purchase of the remaining 20% interest in Helix;
partially offset by:
▪proceeds of $5.5 billion from the issuance of long-term senior unsecured notes used to repurchase and redeem senior unsecured notes in connection with the 2021 debt tender offers and redemption; and
▪repayment of $1.0 billion in full of Altria senior unsecured notes at scheduled maturity in January 2020.
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 the Credit Agreement (as defined below) is discussed in Note 10.
At September 30, 2021, the credit ratings and outlook for Altria’s indebtedness by major credit rating agencies were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Debt
|
|
Long-term Debt
|
|
Outlook
|
Moody’s Investors Service, Inc. (“Moody’s”)
|
P-2
|
|
A3
|
|
Stable
|
Standard & Poor’s Financial Services LLC (“S&P”)
|
A-2
|
|
BBB
|
|
Stable
|
Fitch Ratings Inc.
|
F2
|
|
BBB
|
|
Stable
|
Credit Lines - From time to time, Altria has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs.
In August 2021, Altria entered into an extension and amendment to its $3.0 billion senior unsecured 5-year revolving credit agreement (as amended, the “Credit Agreement”). For further discussion, see Note 10.
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 10.
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.
Ste. Michelle Transaction - On October 1, 2021, UST received net cash proceeds of approximately $1.2 billion from the sale of its wine business.
Debt - At September 30, 2021 and December 31, 2020, Altria’s total debt was $28.1 billion and $29.5 billion, respectively.
In May 2021, Altria repaid in full senior unsecured notes in the aggregate principal amount of $1.5 billion at maturity.
In February 2021, Altria issued long-term senior unsecured notes in the aggregate principal amount of $5.5 billion (the “Notes”). The net proceeds from the Notes were used (i) to fund the purchase and redemption of certain unsecured notes and payment of related fees and expenses, as described below, and (ii) for other general corporate purposes.
During the first quarter of 2021, Altria (i) completed debt tender offers to purchase for cash certain of its long-term senior unsecured notes in the aggregate principal amount of $4,042 million and (ii) redeemed all of its outstanding 3.490% Notes due 2022 in an aggregate principal amount of $1.0 billion. As a result, for the nine months ended September 30, 2021, Altria recorded pre-tax losses on early extinguishment of debt of $649 million, which included premiums and fees of $623 million and the write-off of related unamortized debt discounts and debt issuance costs of $26 million.
As a result of the first quarter debt transactions, Altria reduced its near-term maturity towers and extended the weighted-average maturity of its debt. In addition, the weighted-average coupon interest rate on total long-term debt decreased to 4.0% at September 30, 2021 from 4.1% at December 31, 2020.
For further details on long-term debt, including the terms of the Notes, the debt tender offers and the redemption, see Note 10.
Guarantees and Other Similar Matters - As discussed in Note 12, Altria and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at September 30, 2021. From time to time, subsidiaries of Altria also issue lines of credit to affiliated entities. In addition, as discussed below in Supplemental Guarantor Financial Information and in Note 10, 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.
Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 12, 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 $3.4 billion and $3.6 billion of charges to cost of sales for the nine months ended September 30,
2021 and 2020, respectively, and $1.2 billion and $1.3 billion of charges to cost of sales for the three months ended September 30, 2021 and 2020, 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 1998 Master Settlement Agreement, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 12.
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 are $4.5 billion on average for the next three years. These amounts exclude the potential impact of any NPM Adjustment Items.
The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.
Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of September 30, 2021, PM USA had posted appeal bonds totaling $45 million, which have been collateralized with restricted cash that is included in assets on the condensed consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST or Altria in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 12, 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
Dividends paid during the first nine months of 2021 and 2020 were $4,787 million and $4,690 million, respectively, an increase of 2.1%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria in 2021 under its share repurchase program.
In August 2021, the Board of Directors (the “Board of Directors” or “Board”) declared a 4.7% increase in the quarterly dividend rate to $0.90 per share of Altria common stock versus the previous rate of $0.86 per share. The current annualized dividend rate is $3.60 per share. Altria maintains its 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.
In October 2021, the Board authorized a $1.5 billion expansion of Altria’s existing share repurchase program from $2.0 billion to $3.5 billion, partially funded by the net cash proceeds from the Ste. Michelle Transaction. Altria expects to complete the expanded program by December 31, 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. For a discussion of Altria’s share repurchase programs, see Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Item 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.
New Accounting Guidance Not Yet Adopted
See Note 13. New Accounting Guidance Not Yet Adopted to the condensed consolidated financial statements in Item 1 for a discussion of issued accounting guidance applicable to, but not yet adopted by, Altria.
Contingencies
See Note 12 for a discussion of contingencies.
Supplemental Guarantor Financial Information
PM USA (the “Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (the “Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or
a discharge of, the Parent or the Guarantor.
Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees:
▪received less than reasonably equivalent value or fair consideration therefor; and
▪either:
▪was insolvent or rendered insolvent by reason of such occurrence;
▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or
▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if:
▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation;
▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
▪it could not pay its debts as they become due.
To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent.
The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor;
▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of the Parent’s long-term senior unsecured debt by S&P of A or higher.
The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP.
Summarized Balance Sheets
(in millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
September 30, 2021
|
|
December 31, 2020
|
Assets
|
|
|
|
|
|
|
|
|
Due from Non-Guarantor Subsidiaries
|
|
$
|
81
|
|
|
$
|
112
|
|
|
$
|
199
|
|
|
$
|
199
|
|
Other current assets
|
|
3,076
|
|
|
4,896
|
|
|
962
|
|
|
734
|
|
Total current assets
|
|
$
|
3,157
|
|
|
$
|
5,008
|
|
|
$
|
1,161
|
|
|
$
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from Non-Guarantor Subsidiaries
|
|
$
|
4,790
|
|
|
$
|
4,790
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other assets
|
|
11,292
|
|
|
16,883
|
|
|
1,850
|
|
|
1,983
|
|
Total non-current assets
|
|
$
|
16,082
|
|
|
$
|
21,673
|
|
|
$
|
1,850
|
|
|
$
|
1,983
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Due to Non-Guarantor Subsidiaries
|
|
$
|
1,232
|
|
|
$
|
1,169
|
|
|
$
|
756
|
|
|
$
|
656
|
|
Other current liabilities
|
|
3,123
|
|
|
3,688
|
|
|
4,071
|
|
|
4,539
|
|
Total current liabilities
|
|
$
|
4,355
|
|
|
$
|
4,857
|
|
|
$
|
4,827
|
|
|
$
|
5,195
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
$
|
28,923
|
|
|
$
|
30,958
|
|
|
$
|
1,052
|
|
|
$
|
1,268
|
|
Summarized Statements of Earnings (Losses)
(in millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2021
|
|
|
|
|
Parent (1)
|
|
Guarantor
|
Net revenues
|
|
$
|
—
|
|
|
$
|
16,517
|
|
|
|
Gross profit
|
|
—
|
|
|
8,425
|
|
|
|
Net earnings (losses)
|
|
(5,611)
|
|
|
5,514
|
|
|
|
|
|
|
|
|
|
|
(1) For the nine months ended September 30, 2021, net earnings (losses) include $174 million of intercompany interest income from non-guarantor subsidiaries.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the SEC, reports to security holders, press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements and whether to invest in or remain invested in Altria’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in, or implied by, any forward-looking statements made by Altria; any such statement is qualified by reference to the following cautionary statements. We elaborate on these important factors and the risks we face throughout this Form 10-Q, particularly in Item 1A and the “Business Environment” section preceding our discussion of the operating results of our
segments, and in our publicly filed reports, including our 2020 Form 10-K and our Second Quarter 2021 Form 10-Q. These factors include the following:
▪unfavorable litigation outcomes, including risks associated with adverse jury and judicial determinations, courts and arbitrators reaching conclusions at variance with our, our subsidiaries’ or our investees’ understanding of applicable law, bonding requirements in the jurisdictions that do not limit the dollar amount of appeal bonds, and certain challenges to bond cap statutes;
▪government (including the FDA) and private sector actions that impact adult tobacco consumer acceptability of, or access to, tobacco products;
▪tobacco product taxation, including lower tobacco product consumption levels and potential shifts in adult consumer purchases as a result of federal, state and local excise tax increases;
▪unfavorable outcomes of any government investigations of Altria, our subsidiaries or investees;
▪a successful challenge to our tax positions, an increase to the corporate income tax rate or other changes to federal or state tax laws;
▪the risks related to our and our investees’ international business operations, including failure to prevent violations of various U.S. and foreign laws and regulations such as foreign privacy laws and laws prohibiting bribery and corruption;
▪the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial performance and financial condition and on our subsidiaries’ and investees’ ability to continue manufacturing and distributing products, including as a result of labor shortages, and the impact of health epidemics and pandemics on general economic conditions (including any resulting recession or other economic crisis) and, in turn, adult consumer purchasing behavior, which may be further adversely impacted by any reductions in, or eliminations of, government stimulus or unemployment payments;
▪the failure of our tobacco subsidiaries and our investees to compete effectively in their respective markets;
▪the growth of the e-vapor category and other innovative tobacco products, including oral nicotine pouches, contributing to reductions in cigarette and MST consumption levels and sales volume;
▪our tobacco subsidiaries’ and our investees’ continued ability to promote brand equity successfully; to anticipate and respond to evolving adult consumer preferences; to develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, and investments in third parties); to improve productivity; and to protect or enhance margins through cost savings and price increases;
▪changes, including in economic conditions (due to the COVID-19 pandemic or otherwise), that result in adult consumers choosing lower-priced brands, including discount brands;
▪the unsuccessful commercialization of adjacent products or processes by our tobacco subsidiaries and investees, including innovative tobacco products that may reduce the health risks associated with cigarettes and other traditional tobacco products, and that appeal to adult tobacco consumers;
▪significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic;
▪the risks related to the reliance by our tobacco subsidiaries on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers, and the risk of an extended disruption at a facility of, or of service by, a supplier, distributor or distribution chain service provider of our tobacco subsidiaries or investees, including as a result of the COVID-19 pandemic;
▪required or voluntary product recalls as a result of various circumstances such as product contamination or FDA or other regulatory action;
▪the failure of our information systems or service providers’ information systems to function as intended, or cyber attacks or security breaches;
▪our inability to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage, tobacco control actions and other factors;
▪impairment losses as a result of the write down of intangible assets, including goodwill;
▪the adverse effect of acquisitions, investments, dispositions or other events on our credit rating;
▪our inability to acquire attractive businesses or make attractive investments on favorable terms, or at all, or to realize the anticipated benefits from an acquisition or investment and our inability to dispose of businesses or investments on favorable terms or at all;
▪the risks related to disruption and uncertainty in the credit and capital markets, including risk of access to these markets both generally and at current prevailing rates, which may adversely affect our earnings or dividend rate or both;
▪our inability to attract and retain investors due to the impact of decreasing social acceptance of tobacco usage or unfavorable environmental, social and governance ratings;
▪the risk that any challenge to our investment in JUUL, if successful, could result in a broad range of resolutions, including divestiture of the investment or rescission of the transaction;
▪the risks generally related to our investments in JUUL and Cronos, including our inability to realize the expected benefits of our investments in the expected time frames, or at all, due to the risks encountered by our investees in their businesses, such as operational, competitive, compliance, legislative and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity; potential disruptions to our investees’ management or current or future plans and operations; domestic or international litigation developments, government investigations, tax disputes or otherwise; and impairment of our investment in Cronos and changes in the fair value of our investment in JUUL;
▪the risks related to our inability to acquire a controlling interest in JUUL as a result of standstill restrictions or to control the material decisions of JUUL, restrictions on our ability to sell or otherwise transfer our shares of JUUL until December 20, 2024, and non-competition restrictions for the same time period subject to certain exceptions;
▪the adverse effects of risks encountered by ABI in its business, including effects of the COVID-19 pandemic, foreign currency exchange rates and the impact of movements in ABI’s stock price on our equity investment in ABI, including on our reported earnings from and carrying value of our investment in ABI, which could result in additional impairments of our investment, and the dividends paid by ABI on the shares we own;
▪the risks related to our ownership percentage in ABI decreasing below certain levels, including additional tax liabilities, a reduction in the number of directors that we have the right to have appointed to the ABI board of directors and our potential inability to use the equity method of accounting for our investment in ABI;
▪the risk of challenges to the tax treatment of the consideration we received in the ABI/SABMiller business combination and the tax treatment of our equity investment; and
▪the risks, including criminal, civil or tax liability for Altria, related to Altria’s or Cronos’s failure to comply with applicable laws, including cannabis laws.
You should understand that it is not possible to predict or identify all factors and risks. Consequently, you should not consider the foregoing list to be complete. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.