Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation
When used in these notes, the term “Altria,” refers to Altria Group, Inc. and its subsidiaries, unless the context requires otherwise.
▪Background: At June 30, 2021, Altria’s wholly owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly owned subsidiary of PM USA; UST LLC (“UST”), which through its wholly owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of moist smokeless tobacco products (“MST”), snus products and wine; Helix Innovations LLC (“Helix”), which operates in the United States and Canada, and Helix Innovations GmbH and its subsidiaries (“Helix ROW”), which operate internationally in the rest-of-world, are engaged in the manufacture and sale of on! oral nicotine pouches; and Philip Morris Capital Corporation (“PMCC”), which maintains a portfolio of finance assets, substantially all of which are leveraged leases.
Altria owns 100% of the global on! business as a result of transactions in December 2020 and April 2021 to purchase the remaining 20% interest in (i) Helix ROW and (ii) Helix, respectively. The total purchase price of the December 2020 and April 2021 transactions was approximately $250 million.
Other Altria wholly owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria and its subsidiaries. Altria’s access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At June 30, 2021, Altria’s significant wholly owned subsidiaries were not limited by contractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests.
At June 30, 2021, Altria’s investments in equity securities consisted of Anheuser-Busch InBev SA/NV (“ABI”), Cronos Group Inc. (“Cronos”) and JUUL Labs, Inc. (“JUUL”). Altria accounts for its investments in ABI and Cronos under the equity method of accounting using a one-quarter lag. Altria accounts for its equity investment in JUUL under the fair value option.
For further discussion of Altria’s investments in equity securities, see Note 3. Investments in Equity Securities.
On July 8, 2021, UST entered into a Share Purchase Agreement pursuant to which UST agreed to sell its subsidiary, International Wine & Spirits Ltd. (“IWS”), which includes Ste. Michelle. For further discussion, see Note 13. Subsequent Event.
▪Share Repurchases: In July 2019, Altria’s Board of Directors (the “Board of Directors” or “Board”) authorized a $1.0 billion share repurchase program. In April 2020, the Board rescinded the $500 million remaining in this program as part of Altria’s efforts to enhance its liquidity position in response to the COVID-19 pandemic. Altria did not repurchase any shares in 2020.
In January 2021, the Board authorized a new $2.0 billion share repurchase program. At June 30, 2021, Altria had $1,350 million remaining in this program. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board.
Altria’s share repurchase activity for the six and three months ended June 30, 2021 was as follows:
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(in millions, except per share data)
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For the Six Months Ended June 30, 2021
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For the Three Months Ended June 30, 2021
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Total number of shares repurchased
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13.5
|
|
|
6.6
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Aggregate cost of shares repurchased
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$
|
650
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|
|
$
|
325
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|
Average price per share of shares repurchased
|
$
|
48.09
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|
|
$
|
49.21
|
|
▪Basis of Presentation: The interim condensed consolidated financial statements of Altria are unaudited. It is the opinion of Altria’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected in the interim condensed consolidated financial statements. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.
Certain immaterial prior year amounts have been reclassified to conform with the current year’s presentation.
These statements should be read in conjunction with Altria’s audited consolidated financial statements and related notes, which appear in Altria’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
On January 1, 2021, Altria adopted Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). This guidance removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. The adoption of ASU No. 2019-12 did not have a material impact on Altria’s condensed consolidated financial statements.
Additionally, on January 1, 2021, Altria adopted ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (“ASU No. 2020-01”). This guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The adoption of ASU No. 2020-01 did not have a material impact on Altria’s condensed consolidated financial statements.
For a description of issued accounting guidance applicable to, but not yet adopted by, Altria, see Note 12. New Accounting Guidance Not Yet Adopted.
Note 2. Revenues from Contracts with Customers
Altria disaggregates net revenues based on product type. For further discussion, see Note 8. Segment Reporting.
A majority of Altria’s businesses offer cash discounts to customers for prompt payment and calculate cash discounts as a percentage of the list price based on historical experience and agreed-upon payment terms. Beginning in the first quarter of 2021, USSTC began calculating cash discounts as a flat rate per unit, based on agreed-upon payment terms. Altria’s businesses record receivables net of the cash discounts on Altria’s condensed consolidated balance sheets.
Altria’s businesses that receive payments in advance of product shipment record such payments as deferred revenue. These payments are included in other accrued liabilities on Altria’s condensed consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $339 million and $301 million at June 30, 2021 and December 31, 2020, respectively. When cash is received in advance of product shipment, Altria’s businesses satisfy their performance obligations within three days of receiving payment. At June 30, 2021 and December 31, 2020, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.
Receivables were $132 million and $137 million at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, there were no expected differences between amounts recorded and subsequently received, and Altria’s businesses did not record an allowance for doubtful accounts against these receivables.
Altria’s businesses record an allowance for returned goods, which is included in other accrued liabilities on Altria’s condensed consolidated balance sheets. While all of Altria’s tobacco operating companies sell tobacco products with dates relative to freshness as printed on product packaging, it is USSTC’s policy to accept authorized sales returns from its customers for products that have passed such dates due to the limited shelf life of USSTC’s MST and snus products. Altria’s businesses record estimated sales returns, which are based principally on historical volume and return rates, as a reduction to revenues. Actual sales returns will differ from estimated sales returns to the extent actual results differ from estimated assumptions. Altria’s businesses reflect differences between actual and estimated sales returns in the period in which the actual amounts become known. These differences, if any, have not had a material impact on Altria’s condensed consolidated financial statements. All returned goods are destroyed upon return and not included in inventory. Consequently, Altria’s businesses do not record an asset for their right to recover goods from customers upon return.
Sales incentives include variable payments related to goods sold by Altria’s businesses. Altria’s businesses include estimates of variable consideration as a reduction to revenues upon shipment of goods to customers. The sales incentives that require significant estimates and judgments are as follows:
Price promotion payments- Altria’s businesses make price promotion payments, substantially all of which are made to their retail partners, to incent the promotion of certain product offerings in select geographic areas.
Wholesale and retail participation payments- Altria’s businesses make payments to their wholesale and retail partners to incent merchandising and sharing of sales data in accordance with each business’s trade agreements.
These estimates primarily include estimated wholesale to retail sales volume and historical acceptance rates. Actual payments will differ from estimated payments to the extent actual results differ from estimated assumptions. Differences between actual and estimated payments are reflected in the period such information becomes available. These differences, if any, have not had a material impact on Altria’s condensed consolidated financial statements.
Note 3. Investments in Equity Securities
The carrying amount of Altria’s investments consisted of the following:
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(in millions)
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June 30, 2021
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December 31, 2020
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ABI
|
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$
|
17,185
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|
|
$
|
16,651
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JUUL
|
|
1,605
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|
|
1,705
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|
Cronos (1)
|
|
1,041
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|
|
1,173
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|
Total
|
|
$
|
19,831
|
|
|
$
|
19,529
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|
(1) June 30, 2021 included Altria’s equity method investment in Cronos ($871 million), the Cronos warrant ($150 million) and the Fixed-price Preemptive Rights ($20 million), (collectively, “Investment in Cronos”). The Investment in Cronos at December 31, 2020 included Altria’s equity method investment in Cronos ($1,010 million), the Cronos warrant ($139 million) and the Fixed-price Preemptive Rights ($24 million). See below for further discussion.
Income (losses) from equity investments accounted for under the equity method of accounting and fair value option consisted of the following:
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For the Six Months Ended June 30,
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For the Three Months Ended June 30,
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(in millions)
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2021
|
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2020
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2021
|
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2020
|
ABI
|
$
|
392
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|
|
$
|
112
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|
|
$
|
74
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|
|
$
|
(22)
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|
Cronos
|
(166)
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|
|
54
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|
|
(99)
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|
|
31
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|
Income (losses) from investments under equity method of accounting
|
226
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|
|
166
|
|
|
$
|
(25)
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|
|
$
|
9
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|
JUUL
|
(100)
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|
|
—
|
|
|
100
|
|
|
—
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|
Income (losses) from equity investments
|
$
|
126
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|
|
$
|
166
|
|
|
$
|
75
|
|
|
$
|
9
|
|
Investment in ABI
At June 30, 2021, Altria had a 10.0% ownership interest in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. The Restricted Shares:
▪are unlisted and not admitted to trading on any stock exchange;
▪are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021;
▪are convertible into ordinary shares of ABI on a one-for-one basis after the end of this five-year lock-up period;
▪rank equally with ordinary shares of ABI with regards to dividends and voting rights; and
▪have director nomination rights with respect to ABI.
Altria accounts for its investment in ABI under the equity method of accounting because Altria has the ability to exercise significant influence over the operating and financial policies of ABI, including having active representation on ABI’s board of directors and certain ABI board committees. Through this representation, Altria participates in ABI policy making processes.
Altria reports its share of ABI’s results using a one-quarter lag because ABI’s results are not available in time for Altria to record them in the concurrent period.
The fair value of Altria’s equity investment in ABI is based on (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. If the pledgee or security interest holder forecloses on the Restricted Shares, the relevant Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.
The fair value of Altria’s equity investment in ABI at June 30, 2021 and December 31, 2020 was $14.2 billion (carrying value of $17.2 billion) and $13.8 billion (carrying value of $16.7 billion), respectively, which was less than its carrying value by approximately 17% at the end of both periods. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value and has not recovered. Altria has evaluated the factors related to the fair value decline, including the impact on the fair value of ABI’s shares during the COVID-19 pandemic, which has negatively impacted ABI’s business. Altria has evaluated the duration and magnitude of the fair value decline at June 30, 2021, ABI’s financial
condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded, both at June 30, 2021 and December 31, 2020, that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded.
Investment in JUUL
In December 2018, Altria made an investment in JUUL and received a 35% economic interest in JUUL through non-voting shares, which were convertible at Altria’s election into voting shares (“Share Conversion”), and a security convertible into additional non-voting or voting shares, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”).
Altria received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain its ownership percentage and is subject to a standstill restriction under which it may not acquire additional JUUL shares above its 35% interest. Furthermore, Altria agreed not to sell or transfer any of its JUUL shares until December 20, 2024.
On April 1, 2020, the U.S. Federal Trade Commission (“FTC”) issued an administrative complaint challenging Altria’s investment in JUUL. For further discussion, see Note 11. Contingencies - Antitrust Litigation.
In November 2020, Altria exercised its rights to convert its non-voting JUUL shares into voting shares. Altria does not currently intend to exercise its additional governance rights obtained upon Share Conversion, including the right to elect directors to JUUL’s board or to vote its JUUL shares other than as a passive investor, pending the outcome of the FTC administrative complaint. At June 30, 2021, Altria had a 35% ownership interest in JUUL, consisting of 42 million voting shares.
Prior to Share Conversion, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares do not have a readily determinable fair value, Altria elected to measure its investment in JUUL at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There were no upward or downward adjustments to the carrying value of Altria’s investment in JUUL resulting from observable price changes in orderly transactions since the JUUL Transaction through the date of Share Conversion. In addition, prior to Share Conversion, Altria reviewed its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicated that Altria’s investment in JUUL may be impaired, a quantitative assessment was performed. If the quantitative assessment indicated the estimated fair value of the investment was less than its carrying value, the investment was written down to its fair value. During the six months ended June 30, 2020, Altria did not record an impairment charge on its investment in JUUL.
Following Share Conversion in the fourth quarter of 2020, Altria elected to account for its equity method investment in JUUL under the fair value option. Under this option, Altria’s condensed consolidated statements of earnings include any cash dividends received from its investment in JUUL and any changes in the estimated fair value of its investment, which is calculated quarterly. Altria believes the fair value option provides quarterly transparency to investors as to the fair market value of Altria’s investment in JUUL, given the changes and volatility in the e-vapor category since Altria’s initial investment, as well as the lack of publicly available information regarding JUUL’s business or a market-derived valuation.
For the six and three months ended June 30, 2021, Altria recorded a non-cash, pre-tax unrealized loss of $100 million and a non-cash, pre-tax unrealized gain of $100 million, respectively, as a result of changes in the estimated fair value of its investment in JUUL. There were no material changes to the significant assumptions used in the valuations, as described below, during the six and three months ended June 30, 2021.
Altria uses an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows. Future cash flows were based on a range of scenarios that consider various potential regulatory and market outcomes.
In determining the estimated fair value of its investment in JUUL, as of June 30, 2021 and December 31, 2020, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. Additionally, in determining these significant assumptions, Altria made judgments regarding the (i) likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, (ii) risk created by the number and types of legal cases pending against JUUL and (iii) expectations for the future state of the e-vapor category, including competitive dynamics.
The following table provides a reconciliation of the beginning and ending balance of the JUUL investment, which is classified in Level 3 of the fair value hierarchy:
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Investment
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(in millions)
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Balance
|
Balance at December 31, 2020
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|
$
|
1,705
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Unrealized gains (losses) included in income (losses) from equity investments
|
|
(100)
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|
Balance at June 30, 2021
|
|
$
|
1,605
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Investment in Cronos
At June 30, 2021, Altria had a 42.1% ownership interest in Cronos, consisting of 156.6 million shares, which Altria accounts for under the equity method of accounting. Altria’s ownership percentage decreased from 43.5% at December 31, 2020 due to the issuance of additional shares by Cronos. Altria reports its share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for Altria to record them in the concurrent period.
As part of its Investment in Cronos, at June 30, 2021, Altria owned:
▪anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of Canadian dollar (“CAD”) $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of June 30, 2021, Altria estimates the Fixed-price Preemptive Rights allows Altria to purchase up to an additional approximately 14 million common shares of Cronos; and
▪a warrant providing Altria the ability to purchase an additional approximate 10% of common shares of Cronos (approximately 83 million common shares at June 30, 2021) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.
If exercised in full, the exercise prices for the warrant and Fixed-price Preemptive Rights are approximately CAD $1.6 billion and CAD $0.2 billion, respectively, (approximately USD $1.3 billion and $0.2 billion, respectively, based on the CAD to USD exchange rate on July 26, 2021). At June 30, 2021, upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own approximately 53% of the outstanding common shares of Cronos.
For a discussion of derivatives related to the Investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 4. Financial Instruments.
The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos at June 30, 2021 and December 31, 2020 was $1.3 billion (carrying value of $0.9 billion) and $1.1 billion (carrying value of $1.0 billion), respectively, which exceeded its carrying value by approximately 55% and 8% at June 30, 2021 and December 31, 2020, respectively.
Note 4. Financial Instruments
Altria enters into derivative financial instruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes.
Altria’s investment in ABI, whose functional currency is the Euro, exposes Altria to foreign currency exchange risk on the carrying value of its investment. To manage this risk, Altria designates certain foreign exchange contracts, including cross-currency swap contracts and forward contracts (collectively, “foreign currency contracts”), and Euro denominated unsecured long-term notes (“foreign currency denominated debt”) as net investment hedges of Altria’s investment in ABI.
In May 2021, all outstanding foreign currency contracts matured. When Altria has foreign currency contracts in effect, counterparties are domestic and international financial institutions. Under these contracts, Altria is exposed to potential losses due to non-performance by these counterparties. Altria manages its credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure Altria has with each counterparty and monitoring the financial condition of each counterparty. The counterparty agreements contain provisions that require Altria to maintain an investment grade credit rating. In the event Altria’s credit rating falls below investment grade, counterparties to Altria’s foreign currency contracts can require Altria to post collateral. No collateral was received or posted related to derivative assets and liabilities at December 31, 2020.
The following table provides (i) the aggregate notional amounts of foreign currency contracts and (ii) the aggregate carrying value and fair value of foreign currency denominated debt:
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(in millions)
|
June 30, 2021
|
|
December 31, 2020
|
Foreign currency contracts (notional amounts)
|
$
|
—
|
|
|
$
|
1,066
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|
Foreign currency denominated debt
|
|
|
|
Carrying value
|
5,021
|
|
|
5,171
|
|
Fair value
|
5,431
|
|
|
5,687
|
|
Altria’s estimates of the fair values of its foreign currency contracts are determined using valuation models with significant inputs that are readily available in public markets, or can be derived from observable market transactions, and therefore are classified in Level 2 of the fair value hierarchy. An adjustment for credit risk and non-performance risk is included in the fair values of foreign currency contracts.
The following table provides the aggregate carrying value and fair value of Altria’s total long-term debt:
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(in millions)
|
June 30, 2021
|
|
December 31, 2020
|
Carrying value
|
$
|
28,241
|
|
|
$
|
29,471
|
|
Fair value
|
31,360
|
|
|
34,682
|
|
Altria’s estimate of the fair value of its total long-term debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy.
The Fixed-price Preemptive Rights and Cronos warrant, which are further discussed in Note 3. Investments in Equity Securities, are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are estimated using Black-Scholes option-pricing models, adjusted for observable inputs (which are classified in Level 1 of the fair value hierarchy), including share price, and unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:
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Fixed-price Preemptive Rights
|
|
Cronos Warrant
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
|
Share price (1)
|
|
C$10.68
|
|
C$8.84
|
|
C$10.68
|
|
C$8.84
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|
|
|
|
Expected life (2)
|
|
1.24 years
|
|
1.05 years
|
|
1.68 years
|
|
2.18 years
|
|
|
|
|
Expected volatility (3)
|
|
75.22%
|
|
80.68%
|
|
75.22%
|
|
80.68%
|
|
|
|
|
Risk-free interest rate (4)(5)
|
|
0.29%
|
|
0.13%
|
|
0.38%
|
|
0.21%
|
|
|
|
|
Expected dividend yield (6)
|
|
—%
|
|
—%
|
|
—%
|
|
—%
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|
(1) Based on the closing market price for Cronos common stock on the Toronto Stock Exchange on the date indicated.
(2) Based on the weighted-average expected life of the Fixed-price Preemptive Rights (with a range from approximately 0.25 year to 4.25 years at June 30, 2021 and 0.25 year to 5 years at December 31, 2020) and the March 8, 2023 expiration date of the Cronos warrant.
(3) Based on a blend of historical volatility of the underlying equity security and implied volatility from traded options on the underlying equity security at June 30, 2021. Based on a blend of historical volatility levels of the underlying equity security and peer companies at December 31, 2020.
(4) Based on the implied yield currently available on Canadian Treasury zero coupon issues (with a range from approximately 0.15% to 0.85% at June 30, 2021 and 0.06% to 0.39% at December 31, 2020) weighted for the remaining expected life of the Fixed-price Preemptive Rights.
(5) Based on the implied yield currently available on Canadian Treasury zero coupon issues and the expected life of the Cronos warrant.
(6) Based on Cronos’s expected dividend payments.
The following table provides a reconciliation of the beginning and ending balance of the Fixed-price Preemptive Rights and Cronos warrant, which are classified in Level 3 of the fair value hierarchy:
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(in millions)
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|
|
Balance at December 31, 2019
|
$
|
303
|
|
|
|
|
|
|
|
Pre-tax earnings (losses) recognized in net earnings
|
(140)
|
|
|
|
Balance at December 31, 2020
|
163
|
|
|
|
Pre-tax earnings (losses) recognized in net earnings
|
7
|
|
|
|
Balance at June 30, 2021
|
$
|
170
|
|
|
|
Altria elects to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on its condensed consolidated balance sheets. The fair values of Altria’s derivative financial instruments on a gross basis included on the condensed consolidated balance sheets were as follows:
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Fair Value of Assets
|
|
Fair Value of Liabilities
|
(in millions)
|
Balance Sheet Classification
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Balance Sheet Classification
|
June 30, 2021
|
|
December 31, 2020
|
Derivatives designated as hedging instruments:
|
|
Foreign currency contracts
|
Other current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other accrued liabilities
|
$
|
—
|
|
|
$
|
87
|
|
Foreign currency contracts
|
Other assets
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Cronos warrant
|
Investments in equity securities
|
|
$
|
150
|
|
|
$
|
139
|
|
|
|
|
|
|
Fixed-price Preemptive Rights
|
Investments in equity securities
|
|
20
|
|
|
24
|
|
|
|
|
|
|
Total
|
|
|
$
|
170
|
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
$
|
170
|
|
|
$
|
163
|
|
|
|
$
|
—
|
|
|
$
|
87
|
|
Altria records in its condensed consolidated statements of earnings any changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur. For the six and three months ended June 30, 2021 and 2020, Altria recorded non-cash, pre-tax unrealized gains (losses), representing the changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Fixed-price Preemptive Rights
|
$
|
(4)
|
|
|
$
|
(29)
|
|
|
$
|
(18)
|
|
|
$
|
6
|
|
Cronos warrant
|
11
|
|
|
(68)
|
|
|
(85)
|
|
|
34
|
|
Total
|
$
|
7
|
|
|
$
|
(97)
|
|
|
$
|
(103)
|
|
|
$
|
40
|
|
Net Investment Hedging
The pre-tax effects of Altria’s net investment hedges on accumulated other comprehensive losses and the condensed consolidated statements of earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Accumulated Other Comprehensive Losses
|
|
Gain (Loss) Recognized in
Net Earnings
|
|
Gain (Loss) Recognized in Accumulated Other Comprehensive Losses
|
|
Gain (Loss) Recognized in
Net Earnings
|
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Foreign currency contracts
|
|
$
|
16
|
|
|
$
|
38
|
|
|
$
|
7
|
|
|
$
|
25
|
|
|
$
|
(19)
|
|
|
$
|
(18)
|
|
|
$
|
2
|
|
|
$
|
11
|
|
Foreign currency denominated debt
|
|
152
|
|
|
(9)
|
|
|
—
|
|
|
—
|
|
|
(54)
|
|
|
(86)
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
168
|
|
|
$
|
29
|
|
|
$
|
7
|
|
|
$
|
25
|
|
|
$
|
(73)
|
|
|
$
|
(104)
|
|
|
$
|
2
|
|
|
$
|
11
|
|
The changes in the fair value of the foreign currency contracts and in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate were recognized in accumulated other comprehensive losses related to ABI. Gains on the foreign currency contracts arising from components excluded from effectiveness testing were recognized in interest and other debt expense, net in the condensed consolidated statements of earnings based on an amortization approach.
Note 5. Benefit Plans
Components of Net Periodic Benefit (Income) Cost
Net periodic benefit (income) cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Service cost
|
$
|
34
|
|
|
$
|
37
|
|
|
$
|
10
|
|
|
$
|
8
|
|
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
5
|
|
|
$
|
4
|
|
Interest cost
|
93
|
|
|
126
|
|
|
21
|
|
|
30
|
|
|
47
|
|
|
63
|
|
|
10
|
|
|
15
|
|
Expected return on plan assets
|
(262)
|
|
|
(251)
|
|
|
(8)
|
|
|
(7)
|
|
|
(131)
|
|
|
(125)
|
|
|
(4)
|
|
|
(4)
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
66
|
|
|
53
|
|
|
14
|
|
|
7
|
|
|
33
|
|
|
26
|
|
|
7
|
|
|
4
|
|
Prior service cost (credit)
|
2
|
|
|
2
|
|
|
(15)
|
|
|
(15)
|
|
|
1
|
|
|
1
|
|
|
(9)
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit
(income) cost
|
$
|
(67)
|
|
|
$
|
(33)
|
|
|
$
|
22
|
|
|
$
|
23
|
|
|
$
|
(33)
|
|
|
$
|
(17)
|
|
|
$
|
9
|
|
|
$
|
11
|
|
Employer Contributions
Altria makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service regulations. Altria made employer contributions of $6 million to its pension plans and did not make any contributions to its postretirement plans during the six months ended June 30, 2021. Currently, Altria anticipates making additional employer contributions to its pension and postretirement plans of up to approximately $25 million and $60 million, respectively, in 2021. However, the foregoing estimates of 2021 contributions to the pension and postretirement plans are subject to change as a result of changes in tax and other benefit laws, changes in interest rates, as well as asset performance significantly above or below the assumed long-term rate of return for each respective plan.
During the second quarter of 2021, Altria announced several amendments to its salaried retiree healthcare plans, primarily changing its post-age 65 coverage to a private medicare marketplace. These amendments triggered a plan remeasurement as of May 31, 2021 and resulted in Altria recording a reduction of $432 million to its accrued postretirement health care costs liability and a corresponding reduction to its accumulated other comprehensive losses on its condensed consolidated balance sheet at June 30, 2021. Ongoing amortization has been adjusted to reflect these changes as of June 1, 2021 and is reflected in the amounts shown above.
Note 6. Earnings per Share
Basic and diluted earnings per share (“EPS”) were calculated using the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net earnings attributable to Altria
|
|
$
|
3,573
|
|
|
$
|
3,495
|
|
|
$
|
2,149
|
|
|
$
|
1,943
|
|
Less: Distributed and undistributed earnings attributable to share-based awards
|
|
(6)
|
|
|
(5)
|
|
|
(3)
|
|
|
(3)
|
|
Earnings for basic and diluted EPS
|
|
$
|
3,567
|
|
|
$
|
3,490
|
|
|
$
|
2,146
|
|
|
$
|
1,940
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares for basic EPS
|
|
1,853
|
|
|
1,858
|
|
|
1,849
|
|
|
1,858
|
|
Plus: contingently issuable performance stock units
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Weighted-average shares for diluted EPS
|
|
1,853
|
|
|
1,859
|
|
|
1,849
|
|
|
1,859
|
|
Note 7. Other Comprehensive Earnings/Losses
The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2021
|
(in millions)
|
|
Benefit Plans
|
|
ABI
|
|
Currency
Translation
Adjustments and Other
|
|
Accumulated
Other
Comprehensive
Losses
|
Balances, December 31, 2020
|
|
$
|
(2,420)
|
|
|
$
|
(1,938)
|
|
|
$
|
17
|
|
|
$
|
(4,341)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses) before reclassifications
|
|
432
|
|
(1)
|
470
|
|
|
29
|
|
|
931
|
|
Deferred income taxes
|
|
(109)
|
|
|
(103)
|
|
|
—
|
|
|
(212)
|
|
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
|
|
323
|
|
|
367
|
|
|
29
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified to net earnings
|
|
72
|
|
|
(42)
|
|
|
(1)
|
|
|
29
|
|
Deferred income taxes
|
|
(18)
|
|
|
9
|
|
|
—
|
|
|
(9)
|
|
Amounts reclassified to net earnings, net of deferred income taxes
|
|
54
|
|
|
(33)
|
|
|
(1)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses), net of deferred income taxes
|
|
377
|
|
|
334
|
|
(2)
|
28
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2021
|
|
$
|
(2,043)
|
|
|
$
|
(1,604)
|
|
|
$
|
45
|
|
|
$
|
(3,602)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2021
|
(in millions)
|
|
Benefit Plans
|
|
ABI
|
|
Currency
Translation
Adjustments and Other
|
|
Accumulated
Other
Comprehensive
Losses
|
Balances, March 31, 2021
|
|
$
|
(2,392)
|
|
|
$
|
(1,421)
|
|
|
$
|
39
|
|
|
$
|
(3,774)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses) before reclassifications
|
|
432
|
|
(1)
|
(220)
|
|
|
7
|
|
|
219
|
|
Deferred income taxes
|
|
(109)
|
|
|
48
|
|
|
—
|
|
|
(61)
|
|
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
|
|
323
|
|
|
(172)
|
|
|
7
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified to net earnings (losses)
|
|
34
|
|
|
(14)
|
|
|
(1)
|
|
|
19
|
|
Deferred income taxes
|
|
(8)
|
|
|
3
|
|
|
—
|
|
|
(5)
|
|
Amounts reclassified to net earnings (losses), net of deferred income taxes
|
|
26
|
|
|
(11)
|
|
|
(1)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses), net of deferred income taxes
|
|
349
|
|
|
(183)
|
|
(2)
|
6
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2021
|
|
$
|
(2,043)
|
|
|
$
|
(1,604)
|
|
|
$
|
45
|
|
|
$
|
(3,602)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2020
|
(in millions)
|
|
Benefit Plans
|
|
ABI
|
|
Currency
Translation
Adjustments and Other
|
|
Accumulated
Other
Comprehensive
Losses
|
Balances, December 31, 2019
|
|
$
|
(2,192)
|
|
|
$
|
(693)
|
|
|
$
|
21
|
|
|
$
|
(2,864)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses) before reclassifications
|
|
—
|
|
|
(1,140)
|
|
|
(39)
|
|
|
(1,179)
|
|
Deferred income taxes
|
|
—
|
|
|
238
|
|
|
—
|
|
|
238
|
|
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
|
|
—
|
|
|
(902)
|
|
|
(39)
|
|
|
(941)
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified to net earnings
|
|
56
|
|
|
(15)
|
|
|
—
|
|
|
41
|
|
Deferred income taxes
|
|
(14)
|
|
|
4
|
|
|
—
|
|
|
(10)
|
|
Amounts reclassified to net earnings, net of deferred income taxes
|
|
42
|
|
|
(11)
|
|
|
—
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses), net of deferred income taxes
|
|
42
|
|
|
(913)
|
|
(2)
|
(39)
|
|
|
(910)
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2020
|
|
$
|
(2,150)
|
|
|
$
|
(1,606)
|
|
|
$
|
(18)
|
|
|
$
|
(3,774)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2020
|
(in millions)
|
|
Benefit Plans
|
|
ABI
|
|
Currency
Translation
Adjustments and Other
|
|
Accumulated
Other
Comprehensive
Losses
|
Balances, March 31, 2020
|
|
$
|
(2,171)
|
|
|
$
|
(395)
|
|
|
$
|
33
|
|
|
$
|
(2,533)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses) before reclassifications
|
|
—
|
|
|
(1,528)
|
|
|
(51)
|
|
|
(1,579)
|
|
Deferred income taxes
|
|
—
|
|
|
323
|
|
|
—
|
|
|
323
|
|
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
|
|
—
|
|
|
(1,205)
|
|
|
(51)
|
|
|
(1,256)
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified to net earnings (losses)
|
|
28
|
|
|
(8)
|
|
|
—
|
|
|
20
|
|
Deferred income taxes
|
|
(7)
|
|
|
2
|
|
|
—
|
|
|
(5)
|
|
Amounts reclassified to net earnings (losses), net of deferred income taxes
|
|
21
|
|
|
(6)
|
|
|
—
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses), net of deferred income taxes
|
|
21
|
|
|
(1,211)
|
|
(2)
|
(51)
|
|
|
(1,241)
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2020
|
|
$
|
(2,150)
|
|
|
$
|
(1,606)
|
|
|
$
|
(18)
|
|
|
$
|
(3,774)
|
|
(1) Reflects the remeasurement impact of salaried retiree healthcare plan amendments. For further discussion, see Note 5. Benefit Plans.
(2) Primarily reflects Altria’s share of ABI’s currency translation adjustments and the impact of Altria’s designated net investment hedges. For further discussion of designated net investment hedges, see Note 4. Financial Instruments.
The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Benefit Plans: (1)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
85
|
|
|
$
|
69
|
|
|
$
|
42
|
|
|
$
|
35
|
|
Prior service cost/credit
|
|
(13)
|
|
|
(13)
|
|
|
(8)
|
|
|
(7)
|
|
|
|
72
|
|
|
56
|
|
|
34
|
|
|
28
|
|
ABI (2)
|
|
(42)
|
|
|
(15)
|
|
|
(14)
|
|
|
(8)
|
|
Currency Translation Adjustments and Other (2)
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
|
|
$
|
29
|
|
|
$
|
41
|
|
|
$
|
19
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts are included in net defined benefit plan costs. For further information related to defined benefit plans, see Note 5. Benefit Plans.
(2) Amounts are included in (income) losses from equity investments. For further information related to equity investments, see Note 3. Investments in Equity Securities.
Note 8. Segment Reporting
The products of Altria’s subsidiaries include smokeable tobacco products, consisting of combustible cigarettes manufactured and sold by PM USA, and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; oral tobacco products, consisting of MST and snus products manufactured and sold by USSTC, and oral nicotine pouches manufactured and sold by Helix; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria’s reportable segments of smokeable products, oral tobacco products and wine. The financial services and the innovative tobacco products businesses, which include the heated tobacco business and Helix ROW, are included in all other.
Altria’s chief operating decision maker (the “CODM”) reviews operating companies income (loss) (“OCI”) to evaluate the performance of, and allocate resources to, the segments. OCI for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Interest and other debt expense, net, net periodic benefit income/cost,
excluding service cost, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the CODM.
Segment data were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Smokeable products
|
|
$
|
11,300
|
|
|
$
|
11,209
|
|
|
$
|
6,050
|
|
|
$
|
5,603
|
|
Oral tobacco products
|
|
1,319
|
|
|
1,261
|
|
|
693
|
|
|
660
|
|
Wine
|
|
317
|
|
|
277
|
|
|
167
|
|
|
131
|
|
All other
|
|
36
|
|
|
(21)
|
|
|
26
|
|
|
(27)
|
|
Net revenues
|
|
$
|
12,972
|
|
|
$
|
12,726
|
|
|
$
|
6,936
|
|
|
$
|
6,367
|
|
Earnings before Income Taxes:
|
|
|
|
|
|
|
|
|
OCI:
|
|
|
|
|
|
|
|
|
Smokeable products
|
|
$
|
5,148
|
|
|
$
|
4,820
|
|
|
$
|
2,776
|
|
|
$
|
2,450
|
|
Oral tobacco products
|
|
864
|
|
|
861
|
|
|
472
|
|
|
447
|
|
Wine
|
|
45
|
|
|
(366)
|
|
|
27
|
|
|
13
|
|
All other
|
|
(26)
|
|
|
(56)
|
|
|
(12)
|
|
|
(51)
|
|
Amortization of intangibles
|
|
(35)
|
|
|
(37)
|
|
|
(18)
|
|
|
(18)
|
|
General corporate expenses
|
|
(120)
|
|
|
(90)
|
|
|
(59)
|
|
|
(45)
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
5,876
|
|
|
5,132
|
|
|
3,186
|
|
|
2,796
|
|
Interest and other debt expense, net
|
|
(603)
|
|
|
(583)
|
|
|
(295)
|
|
|
(308)
|
|
Loss on early extinguishment of debt
|
|
(649)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit income, excluding service cost
|
|
89
|
|
|
55
|
|
|
46
|
|
|
28
|
|
Income (losses) from equity investments
|
|
126
|
|
|
166
|
|
|
75
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on Cronos-related financial instruments
|
|
7
|
|
|
(97)
|
|
|
(103)
|
|
|
40
|
|
Earnings before income taxes
|
|
$
|
4,846
|
|
|
$
|
4,673
|
|
|
$
|
2,909
|
|
|
$
|
2,565
|
|
The comparability of OCI for the reportable segments was affected by the following:
▪Non-Participating Manufacturer (“NPM”) Adjustment Items: For the six months ended June 30, 2021, pre-tax income for NPM adjustment items of $32 million was recorded to cost of sales in the smokeable products segment. NPM adjustment items result from the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation in Note 11. Contingencies).
▪Tobacco and Health Litigation Items: Pre-tax charges related to certain tobacco and health litigation items were recorded in Altria’s condensed consolidated statements of earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
(in millions)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Smokeable products segment
|
|
$
|
43
|
|
|
$
|
39
|
|
|
$
|
8
|
|
|
$
|
17
|
|
Interest and other debt expense, net
|
|
—
|
|
|
3
|
|
|
—
|
|
|
1
|
|
Total
|
|
$
|
43
|
|
|
$
|
42
|
|
|
$
|
8
|
|
|
$
|
18
|
|
The amounts shown in the table above for the smokeable products segment were recorded in marketing, administration and research costs. For further discussion, see Note 11. Contingencies.
▪COVID-19 Special Items: Net pre-tax charges of $50 million ($41 million in the smokeable products segment and $9 million in the oral tobacco products segment) related to the COVID-19 pandemic were recorded in Altria’s condensed consolidated statements of earnings for the six and three months ended June 30, 2020. The net pre-tax charges, which were directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic, were all recorded in costs of sales and included premium pay, personal protective equipment and health screenings, which were partially offset by certain employment tax credits. The COVID-19 special items do not include the inventory-related implementation costs associated with the wine business strategic reset discussed below. These implementation costs were due to increased inventory levels, which were further negatively impacted by the COVID-19 pandemic, including economic uncertainty and government restrictions.
▪Implementation and Acquisition-Related Costs:
Wine Business Strategic Reset: During the six months ended June 30, 2020, Ste. Michelle recorded pre-tax implementation costs of $394 million associated with a strategic reset initiated in the first quarter of 2020 to maximize Ste. Michelle’s profitability and achieve improved long-term cash flow generation. Substantially all of the charges consisted of the following: (i) write-off of inventory ($292 million) as Ste. Michelle no longer believed that the benefit of the blending and production plans for its inventory outweighed inventory carrying cost given the reduced product volume demand; and (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believed no longer had a future economic benefit ($100 million). These charges were included in cost of sales in Altria’s condensed consolidated statements of earnings.
Acquisition-Related Costs: For the six months ended June 30, 2021, Altria recorded pre-tax acquisition-related costs of $37 million in the oral tobacco products segment primarily for the settlement of an arbitration related to the 2019 on! transaction. These costs were included in marketing, administration and research costs in Altria’s condensed consolidated statements of earnings.
Note 9. Debt
Short-term Borrowings and Borrowing Arrangements
At June 30, 2021 and December 31, 2020, Altria had no short-term borrowings.
At June 30, 2021, Altria had a senior unsecured 5-year revolving credit agreement (as amended, the “Credit Agreement”) that provides for borrowings up to an aggregate principal amount of $3.0 billion. The Credit Agreement, which is used for general corporate purposes, expires on August 1, 2023 and includes an option, subject to certain conditions, for Altria to extend the Credit Agreement for two additional one-year periods. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”), or any mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Financial Services LLC (“S&P”). The applicable percentage based on Altria’s long-term senior unsecured debt ratings at June 30, 2021 for borrowings under the Credit Agreement was 1.0%. The Credit Agreement does not include any other rating triggers, or any provisions that could require the posting of collateral.
The Credit Agreement includes various covenants, one of which requires Altria to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Consolidated Interest Expense of not less than 4.0 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. At June 30, 2021, the ratio of consolidated EBITDA to Consolidated Interest Expense, calculated in accordance with the Credit Agreement, was 9.7 to 1.0. At June 30, 2021, Altria was in compliance with its covenants in the Credit Agreement. The terms “Consolidated EBITDA” and “Consolidated Interest Expense,” each as defined in the Credit Agreement, include certain adjustments.
In March 2020, due to the uncertainty at that time in the global capital markets, including the commercial paper markets, resulting from the COVID-19 pandemic, Altria elected to borrow the full $3.0 billion available under the Credit Agreement as a precautionary measure to increase its cash position and preserve financial flexibility. In June 2020, Altria repaid the full amount outstanding under the Credit Agreement using the net proceeds from the issuance of long-term senior unsecured notes issued in May 2020 and available cash.
Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA.
Long-term Debt
The aggregate carrying value of Altria’s total long-term debt at June 30, 2021 and December 31, 2020 was $28.2 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. The Notes contain the following terms:
▪$1.75 billion at 2.450%, due 2032, interest payable semiannually beginning August 4, 2021;
▪$1.50 billion at 3.400%, due 2041, interest payable semiannually beginning August 4, 2021;
▪$1.25 billion at 3.700%, due 2051, interest payable semiannually beginning August 4, 2021; and
▪$1.00 billion at 4.000%, due 2061, interest payable semiannually beginning August 4, 2021.
The Notes are Altria’s senior unsecured obligations and rank equally in right of payment with all of Altria’s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria and (ii) the Notes ceasing to be rated investment grade by each of Moody’s, S&P and Fitch Ratings, Inc. within a specified time period, Altria will be required to make an offer to purchase the Notes at a price equal to 101% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the Notes.
The obligations of Altria under the Notes are guaranteed by PM USA.
During the first quarter of 2021, Altria completed debt tender offers to purchase for cash certain of its long-term senior unsecured notes in an aggregate principal amount of $4,042 million. Details of the debt tender offers are as follows:
|
|
|
|
|
|
(in millions)
|
Principal Amount of Notes Purchased
|
2.850% Notes due 2022
|
$
|
795
|
|
2.950% Notes due 2023
|
132
|
|
4.000% Notes due 2024
|
624
|
|
3.800% Notes due 2024
|
655
|
|
4.400% Notes due 2026
|
430
|
|
4.800% Notes due 2029
|
1,094
|
|
9.950% Notes due 2038
|
65
|
|
10.200% Notes due 2039
|
18
|
|
6.200% Notes due 2059
|
229
|
|
|
$
|
4,042
|
|
During the first quarter of 2021, Altria also redeemed all of its outstanding 3.490% Notes due 2022 in an aggregate principal amount of $1.0 billion.
As a result of the debt tender offers and redemption, during the first quarter of 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.
At June 30, 2021 and December 31, 2020, accrued interest on long-term debt of $384 million and $458 million, respectively, was included in other accrued liabilities on Altria’s condensed consolidated balance sheets.
For a discussion of the fair value of Altria’s long-term debt and the designation of its Euro denominated senior unsecured notes as a net investment hedge of its investment in ABI, see Note 4. Financial Instruments.
Note 10. Income Taxes
The income tax rates for the six and three months ended June 30, 2021 were 26.3% and 26.1%, respectively, versus 25.4% and 24.4% for the six and three months ended June 30, 2020, respectively. The changes in the tax rates for both periods were due primarily to higher net tax expense in 2021 due to valuation allowances recorded for deferred tax assets related to Altria’s investment in JUUL and Altria’s Investment in Cronos.
The following chart provides a reconciliation of the beginning and ending valuation allowances for the period ended June 30, 2021:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
2,817
|
|
Additions to valuation allowance charged to income tax expense
|
|
233
|
|
Reductions to valuation allowance credited to income tax benefit
|
|
(49)
|
|
Foreign currency translation
|
|
(4)
|
|
Balance at end of period
|
|
$
|
2,997
|
|
Altria determines the realizability of deferred tax assets based on the weight of available evidence, that it is more-likely-than-not that the deferred tax asset will not be realized. In reaching this determination, Altria considers all available positive and negative evidence, including the character of the loss, carryback and carryforward considerations, future reversals of temporary differences and available tax planning strategies.
The current changes in valuation allowances were due to deferred tax assets recorded in connection with Altria’s Investment in Cronos and changes in the estimated fair value of its investment in JUUL.
Note 11. Contingencies
Legal proceedings covering a wide range of matters are pending or threatened in various U.S. and foreign jurisdictions against Altria and its subsidiaries, including PM USA and USSTC, as well as their respective indemnitees and Altria’s investees. Various types of claims may be raised in these proceedings, including product liability, unfair trade practices, antitrust, tax, contraband shipments, patent infringement, employment matters, claims alleging violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), claims for contribution and claims of competitors, shareholders or distributors. Legislative action, such as changes to tort law, also may expand the types of claims and remedies available to plaintiffs.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria or its subsidiaries also may be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, also may seek to repeal or alter bond cap statutes through legislation. Although Altria cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria and its subsidiaries record provisions in the condensed consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this
Note 11. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending cases; and (iii) accordingly, management has not provided any amounts in the condensed consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.
Altria and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria, or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria to do so.
Overview of Altria and/or PM USA Tobacco-Related Litigation
Types and Number of U.S. Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iii) e-vapor cases alleging violation of RICO, fraud, failure to warn, design defect, negligence, antitrust and unfair trade practices; and (iv) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in tobacco-related litigation are discussed below.
The table below lists the number of certain tobacco-related cases pending in the U.S. against PM USA and/or Altria as of July 26, 2021, July 24, 2020 and July 26, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 26, 2021
|
|
July 24, 2020
|
|
July 26, 2019
|
Individual Smoking and Health Cases (1)
|
169
|
|
116
|
|
90
|
Health Care Cost Recovery Actions (2)
|
1
|
|
1
|
|
1
|
E-vapor Cases (3)
|
2,626
|
|
621
|
|
—
|
Other Tobacco-Related Cases (4)
|
3
|
|
4
|
|
4
|
(1) Includes 14 cases filed in Illinois, 18 cases filed in New Mexico, 36 cases filed in Massachusetts and 67 non-Engle cases filed in Florida. Does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (these Engle progeny cases are discussed below in Smoking and Health Litigation - Engle Class Action). Also does not include 1,471 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. Class members were prohibited from filing individual lawsuits after 2000 under the court-approved settlement.
(2) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.
(3) Includes 54 class action lawsuits, 2,318 individual lawsuits and 254 “third party” lawsuits relating to JUUL e-vapor products, which include school districts, state and local government, tribal and healthcare organization lawsuits. JUUL is an additional named defendant in each of these lawsuits. The 54 class action lawsuits include 29 cases in the Northern District of California (“Multidistrict Litigation” or “MDL”) involving plaintiffs whose claims were previously included in other class action complaints but were refiled as separate stand-alone class actions for procedural and other reasons.
(4) Includes one inactive smoking and health case alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs and two inactive class action lawsuits alleging that use of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of RICO.
International Tobacco-Related Cases: As of July 26, 2021, (i) Altria is named as a defendant in three e-vapor class action lawsuits in Canada; (ii) PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight of which also name Altria as a defendant; and (iii) PM USA and Altria are named as defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.
Tobacco-Related Cases Set for Trial: As of July 26, 2021, five Engle progeny cases against PM USA are set for trial through September 30, 2021. Trial dates are subject to change and many of the trials were postponed due to the COVID-19 pandemic; however, the courts are reopening and trials may be scheduled for the second half of 2021.
Trial Results: Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 69 tobacco-related cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 44 of the 69 cases. These 44 cases were tried in Alaska (1), California (7), Connecticut (1), Florida (10), Louisiana (1), Massachusetts (4), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2).
Of the 25 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 20 have reached final resolution, and one case (Gentile) that was initially returned in favor of plaintiff was reversed post-trial and remains pending.
See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of verdicts in state and federal Engle progeny cases involving PM USA as of July 26, 2021.
Judgments Paid and Provisions for Tobacco and Health Litigation Items (Including Engle Progeny Litigation): After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid judgments and settlements (including related costs and fees) totaling approximately $857 million and interest totaling approximately $218 million as of June 30, 2021. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $408 million and related interest totaling approximately $56 million.
The changes in Altria’s accrued liability for tobacco and health litigation items, including related interest costs, for the periods specified below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
Accrued liability for tobacco and health litigation items at beginning of period
|
$
|
9
|
|
|
$
|
14
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
|
Pre-tax charges for:
|
|
|
|
|
|
|
|
|
|
Tobacco and health litigation (1)
|
43
|
|
|
39
|
|
|
8
|
|
|
17
|
|
|
|
Related interest costs
|
—
|
|
|
3
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments (1)
|
(52)
|
|
|
(34)
|
|
|
(16)
|
|
|
(6)
|
|
|
|
Accrued liability for tobacco and health litigation items at end of period
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes certain amounts related to pre-trial resolution of tobacco and health cases.
The accrued liability for tobacco and health litigation items, including related interest costs, was included in accrued liabilities on Altria’s condensed consolidated balance sheets. Pre-tax charges for tobacco and health litigation were included in marketing, administration and research costs on Altria’s condensed consolidated statements of earnings. Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria’s condensed consolidated statements of earnings.
Security for Judgments: To obtain stays of judgments pending appeal, PM USA has posted various forms of security. As of June 30, 2021, PM USA has posted appeal bonds totaling approximately $50 million, which have been collateralized with restricted cash that are included in assets on the condensed consolidated balance sheets.
Smoking and Health Litigation
Overview: Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of unfair trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
Non-Engle Progeny Litigation: Summarized below are the non-Engle progeny smoking and health cases pending during 2021 in which a verdict was returned in favor of plaintiff and against PM USA. Charts listing certain verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.
Principe: In February 2020, a jury in a Florida state court returned a verdict in favor of plaintiff and against PM USA, awarding approximately $11 million in compensatory damages. There was no claim for punitive damages. PM USA’s appeal is pending in the Third District Court of Appeal.
Greene: In September 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiffs and against PM USA, awarding approximately $10 million in compensatory damages. In May 2020, the court ruled on plaintiffs’ remaining claim and trebled the compensatory damages award to approximately $30 million. In February 2021, the trial court awarded plaintiffs attorneys’ fees and costs in the amount of approximately $2.3 million. Also in February 2021, PM USA served its post-trial motions to reverse the judgment or for a new trial. The trial court denied the post-trial motions in June 2021. PM USA has appealed the judgment to the Appeals Court of Massachusetts.
Laramie: In August 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiff and against PM USA, awarding $11 million in compensatory damages and $10 million in punitive damages. PM USA has appealed and, in February 2021, the Massachusetts Supreme Judicial Court asserted jurisdiction over the appeal.
Gentile: In October 2017, a jury in a Florida state court returned a verdict in favor of plaintiff and against PM USA, awarding approximately $7.1 million in compensatory damages and allocating 75% of the fault to PM USA. PM USA appealed. In September 2019, the Florida Fourth District Court of Appeal reversed the judgment entered by the trial court, granted PM USA judgment on certain claims and remanded for a new trial on the remaining claims. Plaintiff petitioned the Florida Supreme Court for further review, which the court denied in January 2021.
Federal Government’s Lawsuit: See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America health care cost recovery case.
Engle Class Action: In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent.
In August 2006, PM USA and plaintiffs sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In February 2008, the trial court decertified the class.
Pending Engle Progeny Cases: The deadline for filing Engle progeny cases expired in January 2008, at which point a total of approximately 9,300 federal and state claims were pending. As of July 26, 2021, approximately 1,110 state court cases were pending against PM USA or Altria asserting individual claims by or on behalf of approximately 1,380 state court plaintiffs. Because of a number of factors, including docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. While the Federal Engle Agreement (discussed below) resolved nearly all Engle progeny cases pending in federal court, as of July 26, 2021, two cases were pending against PM USA in federal court representing the cases excluded from that agreement.
Engle Progeny Trial Results: As of July 26, 2021, 136 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Seventy-five verdicts were returned in favor of plaintiffs and seven verdicts (Skolnick, Calloway, Oshinsky-Blacker, McCoy, Mahfuz, Neff and Frogel) that were initially returned in favor of plaintiffs were reversed post-trial or on appeal and remain pending.
Fifty-four verdicts were returned in favor of PM USA, of which 44 were state cases. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of July 26, 2021. The jury in one case, Garcia, awarded plaintiff compensatory damages and found plaintiff was entitled to punitive damages; however, the court declared a mistrial in the second phase of the trial regarding punitive damages because the jury was unable to determine the amount of the punitive damages. Four verdicts (Pearson, D. Cohen, Collar and Chacon) that were returned in favor of PM USA were subsequently reversed for new trials. Juries in two cases (Reider and Banks) returned zero damages verdicts in favor of PM USA. Juries in
two other cases (Weingart and Hancock) returned verdicts against PM USA awarding no damages, but the trial court in each case decided to award plaintiffs damages. One case, Pollari, resulted in a verdict in favor of PM USA following a retrial of an initial verdict returned in favor of plaintiff. Plaintiff and defendants appealed the verdict and the appellate court affirmed the judgement in favor of the defendants. Three cases, Gloger, Rintoul (Caprio) and Duignan, resulted in verdicts in favor of plaintiffs following retrial of initial verdicts returned in favor of plaintiffs. Post-trial appeals are pending in those three cases. Two cases, Freeman and Harris, resulted in an appellate reversal of a jury verdict in favor of plaintiff, and a judgment in favor of PM USA.
The charts below list the verdicts and post-trial developments in certain Engle progeny cases in which verdicts were returned in favor of plaintiffs. The first chart lists cases that are pending as of July 26, 2021 but where PM USA has determined an unfavorable outcome is not probable and the amount of loss cannot be reasonably estimated. The second chart lists cases that have concluded within the previous 12 months. Unless otherwise noted for a particular case, the jury’s award for compensatory damages will not be reduced by any finding of plaintiff’s comparative fault. Further, the damages noted reflect adjustments based on post-trial or appellate rulings. As of July 26, 2021, there are no cases where PM USA has recorded a provision in its condensed consolidated financial statements because PM USA has not determined for any currently pending case that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated.
References below to “R.J. Reynolds,” “Lorillard” and “Liggett Group” are to R.J. Reynolds Tobacco Company, Lorillard Tobacco Company and Liggett Group, LLC, respectively.
Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)
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|
|
|
|
Plaintiff
|
Verdict Date
|
Defendant(s)
|
Court
|
Compensatory Damages (1)
|
Punitive Damages
(PM USA)
|
Appeal Status
|
Garcia
|
May 2021
|
PM USA
|
Miami-Dade
|
$3 million
|
Mistrial
|
Defendant filed post-trial motions, including motions for a new trial and a judgment notwithstanding the verdict.
|
Duignan
|
February 2020 (2)
|
PM USA and R.J. Reynolds
|
Pinellas
|
$3 million
|
$12 million
|
Appeal by defendants to Second District Court of Appeal pending.
|
Cuddihee
|
January 2020
|
PM USA
|
Duval
|
$3 million
|
$0
|
Appeal by plaintiff and defendant to First District Court of Appeal pending.
|
Rintoul (Caprio)
|
November 2019 (2)
|
PM USA and R.J. Reynolds
|
Broward
|
$9 million
|
$74 million
|
Appeal by plaintiff and defendants to Fourth District Court of Appeal pending.
|
Gloger
|
November 2019 (2)
|
PM USA and R.J. Reynolds
|
Miami-Dade
|
$15 million
|
$11 million
|
Appeal by defendants to Third District Court of Appeal pending.
|
McCall
|
March 2019
|
PM USA
|
Broward
|
<$1 million (<$1 million PM USA)
|
$0
|
New trial ordered on punitive damages.
|
Neff
|
March 2019
|
PM USA and R.J. Reynolds
|
Broward
|
$4 million
|
$2 million
|
Fourth District Court of Appeal reversed the judgment against defendants and remanded for a new trial.
|
Mahfuz
|
February 2019
|
PM USA and R.J. Reynolds
|
Broward
|
$12 million
|
$10 million
|
Fourth District Court of Appeal reversed the judgment against defendants and remanded for a new trial.
|
Holliman
|
February 2019
|
PM USA
|
Miami-Dade
|
$3 million
|
$0
|
Defendant’s appeal to Third District Court of Appeal pending.
|
Chadwell
|
September 2018
|
PM USA
|
Miami-Dade
|
$2 million
|
$0
|
Third District Court of Appeal affirmed the compensatory damages award. PM USA petitioned Florida Supreme Court for review. Case stayed pending Florida Supreme Court decision in Prentice.(3)
|
Kaplan
|
July 2018
|
PM USA and R.J. Reynolds
|
Broward
|
$2 million
|
$2 million
|
Fourth District Court of Appeal affirmed the verdict and reaffirmed the verdict on rehearing.
|
|
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Plaintiff
|
Verdict Date
|
Defendant(s)
|
Court
|
Compensatory Damages (1)
|
Punitive Damages
(PM USA)
|
Appeal Status
|
R. Douglas
|
November 2017
|
PM USA
|
Duval
|
<$1 million
|
$0
|
Awaiting entry of final judgment by the trial court.
|
Sommers
|
April 2017
|
PM USA
|
Miami-Dade
|
$1 million
|
$0
|
Third District Court of Appeal affirmed compensatory damages award and granted new trial on punitive damages. Florida Supreme Court denied PM USA’s petition for review of the Third District Court of Appeal’s decision. PM USA paid approximately $1 million for the compensatory damages award and awaits the new trial on punitive damages. (4)
|
Cooper (Blackwood)
|
September 2015
|
PM USA and R.J. Reynolds
|
Broward
|
$5 million
(<$1 million PM USA)
|
$0
|
Fourth District Court of Appeal affirmed judgment and granted a new trial on punitive damages.
|
D. Brown
|
January 2015
|
PM USA
|
Federal Court - Middle District of Florida
|
$8 million
|
$9 million
|
Appeal by defendant to U.S. Court of Appeals for the Eleventh Circuit stayed pending Florida Supreme Court decision in Prentice. (3)
|
(1) PM USA’s portion of the compensatory damages award is noted parenthetically where the court has ruled that comparative fault applies.
(2) Plaintiff’s verdict following a retrial of an initial verdict in favor of plaintiff.
(3) PM USA is not a defendant in Prentice.
(4) Plaintiff was granted an award of approximately $3 million in fees, costs and interest that PM USA appealed. The Florida Third District Court of Appeals affirmed the award and PM USA paid the award amount in March 2021.
Engle Cases Concluded Within Past 12 Months (1)
(rounded to nearest $ million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plaintiff
|
Verdict Date
|
Defendant(s)
|
Court
|
Accrual Date
|
Payment Amount
(if any)
|
Payment Date
|
Berger (Cote)
|
September 2014
|
PM USA
|
Federal Court - Middle District of Florida
|
Fourth quarter of 2018 and first quarter of 2021
|
$29 million
|
February 2021
|
Santoro
|
March 2017
|
PM USA, R.J. Reynolds and Liggett Group
|
Broward
|
Second quarter of 2020 and first quarter of 2021
|
$1 million
|
January 2021
|
Dean (Kerrivan)
|
October 2014
|
PM USA and R.J. Reynolds
|
Federal Court - Middle District of Florida
|
Third quarter of 2020
|
$26 million
|
August 2020
|
Landi
|
June 2018
|
PM USA and R.J. Reynolds
|
Broward
|
Second quarter of 2020
|
$10 million
|
July 2020 (2)
|
(1) In five cases in which PM USA paid the judgments more than a year ago, Naugle, Gore, M. Brown, Jordan and Theis, plaintiffs were awarded approximately $8 million, $2 million, $8 million, $4 million and $1 million in fees and costs, respectively. PM USA has appealed in all of these cases, except Theis. In M. Brown, in March 2021 the Florida First District Court of Appeals affirmed the fee award and reversed the pre-judgment interest award and, in April 2021, PM USA paid $8.2 million in satisfaction of the fee award and post-judgment interest. In Theis, PM USA paid $1 million in satisfaction of fees and costs in May 2021.
(2) In June 2021, plaintiff was granted an award of approximately $3 million in fees, costs and interest against PM USA and R.J. Reynolds.
Engle Progeny Appellate Issues: The Florida appellate courts are considering the following appeals which may have wide application to other Engle progeny cases:
In Mary Sheffield v. R.J. Reynolds Tobacco Company, an Engle progeny case against R.J. Reynolds only, the Florida Supreme Court has taken jurisdiction to resolve the conflict among Florida’s District Courts of Appeal over whether the 1999 amendments to Florida’s punitive damages statute (including its caps and bar on multiple punitive damages awards for the same course of conduct) apply in wrongful death cases where the decedent was injured prior to the October 1, 1999 effective date of the amendments but died from his or her injuries after such effective date. Oral argument was held before the Florida Supreme Court in April 2021; a decision has not yet been issued.
In Linda Prentice v. R.J. Reynolds Tobacco Company, an Engle progeny case against R.J. Reynolds only, the Florida First District Court of Appeal in January 2020 reversed a judgment in favor of the plaintiff and remanded for a new trial. The court held that the trial court had erred by failing to instruct the jury that in order to prevail on her claim for conspiracy to commit fraudulent concealment, the plaintiff was required to prove that her decedent relied to his detriment on a statement that concealed or omitted material information about the health risks of smoking. That holding conflicts with decisions from the Second, Third, and Fourth District Courts of Appeal, which have each held that Engle plaintiffs do not need to prove reliance on a statement, and instead can prevail by proving reliance on the Engle defendants’ concealment of information. In August 2020, the Florida Supreme Court accepted jurisdiction in the case. As an alternative ground to approve the First District Court of Appeal’s decision in its favor in Prentice, R.J. Reynolds has asked the Florida Supreme Court to reconsider its prior decisions giving the Engle Phase I findings preclusive effect in Engle progeny cases, as described more fully in the section Engle Class Action above. Oral argument was held before the Florida Supreme Court in June 2021; a decision has not yet been issued.
Florida Bond Statute: In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs have been unsuccessful in various challenges to the bond cap statute in Florida state court.
No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.
From time to time, legislation has been presented to the Florida legislature that would repeal the bond cap statute; however to date, no legislation repealing the statute has passed.
Other Smoking and Health Class Actions: Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 61 smoking and health class actions involving PM USA in Arkansas (1), California (1), Delaware (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1). See Certain Other Tobacco-Related Litigation below for a discussion of “Lights” and “Ultra Lights” class action cases and medical monitoring class action cases pending against PM USA.
As of July 26, 2021, PM USA and Altria are named as defendants, along with other cigarette manufacturers, in seven class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (two separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants’ cigarettes. In March 2019, all of these class actions were stayed as a result of three Canadian tobacco manufacturers (none of which is related to Altria or its subsidiaries) seeking protection under Canada’s Companies’ Creditors Arrangement Act (which is similar to Chapter 11 bankruptcy in the U.S.). The companies entered into these proceedings following a Canadian appellate court upholding two smoking and health class action verdicts against those companies totaling approximately CAD $13 billion. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI, which provides for indemnities for certain liabilities concerning tobacco products.
Health Care Cost Recovery Litigation
Overview: In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Although there have been some decisions to the contrary, most judicial decisions in the U.S. have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five federal circuit courts of appeal.
In addition to the cases brought in the U.S., health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria, in Canada (10 cases), and other entities have stated that they are considering filing such actions.
Since the beginning of 2008, the Canadian Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in the British Columbia and Quebec cases, while both Altria and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia cases. The Nunavut Territory and Northwest Territory have passed legislation permitting similar claims, but lawsuits based on this legislation have not been filed. All of these cases have been stayed pending resolution of proceedings in Canada involving three tobacco manufacturers (none of which are affiliated with Altria or its subsidiaries) under the Companies’ Creditors Arrangement Act discussed above. See Smoking and Health Litigation - Other Smoking and Health Class Actions above for a discussion of these proceedings. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other tobacco product manufacturers entered into the 1998 Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia and certain U.S. territories to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers or “OPMs” (now PM USA, R.J. Reynolds and, with respect to certain brands, ITG Brands, LLC (“ITG”)) make annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the OPMs are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million. For the three months ended June 30, 2021 and 2020, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $1.2 billion and $1.0 billion, respectively. For the six months ended June 30, 2021 and 2020, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $2.1 billion for each period. These amounts include PM USA’s estimate of amounts related to NPM Adjustments discussed below.
NPM Adjustment Disputes: The “NPM Adjustment” is a reduction in MSA payments made by the OPMs and those manufacturers that are subsequent signatories to the MSA (collectively, the “participating manufacturers” or “PMs”) that applies if the PMs collectively lose at least a specified level of market share to non-participating manufacturers since 1997, subject to certain conditions and defenses.
The independent auditor (“IA”) appointed under the MSA has calculated that PM USA’s share of the maximum potential NPM Adjustments for 2004-2020 is (exclusive of interest or earnings): $388 million for 2004; $181 million for 2005; $154 million for 2006; $185 million for 2007; $250 million for 2008; $211 million for 2009; $218 million for 2010; $166 million for 2011; $214 million for 2012; $224 million for 2013; $258 million for 2014; $313 million for 2015; $292 million for 2016; $302 million for 2017; $325 million for 2018; $444 million for 2019; and $572 million for 2020. These maximum amounts will be reduced, likely substantially, to reflect the NPM Adjustment settlements discussed below, and potentially for current and future calculation disputes and other developments. In addition, PM USA’s recovery of these amounts, even as reduced, is dependent upon subsequent determinations regarding state-specific defenses and disputes with other PMs.
Settlements of NPM Adjustment Disputes.
▪Multi-State Settlement. By the end of 2018, PM USA entered into a multi-state settlement of NPM Adjustment disputes with a total of 36 MSA states and territories in which PM USA settled the NPM Adjustment disputes through 2022 with 35 of the 36 states, and through 2024 with one state. Pursuant to the multi-state settlement, PM USA received $1.03 billion and expects to receive approximately $320 million in credits to offset PM USA’s MSA payments through 2029.
▪New York Settlement. In 2015, PM USA entered into a separate NPM Adjustment settlement with New York in which PM USA settled the NPM Adjustment disputes with New York in perpetuity. PM USA received $373 million pursuant to the New York settlement and expects to receive annual credits applied against the MSA payments due to New York going forward.
▪Montana Settlement. In 2020, PM USA entered into a separate NPM Adjustment settlement with Montana in which PM USA settled the NPM Adjustment disputes with Montana through 2030. This settlement resulted in a payment by PM USA of $4 million.
Continuing NPM Adjustment Disputes with States That Have Not Settled.
▪2004 NPM Adjustment. The PMs and the 10 states that have not settled the NPM Adjustment disputes are currently arbitrating NPM Adjustment disputes for 2004 in a multi-state arbitration. Hearings for 9 of the 10 states have concluded,
and the hearing for one remaining state is currently scheduled for October 2021. As of July 26, 2021, no decisions have resulted from the arbitrations.
▪2005-2007 NPM Adjustments. The PMs and the 10 states that have not settled the NPM Adjustment disputes are currently arbitrating NPM Adjustment disputes before a single arbitration panel. The arbitration encompasses three years, 2005-2007, for nine of the 10 states, and one year, 2005, for one state. As of July 26, 2021, no decisions have resulted from the arbitration.
▪Subsequent Years. No assurance can be given as to when proceedings for 2008 and subsequent years will be scheduled or the precise form those proceedings will take.
Other Disputes Under the State Settlement Agreements: The payment obligations of the tobacco product manufacturers that are parties to the State Settlement Agreements, as well as the allocations of any NPM Adjustments and related settlements, have been and may continue to be affected by R.J. Reynolds’s acquisition of Lorillard in 2015 and its related sale of certain cigarette brands to ITG (the “ITG transferred brands”). PM USA filed motions to enforce the state settlement agreements in Florida, Minnesota, Texas and Mississippi in connection with various positions that R.J. Reynolds and ITG took with regard to the ITG transferred brands. After various court decisions in each of those states that were favorable to PM USA, those motions to enforce have now been resolved either through settlement or exhaustion of appeals. Despite these resolutions, PM USA continues to dispute the accuracy of certain submissions made by R.J. Reynolds and ITG concerning the calculation of certain payments relating to the ITG transferred brands and may pursue such claims.
In December 2019, the State of Mississippi filed a motion in Mississippi state court seeking to enforce the Mississippi State Settlement Agreement against PM USA, R.J. Reynolds and ITG concerning the tax rates used in the annual calculation of the net operating profit adjustment payments starting in 2018. A hearing is scheduled for October 2021.
Federal Government’s Lawsuit: In 1999, the United States government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria, asserting claims under three federal statutes. The case ultimately proceeded only under the civil provisions of RICO. In August 2006, the district court held that certain defendants, including Altria and PM USA, violated RICO and engaged in seven of the eight “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:
▪defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;
▪defendants hid from the public that cigarette smoking and nicotine are addictive;
▪defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;
▪defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;
▪defendants falsely denied that they intentionally marketed to youth;
▪defendants publicly and falsely denied that ETS is hazardous to non-smokers; and
▪defendants suppressed scientific research.
The court did not impose monetary penalties on defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes;” (iv) an injunction against conveying any express or implied health message or health descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to ETS; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until the third quarter of 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the FTC for a period of 10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the U.S.; and (ix) payment of the government’s costs in bringing the action.
Following several years of appeals relating to the content of the corrective statements remedy described above, in October 2017, the district court approved the parties’ proposed consent order implementing corrective statements in newspapers and on television. The corrective statements began appearing in newspapers and on television in the fourth quarter of 2017. In April
2018, the parties reached agreement on the implementation details of the corrective statements on websites and onserts. The corrective statements began appearing on websites in the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018.
In 2014 and 2019, Altria and PM USA recorded provisions totaling approximately $36 million for the estimated costs of implementing the corrective communications remedy.
The requirements related to corrective statements at point-of-sale remain outstanding. In May 2014, the district court ordered further briefing on the issue, which was completed in June 2014. In May 2018, the parties submitted a joint status report and additional briefing on point-of-sale signage to the district court. In May 2019, the district court ordered a hearing on the point-of-sale signage issue. The hearing is currently scheduled for June 2022.
In June 2020, the United States government filed a motion with the district court asking for clarification as to whether the court-ordered injunction that applies to cigarettes also applies to HeatSticks, a heated tobacco product used with the IQOS electronic device. In August 2020, Altria and PM USA filed an opposition to the government’s motion and, in the alternative, a motion to modify the injunction to make clear it does not apply to HeatSticks. Regardless of the district court’s decisions on the pending motions, the government has indicated it will not oppose a modification to the injunction that permits PM USA to use the Modified Risk Tobacco Product claim authorized by the United States Food and Drug Administration for HeatSticks.
E-vapor Product Litigation
As of July 26, 2021, Altria and/or its subsidiaries, including PM USA, were named as defendants in 54 class action lawsuits relating to JUUL e-vapor products. JUUL is an additional named defendant in each of these lawsuits. The theories of recovery include violation of RICO, fraud, failure to warn, design defect, negligence and unfair trade practices. Plaintiffs seek various remedies, including compensatory and punitive damages and an injunction prohibiting product sales. The 54 class action lawsuits include 29 cases involving plaintiffs whose claims were previously included in other class action complaints but were refiled as separate stand-alone class actions for procedural and other reasons.
Altria and/or its subsidiaries, including PM USA, also have been named as defendants in other lawsuits involving JUUL e-vapor products, including 2,318 individual lawsuits, 254 “third party” lawsuits, which include school districts, state and local governments and tribal and healthcare organization lawsuits. JUUL is an additional named defendant in each of these lawsuits.
The majority of the individual and class action lawsuits mentioned above were filed in federal court. In October 2019, the United States Judicial Panel on Multidistrict Litigation ordered the coordination or consolidation of these lawsuits in the U.S. District Court for the Northern District of California for pretrial purposes.
Altria and its subsidiaries filed motions to dismiss certain claims in the class action and school district cases, including the federal RICO claim. In October 2020, the U.S. District Court for the Northern District of California granted the motion to dismiss the RICO class action claim without prejudice. Although it otherwise denied the motion, the court found that plaintiffs had not sufficiently alleged standing or causation with respect to their claim under California law. The court also granted the motion to dismiss the RICO claim in the cases filed by various school districts, but denied the motion in all other respects. The court gave plaintiffs the opportunity to amend their complaints to attempt to cure the deficiencies the court identified and plaintiffs filed their amended complaints in November 2020. In January 2021, Altria and its subsidiaries filed a renewed motion to dismiss the RICO claim, which the court denied in April 2021. In December 2020, the U.S. District Court for the Northern District of California selected 12 personal injury plaintiffs to be adjudicated as bellwether cases and in July 2021, the court set dates for the first four of such cases to commence in 2022.
An additional group of cases is pending in California state courts. In January 2020, the Judicial Council of California determined that this group of cases was appropriate for coordination and assigned the group to the Superior Court of California, Los Angeles County, for pretrial purposes.
JUUL also is named in a significant number of additional individual and class action lawsuits to which neither Altria nor any of its subsidiaries is currently named.
Three of the “third party” lawsuits noted above against Altria and/or its subsidiaries and JUUL, as an additional named defendant, were initiated, individually, by the attorneys general of Alaska, Hawaii and Minnesota alleging violations of state consumer protection and other similar laws. JUUL is also named in other attorneys general lawsuits to which neither Altria nor any of its subsidiaries is currently named. JUUL settled one such lawsuit by agreeing to (i) pay approximately $40 million and (ii) certain restrictions on its sales and marketing activities.
IQOS Litigation
In April 2020, RAI Strategic Holdings, Inc. and R.J. Reynolds Vapor Co., which are affiliates of R.J. Reynolds, filed a lawsuit against Altria, PM USA, Altria Client Services LLC, PMI and its affiliate, Philip Morris Products S.A., in the United States District Court for the Eastern District of Virginia. The lawsuit asserts claims of patent infringement based on the sale of the IQOS electronic device and HeatSticks in the United States. Plaintiffs seek various remedies, including preliminary and
permanent injunctive relief, treble damages and attorneys’ fees. Altria and PMI have been dismissed from the lawsuit. In June 2020, the remaining defendants filed a motion to dismiss certain of plaintiffs’ claims and also filed counterclaims against the plaintiffs for infringement of various patents owned by the remaining defendants. The case was stayed in December 2020 due to the COVID-19 pandemic; however, the stay was lifted with respect to defendants’ counterclaims in February 2021.
Also in April 2020, a related action was filed against the same defendants by the same plaintiffs, as well as R.J. Reynolds, with the United States International Trade Commission (“ITC”). There, the plaintiffs also allege patent infringement, but the remedies sought include a prohibition on the importation of the IQOS electronic device, HeatSticks and component parts into the United States and on the sale of any such products previously imported into the United States. No damages are recoverable in the proceedings before the ITC. A hearing before an administrative law judge was held in January 2021.
In May 2021, the administrative law judge found that the IQOS electronic device and HeatSticks infringe plaintiffs’ patents. The administrative law judge recommended to the ITC a ban on the importation of the IQOS electronic device and HeatSticks into the United States. In May 2021, defendants sought review of the judge’s determination before the ITC. In July 2021, the ITC accepted review of the administrative law judge’s findings and recommendations on certain issues, including issues relating to the patent infringement claims and potential remedies. If the review before the ITC is unsuccessful, further review before the U.S. Trade Representative and, if necessary, an appeal to the United States Court of Appeals for the Federal Circuit is permitted; however, any ban on importation or on the sale of previously imported product is unlikely to be stayed pending the conclusion of the appeal. Due to the uncertainty of this litigation, in July 2021, PM USA decided to delay further expansion of the IQOS electronic device and Marlboro HeatSticks.
An additional unrelated patent infringement case regarding the IQOS electronic device was filed in November 2020 in the United States District Court for the Northern District of Georgia against PM USA and Philip Morris Products S.A. seeking damages and equitable relief. In February 2021, defendants filed a motion to dismiss the lawsuit, which the court granted in July 2021.
Antitrust Litigation
In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act of 1890 (“Sherman Act”) and Section 5 of the Federal Trade Commission Act of 1914, and substantially lessened competition in violation of Section 7 of the Clayton Antitrust Act (“Clayton Act”). If the FTC’s challenge is successful, the FTC may order a broad range of remedies, including divestiture of Altria’s minority investment in JUUL, rescission of the transaction and all associated agreements, and prohibition against any officer or director of either Altria or JUUL serving on the other party’s board of directors or attending meetings of the other party’s board of directors. The administrative trial was held before an FTC administrative law judge in June 2021. The post-trial briefing is scheduled to be completed in October 2021. The administrative law judge’s decision is subject to review by the FTC on its own motion or at the request of any party. The FTC then issues its ruling, which may be appealed to any United States Court of Appeals.
Also as of July 26, 2021, 16 putative class action lawsuits have been filed against Altria and JUUL in the United States District Court for the Northern District of California. The lawsuits initially named, in addition to the two companies, certain senior executives and certain members of the board of directors of both companies as defendants; however, those individuals currently or formerly affiliated with Altria were later dismissed. In November 2020 these lawsuits were consolidated into three complaints (one on behalf of direct purchasers, one on behalf of indirect purchasers and one on behalf of indirect resellers). The consolidated lawsuits, as amended, cite the FTC administrative complaint and allege that Altria and JUUL violated Sections 1, 2 and/or 3 of the Sherman Act and Section 7 of the Clayton Act and various state antitrust, consumer protection and unjust enrichment laws by restraining trade and/or substantially lessening competition in the U.S. closed-system electronic cigarette market. Plaintiffs seek various remedies, including treble damages, attorneys’ fees, a declaration that the agreements between Altria and JUUL are invalid, divestiture of Altria’s minority investment in JUUL and rescission of the transaction. Altria filed a motion to dismiss these lawsuits in January 2021.
In November 2020, Altria exercised its rights to convert its non-voting JUUL shares to voting shares. However, pending the outcome of the FTC administrative complaint, Altria currently does not intend to exercise its additional governance rights obtained upon the conversion, including the right to elect directors to JUUL’s board or to vote its JUUL shares other than as a passive investor. For further discussion of Altria’s rights in the event of share conversion, see Note 3. Investments in Equity Securities - Investment in JUUL.
Shareholder Class Action and Shareholder Derivative Lawsuits
In October and December 2019, two purported Altria shareholders filed putative class action lawsuits against Altria, Howard A. Willard III, Altria’s former Chairman and Chief Executive Officer, and William F. Gifford, Jr., Altria’s former Vice Chairman and Chief Financial Officer and current Chief Executive Officer, in the United States District Court for the Eastern District of New York. In December 2019, the court consolidated the two lawsuits into a single proceeding. The consolidated lawsuit was subsequently transferred to the United States District Court for the Eastern District of Virginia. The lawsuit asserts claims
under Sections 10(b) and 20(a) and under Rule 10b-5 of the Exchange Act. In April 2020, JUUL, its founders and some of its current and former executives were added to the lawsuit. The claims allege false and misleading statements and omissions relating to Altria’s investment in JUUL. Plaintiffs seek various remedies, including damages and attorneys’ fees. In July 2020, the defendants filed motions to dismiss plaintiffs’ claims, which the district court denied in March 2021.
In August 2020, two purported Altria shareholders filed separate derivative lawsuits in the United States District Court for the Northern District of California on behalf of themselves and Altria, against Mr. Willard, Mr. Gifford, JUUL and certain of its executives and officers. These derivative lawsuits relate to Altria’s investment in JUUL, and assert claims of breach of fiduciary duty by the Altria defendants and aiding and abetting in that alleged breach of fiduciary duty by the remaining defendants. In March 2021, the United States District Court for the Northern District of California granted defendants’ motion to transfer both lawsuits to the United States District Court for the Eastern District of Virginia. A third derivative lawsuit was filed in September 2020 in the Circuit Court for Henrico County, Virginia against Mr. Willard, Mr. Gifford, Kevin C. Crosthwaite (Altria’s former Chief Growth Officer and current JUUL Chief Executive Officer) and certain members of Altria’s Board of Directors. This suit asserts a claim for breach of fiduciary duty. Plaintiffs seek various remedies, including damages, disgorgement of profits, reformation of Altria’s corporate governance and internal procedures, and attorneys’ fees. The fourth, fifth and sixth derivative lawsuits were filed in October 2020, January 2021 and March 2021, respectively, in the United States District Court for the Eastern District of Virginia against Mr. Willard, Mr. Gifford, Mr. Crosthwaite, certain members of Altria’s Board of Directors, JUUL, its founders and some of its current and former executives. These suits assert various claims, including breach of fiduciary duty, unjust enrichment, waste of corporate assets and violations of certain federal securities laws. The remedies sought in these lawsuits are similar to those sought by plaintiffs in the Virginia lawsuit. In April 2021, the court consolidated the five cases pending in the Eastern District of Virginia into a single action.
A seventh derivative lawsuit was filed in May 2021 in the Circuit Court for Henrico County, Virginia against Mr. Willard, Mr. Gifford, Mr. Crosthwaite and certain members of Altria’s Board of Directors. An additional eighth derivative lawsuit was filed in June 2021 in the Circuit Court for Henrico County, Virginia against Mr. Willard, Mr. Gifford, Mr. Crosthwaite, certain members of Altria’s Board of Directors, JUUL, its founders and some of its current and former executives. Both of these suits assert various claims, including breach of fiduciary duty.
Certain Other Tobacco-Related Litigation
“Lights/Ultra Lights” Cases and Other Smoking and Health Class Actions: Plaintiffs have sought certification of their cases as class actions, alleging among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and have sought injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria or its other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. Twenty-one state courts in 23 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA. As of July 26, 2021, two “Lights/Ultra Lights” class actions are pending in U.S. state court. Neither case is active.
As of July 26, 2021, one smoking and health case alleging personal injury or seeking court-supervised programs or ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, is pending in a U.S. state court. The case is currently inactive.
UST Litigation: UST and/or its tobacco subsidiaries have been named in a number of individual tobacco and health lawsuits over time. Plaintiffs’ allegations of liability in these cases have been based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs have typically sought various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. As of July 26, 2021, there is one case pending against USSTC.
Environmental Regulation
Altria and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the U.S.: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.
Altria provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria’s consolidated results of operations, capital expenditures, financial position or cash flows.
Guarantees and Other Similar Matters
In the ordinary course of business, certain subsidiaries of Altria have agreed to indemnify a limited number of third parties in the event of future litigation. At June 30, 2021, Altria and certain of its subsidiaries (i) had $49 million of unused letters of credit obtained in the ordinary course of business; (ii) were contingently liable for guarantees related to their own performance, including $25 million for surety bonds; and (iii) had a redeemable noncontrolling interest of $41 million recorded on its condensed consolidated balance sheet. In addition, from time to time, subsidiaries of Altria issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria’s liquidity.
Under the terms of a distribution agreement between Altria and PMI (the “Distribution Agreement”), entered into as a result of Altria’s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria does not have a related liability recorded on its condensed consolidated balance sheet at June 30, 2021 as the fair value of this indemnification is insignificant. PMI has agreed not to seek indemnification with respect to the IQOS patent litigation discussed above under Certain Other Tobacco-Related Litigation - IQOS Litigation, excluding the patent infringement case filed with the United States District Court for the Northern District of Georgia.
PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under its $3.0 billion Credit Agreement and amounts outstanding under its commercial paper program.
Note 12. New Accounting Guidance Not Yet Adopted
The following table provides a description of issued accounting guidance applicable to, but not yet adopted by, Altria:
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Standards
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Description
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Effective Date for Public Entity
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Effect on Financial Statements
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ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
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The guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Key provisions of the guidance include reducing the number of accounting models, simplifying the earnings per share calculations and expanding the disclosures related to convertible instruments.
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The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.
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Altria is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
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Note 13. Subsequent Event
On July 8, 2021, UST entered into a Share Purchase Agreement pursuant to which UST agreed to sell its subsidiary, IWS, which includes Ste. Michelle, to an entity controlled by investment funds managed by Sycamore Partners Management, L.P. (“Sycamore Partners”) in an all-cash transaction with a purchase price of approximately $1.2 billion and the assumption of certain liabilities of IWS and its subsidiaries (the “Ste. Michelle Transaction”). Altria’s net cash proceeds will be subject to customary net working capital and other adjustments at closing. Altria expects the Ste. Michelle Transaction to close during the second half of 2021, subject to Sycamore Partners obtaining the necessary financing and the satisfaction of customary closing conditions, including antitrust regulatory clearance. In the second half of 2021, Altria will classify the related assets and liabilities of IWS as held for sale on its condensed consolidated balance sheet and will record a charge which is not expected to be material to Altria’s financial statements. Altria does not expect to account for the results of Ste. Michelle as a discontinued operation in its financial statements.