The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of risk factors that may affect future results in Item 1A. Description of the Company For a description ofAltria , see Item 1. Business, and Background in Note 1. 14
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Altria 's reportable segments are smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in an all other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution ofAltria 's innovative tobacco products businesses toAltria 's consolidated results. Effective with the first quarter of 2020,Altria 's smokeless products segment will be renamed as the oral tobacco products segment.Altria 's oral tobacco products segment will include financial results, volume and retail share performance from USSTC's core MST and snus businesses and Helix's on! oral nicotine pouches. Prior period volume and retail share data will be updated to reflect these changes. Executive Summary Consolidated Results of Operations The changes inAltria 's net earnings (losses) and diluted EPS attributable toAltria for the year endedDecember 31, 2019 , from the year endedDecember 31, 2018 , were due primarily to the following: (in millions, except per share data) Net Earnings Diluted EPS For the year ended December 31, 2018$ 6,963 $ 3.68 2018 NPM Adjustment Items (109 ) (0.06 ) 2018 Asset impairment, exit, implementation and acquisition-related costs 432 0.23 2018 Tobacco and health litigation items 98 0.05 2018 ABI-related special items (68 ) (0.03 ) 2018 (Gain) loss on ABI/SABMiller business combination 26 0.01 2018 Tax items 197 0.11 Subtotal 2018 special items 576 0.31 2019 Asset impairment, exit, implementation and acquisition-related costs (269 ) (0.15 ) 2019 Tobacco and health litigation items (58 ) (0.03 ) 2019 Impairment of JUUL equity securities (8,600 ) (4.60 ) 2019 ABI-related special items 280 0.15 2019 Cronos-related special items (640 ) (0.34 ) 2019 Tax items 99 0.05 Subtotal 2019 special items (9,188 ) (4.92 ) Fewer shares outstanding - 0.04 Change in tax rate (65 ) (0.03 ) Operations 421 0.22 For the year ended December 31, 2019$ (1,293 )
See the discussion of events affecting the comparability of statement of earnings (losses) amounts in the Consolidated Operating Results section of the following Discussion and Analysis. ? Fewer Shares Outstanding: Fewer shares outstanding during 2019 compared with 2018 were due primarily to shares repurchased byAltria under its share repurchase programs.
? Change in Tax Rate: The change in tax rate was driven primarily by lower
dividends from ABI.
? Operations: The increase of
above was due primarily to the following:
? higher income from the smokeable and smokeless products segments;
? lower spending as a result ofAltria 's decision in 2018 to refocus its innovative product efforts; and
? higher earnings from
partially offset by higher interest and other debt expense, net, due to debt incurred in connection with the Cronos and JUUL transactions. For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis. 2020 Forecasted ResultsAltria forecasts that its 2020 full-year adjusted diluted EPS growth rate is expected to be in the range of 4% to 7% over its 2019 full-year adjusted diluted EPS base of$4.22 , as shown in the table below.Altria 's 2020 guidance reflects increased investments related toPM USA's 15
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commercialization efforts for IQOS, Helix's plans to manufacture and expandU.S. distribution of on! and one extra shipping day in the first quarter of 2020. This forecasted growth rate excludes estimated per share charges in 2020 of$0.05 for tax expense, representing a partial reversal of the tax basis benefit recorded in 2017 attributable to the deemed repatriation tax related toAltria 's investment in ABI. For further discussion, see Note 15.Altria expects its 2020 full-year adjusted effective tax rate will be in a range of 23.5% to 24.5%.
Reconciliation of 2019 Reported Diluted EPS to 2019 Adjusted Diluted EPS 2019 Reported diluted EPS
$ (0.70 ) Asset impairment, exit, implementation and acquisition-related costs 0.15 Tobacco and health litigation items
0.03
Impairment of JUUL equity securities 4.60 ABI-related special items (0.15 ) Cronos-related special items 0.34 Tax items (0.05 ) 2019 Adjusted diluted EPS$ 4.22 Altria 's full-year adjusted diluted EPS guidance and full-year forecast for its adjusted effective tax rate exclude the impact of certain income and expense items that management believes are not part of underlying operations. These items may include, for example, restructuring charges, asset impairment charges, acquisition-related costs, equity investment-related special items (including any changes in fair value for the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain non-participating manufacturer ("NPM") adjustment disputes under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as "NPM Adjustment Items" and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 19).Altria 's management cannot estimate on a forward-looking basis the impact of certain income and expense items, including those items noted in the preceding paragraph, onAltria 's reported diluted EPS and its reported effective tax rate because these items, which could be significant, may be unusual or infrequent, are difficult to predict and may be highly variable. As a result,Altria does not provide a correspondingUnited States generally accepted accounting principles ("U.S. GAAP") measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast. The factors described in Item 1A represent continuing risks to this forecast. WhileAltria reports its financial results in accordance withU.S. GAAP, its management reviews certain financial results, including diluted EPS, on an adjusted basis, which excludes certain income and expense items, including those items noted above.Altria 's management does not view any of these special items to be part ofAltria 's underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results.Altria 's management also reviews income tax rates on an adjusted basis.Altria 's adjusted effective tax rate may exclude certain tax items from its reported effective tax rate.Altria 's management believes that adjusted financial measures provide useful additional insight into underlying business trends and results and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided toAltria 's chief operating decision maker (the "CODM") for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. These adjusted financial measures are not consistent withU.S. GAAP and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance withU.S. GAAP. Discussion and Analysis Critical Accounting Policies and Estimates Note 2 includes a summary of the significant accounting policies and methods used in the preparation ofAltria 's consolidated financial statements. In most instances,Altria must use an accounting policy or method because it is the only policy or method permitted underU.S. GAAP. The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. If actual amounts are ultimately different from previous estimates, the revisions are included inAltria 's consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, betweenAltria 's estimates and actual amounts in any year have not had a significant impact on its consolidated financial statements. 16
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The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods, used in the preparation ofAltria 's consolidated financial statements: ?Consolidation: The consolidated financial statements includeAltria , as well as its wholly-owned and majority-owned subsidiaries. Investments in whichAltria currently has the ability to exercise significant influence over the operating and financial policies of the investee are accounted for under the equity method of accounting. Equity investments in whichAltria does not have the ability to exercise significant influence over the operating and financial policies of the investee are accounted for as an investment in an equity security. All intercompany transactions and balances have been eliminated. Upon antitrust clearance,Altria expects to account for its equity method investment in JUUL using the fair value option. Under the fair value option,Altria 's consolidated statements of earnings (losses) will include any cash dividends from its investment in JUUL and any changes in the fair value of its investment, which will be calculated quarterly.Altria believes the fair value option provides quarterly transparency to investors as to the fair market value ofAltria 's investment in JUUL, given the changes and volatility in the e-vapor category sinceAltria 's initial investment, as well as the lack of publicly available information regarding JUUL's business or a market-derived valuation. ?Revenue Recognition:Altria 's businesses generate substantially all of their revenue from sales contracts with customers. WhileAltria 's businesses enter into separate sales contracts with each customer for each product type, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. All performance obligations are satisfied within one year; therefore, costs to obtain contracts are expensed as incurred and unsatisfied performance obligations are not disclosed. There is no financing component becauseAltria 's businesses expect, at contract inception, that the period between whenAltria 's businesses transfer product to the customer and when the customer pays for that product will be one year or less.Altria 's businesses define net revenues as revenues, which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns (also referred to as returned goods) and sales incentives.Altria 's businesses exclude from the transaction price sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on cigarettes, cigars, smokeless tobacco or wine billed to customers).Altria 's businesses recognize revenues from sales contracts with customers upon shipment of goods when control of such products is obtained by the customer.Altria 's businesses determine that a customer obtains control of the product upon shipment when title of such product and risk of loss transfers to the customer.Altria 's businesses account for shipping and handling costs as fulfillment costs and such amounts are classified as part of cost of sales inAltria 's consolidated statements of earnings.Altria 's businesses record an allowance for returned goods, based principally on historical volume and return rates, which is included in other accrued liabilities onAltria 's consolidated balance sheets.Altria 's businesses record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction to revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period) based principally on historical volume, utilization and redemption rates. Expected payments for sales incentives are included in accrued marketing liabilities onAltria 's consolidated balance sheets. Payment terms vary depending on product type.Altria 's businesses consider payments received in advance of product shipment as deferred revenue, which is included in other accrued liabilities onAltria 's consolidated balance sheets until revenue is recognized.PM USA receives payment in advance of a customer obtaining control of the product. USSTC receives substantially all payments within one business day of the customer obtaining control of the product. Ste. Michelle receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in receivables onAltria 's consolidated balance sheets. For further discussion, see Note 3. Revenues from Contracts with Customers to the consolidated financial statements in Item 8. ?Depreciation, Amortization, Impairment Testing and Asset Valuation:Altria depreciates property, plant and equipment and amortizes its definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.Altria reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable.Altria performs undiscounted operating cash flow analyses to determine if an impairment exists. These analyses are affected by general economic conditions and projected growth rates. For purposes of recognition and measurement of an impairment for assets held for use,Altria groups assets and liabilities at the lowest level for which cash flows are separately identifiable. IfAltria determines that an impairment exists, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.Altria also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.Altria conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would requireAltria to perform an interim review. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit, but is limited to the total 17
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amount of goodwill allocated to a reporting unit. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the intangible asset is considered impaired and is reduced to fair value in the period identified.Goodwill by reporting unit and indefinite-lived intangible assets atDecember 31, 2019 were as follows: Indefinite-Lived (in millions) Goodwill Intangible Assets Cigarettes$ 22 $ 2 Smokeless products 5,078 8,801 Cigars 77 2,640 Wine - 233 Total$ 5,177 $ 11,676 During 2019,Altria completed its quantitative annual impairment test of goodwill and indefinite-lived intangible assets performed as ofOctober 1, 2019 . Upon completion of this testing,Altria concluded that the goodwill of$74 million in the wine segment was fully impaired as the wine reporting unit was impacted by a slowing growth rate in the premium wine category and higher inventories. In performing the 2019 quantitative annual impairment test for the wine reporting unit,Altria concluded that the fair value of the unit as a whole was approximately 25% below its carrying value of approximately$1.5 billion after the impairment charge discussed above.Altria also evaluated all wine reporting unit assets, including current assets, property, plant and equipment, and other long-lived assets other than goodwill and concluded that these assets were fairly stated atDecember 31, 2019 . The results of the 2019 quantitative annual impairment test of goodwill and indefinite-lived intangible assets for the other reporting units and trademarks are indicated below. The estimated fair values of the cigarettes and cigars reporting units and the indefinite-lived intangible assets within the cigars reporting unit substantially exceeded their carrying values. The estimated fair values of the smokeless products reporting unit and the indefinite-lived intangible assets within the reporting unit substantially exceeded their carrying values, with the exception of the Skoal trademark. AtDecember 31, 2019 , the estimated fair value of the Skoal trademark exceeded its carrying value of$3.9 billion by approximately 18%. Skoal continues to be impacted by slowing category volumes and increased competitive activities due to higher pricing and adult tobacco consumer movement among tobacco products, including oral nicotine pouch products. The estimated fair values of the indefinite-lived intangible assets within the wine reporting unit substantially exceeded their carrying values, with the exception of the Patz & Hall trademark, which atDecember 31, 2019 , exceeded its carrying value of$30 million by approximately 11%. During 2018,Altria 's quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in$54 million of impairment charges. During 2017,Altria 's quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in no impairment charges. In 2019,Altria used an income approach to estimate the fair values of all of its reporting units and indefinite-lived intangible assets. The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. The weighted-average discount rate used in performing the valuations was approximately 10%. In performing the 2019 discounted cash flow analysis,Altria made various judgments, estimates and assumptions, the most significant of which were volume, income, growth rates and discount rates. The analysis incorporated assumptions used inAltria 's long-term financial forecast, which is used byAltria 's management to evaluate business and financial performance, including allocating resources and evaluating results relative to setting employee compensation targets. The assumptions incorporated the highest and best use ofAltria 's indefinite-lived intangible assets and also included perpetual growth rates for periods beyond the long-term financial forecast. The perpetual growth rate used in performing all of the valuations was 2%. Fair value calculations are sensitive to changes in these estimates and assumptions, some of which relate to broader macroeconomic conditions outside ofAltria 's control. AlthoughAltria 's discounted cash flow analysis is based on assumptions that are considered reasonable and based on the best available information at the time that the discounted cash flow analysis is developed, there is significant judgment used in determining future cash flows. The following factors have the most potential to impact expected future cash flows and, therefore,Altria 's impairment conclusions: general economic conditions; federal, state and local regulatory developments; category growth rates; consumer preferences; success of planned product expansions; competitive activity; and income and tobacco-related taxes. For further discussion of these factors, see Operating Results by Business Segment - Tobacco Space - Business Environment below. WhileAltria 's management believes that the estimated fair values of each reporting unit and indefinite-lived intangible asset are reasonable, actual performance in the short-term or long-term could be significantly different from forecasted performance, which could result in impairment charges in future periods. 18
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For further discussion of goodwill and other intangible assets, see Note 4. Investments in ABI and CronosAltria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment on a quarterly basis in connection with the preparation of its financial statements by comparing the fair value of each of its investments to their carrying value. If the carrying value of an investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and reduced to fair value, and the impairment is recognized in the period identified. The factors used to make this determination include the duration and magnitude of the fair value decline, the financial condition and near-term prospects of the investee, andAltria 's intent and ability to hold its investment until recovery. The fair value ofAltria 's equity investment in ABI atDecember 31, 2019 and 2018 was$16.1 billion (carrying value of$18.1 billion ) and$13.1 billion (carrying value of$17.7 billion ), respectively, which was less than its carrying value by 11% and 26%, respectively, atDecember 31, 2019 and 2018. During 2019, the fair value increased and atSeptember 30, 2019 , the fair value ofAltria 's equity investment in ABI exceeded its carrying value by 4%. InOctober 2019 , the fair value ofAltria 's equity investment in ABI declined below its carrying value. AtFebruary 24, 2020 , the fair value ofAltria 's equity investment in ABI was approximately$13.7 billion (approximately 24% below its carrying value).Altria concluded that the decline in fair value of its investment in ABI below its carrying value is temporary and, therefore, no impairment was recorded. This conclusion is based on: (i) the fair value ofAltria 's equity investment in ABI having historically exceeded its carrying value sinceOctober 2016 , whenAltria obtained its ownership interest in ABI, with the exception of certain periods starting inSeptember 2018 ; (ii) the period of time that ABI shares have traded belowAltria 's carrying value (although ABI shares began to trade belowAltria 's carrying value inSeptember 2018 , the fair value of ABI's shares have exceededAltria 's carrying value as recently asSeptember 30, 2019 ) and the magnitude by which the carrying value ofAltria 's investment in ABI exceeds its fair value; (iii) ABI's global platform (world's largest brewer by volume and one of the world's top five consumer products companies by revenue) with strong market positions in key markets, geographic diversification, experienced management team, financial condition, expected earnings and history of performance; and (iv)Altria 's ownership of restricted shares being subject to a five-year lock-up (subject to limited exceptions) endingOctober 10, 2021 , whichAltria believes provides sufficient time to allow for an anticipated recovery in the fair value of its investment in ABI. IfAltria were to conclude that the decline in fair value is other than temporary,Altria would determine and recognize, in the period identified, the impairment of its investment, which could result in a material adverse effect onAltria 's consolidated financial position or earnings. The fair value ofAltria 's acquired common shares in Cronos atDecember 31, 2019 was$1.2 billion compared with its carrying value of$1.0 billion . AtFebruary 24, 2020 , the fair value ofAltria 's acquired common shares in Cronos was approximately$1.0 billion (which approximates its carrying value).Altria will continue to assess the fair value of its acquired common shares in Cronos to determine if any decline in fair value below its carrying value is other than temporary. For further discussion ofAltria 's investments in ABI and Cronos, see Note 7. Investment in JUULAltria reviews its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicates thatAltria 's investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value, and the impairment is recognized in the period identified. As part of the preparation of its financial statements for the periods endedSeptember 30, 2019 andDecember 31, 2019 ,Altria performed its respective qualitative assessments of impairment indicators for its investment in JUUL and determined that indicators of impairment existed. AtSeptember 30, 2019 , these indicators included recent significant adverse changes in both the e-vapor regulatory environment and the industry in which JUUL operates. AtDecember 31, 2019 ,Altria determined that a significant increase in the number and types of legal cases pending against JUUL in the fourth quarter of 2019 and the expectation that this trend will continue resulted in an additional indicator of impairment. Given the existence of these impairment indicators,Altria performed quantitative valuations of its investment in JUUL as ofSeptember 30, 2019 andDecember 31, 2019 and recorded total pre-tax charges of$8.6 billion for the year endedDecember 31, 2019 , reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). Of this amount,Altria recorded pre-tax charges of$4.5 billion in the third quarter of 2019 and$4.1 billion in the fourth quarter of 2019. The third-quarter impairment charge was due primarily to lower e-vapor sales volume assumptions in theU.S. and international markets and a delay in achieving operating margin performance, as compared to the assumptions at the time of the JUUL Transaction. The fourth-quarter impairment charge results substantially from increased discount rates applied to future cash flow projections, due to the significant risk created by the increase in number and types of legal cases pending against JUUL in the fourth quarter. AlthoughAltria has not made any assumptions or drawn any conclusions regarding the merits or likelihood of success of any of any of these cases, litigation is subject to uncertainty, and it is possible that there could be adverse developments in pending or future cases. While JUUL secured approximately$720 million in financing in earlyFebruary 2020 , the uncertainty has 19
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increased the risk that JUUL may not be able to obtain financing and/or fund working capital requirements, financial obligations and international expansion plans.Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for theU.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 in theU.S. were based on a range of scenarios that consider various potential regulatory and market outcomes. In determining the fair value of its investment in JUUL,Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. The discount rates used in performing the valuations ranged from 13.5% to 16.5% atSeptember 30, 2019 and 19.5% to 23.0% atDecember 31, 2019 . The perpetual growth rates used in performing the valuations ranged from (0.5%) to 0.0% at bothSeptember 30, 2019 andDecember 31, 2019 . Additionally,Altria made significant assumptions regarding the likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. AlthoughAltria 's discounted cash flow analyses were based on assumptions thatAltria 's management considered reasonable and are based on the best available information at the time that the analyses were developed, there is significant judgment used in determining future cash flows.Altria believes the following factors have the most potential to impact projected future cash flows and, therefore,Altria 's valuation of JUUL: federal, state, local and international regulatory developments; JUUL's execution of its strategy, including the success of its planned international market expansions; category growth rates; e-vapor-related litigation against JUUL; consumer preferences; and competitive activity. WhileAltria 's management believes that the estimated fair value of its investment in JUUL as ofDecember 31, 2019 is appropriate, JUUL's actual performance in the short term or long term could be significantly different from forecasted performance due to changes in the factors noted above. One or more such changes could result in additional impairment charges toAltria 's investment in JUUL in future periods. For additional information onAltria 's investment in JUUL and the impairment indicators thatAltria considered, see Note 7. Investments inEquity Securities - Investment in JUUL. ?Marketing Costs:Altria 's businesses promote their products with consumer incentives, trade promotions and consumer engagement programs. These consumer incentive and trade promotion activities, which include discounts, coupons, rebates, in-store display incentives and volume-based incentives, do not create a distinct deliverable and are, therefore, recorded as a reduction of revenues. Consumer engagement program payments are made to third parties.Altria 's businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs inAltria 's consolidated statements of earnings (losses). For interim reporting purposes,Altria 's businesses charge consumer engagement programs and certain consumer incentive expenses to operations as a percentage of sales, based on estimated sales and related expenses for the full year. ?Contingencies: As discussed in Note 19 and Item 3, legal proceedings covering a wide range of matters are pending or threatened in variousU.S. and foreign jurisdictions againstAltria and its subsidiaries, includingPM USA and UST and its subsidiaries, as well as their respective indemnitees andAltria 's investees. In 1998,PM USA and certain otherU.S. tobacco product manufacturers entered into the 1998 Master Settlement Agreement (the "MSA") with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims.PM USA and certain otherU.S. tobacco product manufacturers had previously entered into agreements to settle similar claims brought byMississippi ,Florida ,Texas andMinnesota (together with the MSA, the "State Settlement Agreements").PM USA's portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. In addition,PM USA ,Middleton ,Nat Sherman and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. Payments under the State Settlement Agreements and the FDA user fees are based on variable factors, such as volume, operating income, market share and inflation, depending on the subject payment.Altria 's subsidiaries account for the cost of the State Settlement Agreements and FDA user fees as a component of cost of sales.Altria 's subsidiaries recorded approximately$4.5 billion ,$4.5 billion and$4.7 billion of charges to cost of sales for the years endedDecember 31, 2019 , 2018 and 2017, respectively, in connection with the State Settlement Agreements and FDA user fees.Altria and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed in Note 19 and Item 3: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs in the consolidated statements of earnings (losses). ?Employee Benefit Plans:Altria provides a range of benefits to certain employees and retired employees, including pension, postretirement health care and postemployment benefits.Altria records annual amounts relating to these plans based on calculations specified 20
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byU.S. GAAP, which include various actuarial assumptions as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates.Altria reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. Any effect of the modifications is generally amortized over future periods.Altria recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. The gains or losses and prior service costs or credits recorded as components of other comprehensive earnings (losses) are subsequently amortized into net periodic benefit cost in future years.Altria 's discount rate assumptions for its pension and postretirement plans obligations decreased to 3.4% atDecember 31, 2019 from 4.4% atDecember 31, 2018 .Altria presently anticipates a decrease of approximately$36 million in its 2020 pre-tax pension and postretirement expense versus 2019, excluding amounts in each year related to settlement and curtailment. This anticipated decrease is due primarily to (i) lower interest costs, driven by the impact of lower discount rates; and (ii) lower amortization due to a change in the recognition period, based on the culmination of pension population changes to primarily inactive status following the plan's closure to new entrants in 2008. This decrease is partially offset by lower expected return on assets due to a change in asset allocation strategy. Assuming no change to the shape of the yield curve, a 50 basis point decrease (increase) inAltria 's discount rates would increase (decrease)Altria 's pension and postretirement expense by approximately$15 million . Similarly, a 50 basis point decrease (increase) in the expected return on plan assets would increase (decrease)Altria 's pension and postretirement expense by approximately$40 million . For additional information see Note 17. Benefit Plans to the consolidated financial statements in Item 8 ("Note 17"). ?Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.Altria records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.Altria recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.Altria recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes in its consolidated statements of earnings (losses).Altria recognized income tax benefits and charges in the consolidated statements of earnings (losses) during 2019, 2018 and 2017 as a result of various tax events, including the impact of the Tax Reform Act. The main provisions of the Tax Reform Act that impactAltria include: (i) a reduction in theU.S. federal statutory corporate income tax rate from 35% to 21% effectiveJanuary 1, 2018 , and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system. The transition to a modified territorial tax system requiredAltria to record a deemed repatriation tax and an associated tax basis benefit in 2017. The tax impact related to the tax basis benefit and the deemed repatriation tax was based on provisional estimates as ofJanuary 2018 , substantially all of which were related toAltria 's share of ABI's accumulated earnings and associated taxes.Altria recorded adjustments to the provisional estimates and completed the accounting for the repatriation tax in 2018. For additional information on income taxes, see Note 15. 21
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Consolidated Operating Results
For the Years Ended December 31, (in millions) 2019 2018 2017 Net Revenues: Smokeable products$ 21,996 $ 22,297 $ 22,636 Smokeless products 2,367 2,262 2,155 Wine 689 691 698 All other 58 114 87 Net revenues$ 25,110 $ 25,364 $ 25,576 Excise Taxes on Products: Smokeable products$ 5,166 $ 5,585 $ 5,927 Smokeless products 127 131 132 Wine 21 21 23 Excise taxes on products$ 5,314 $ 5,737 $ 6,082 Operating Income: Operating companies income (loss): Smokeable products$ 9,009 $ 8,408 $ 8,426 Smokeless products 1,580 1,431 1,306 Wine (3 ) 50 146 All other (16 ) (421 ) (51 ) Amortization of intangibles (44 ) (38 ) (21 ) General corporate expenses (199 ) (315 ) (213 ) Corporate asset impairment and exit costs (1 ) - - Operating income$ 10,326 $ 9,115 $ 9,593 As discussed further in Note 16. Segment Reporting to the consolidated financial statements in Item 8 ("Note 16"), the CODM reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments. The following events that occurred during 2019, 2018 and 2017 affected the comparability of statement of earnings (losses) amounts. ?Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax asset impairment, exit, implementation and acquisition-related costs were$331 million ,$538 million and$89 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. For the year endedDecember 31, 2019 ,Altria recorded pre-tax acquisition-related costs of$115 million . These costs were primarily for the write-off of debt issuance costs related toAltria 's short-term borrowings under the term loan agreement thatAltria entered into in connection with its investments in Cronos and JUUL. InDecember 2018 ,Altria : ? refocused its innovative product efforts, which includedNu Mark's
discontinuation of production and distribution of all e-vapor products;
? implemented a cost reduction program (which included workforce reductions
and third-party spending reductions across the businesses) that delivered
? incurred
primarily of advisory fees, substantially all of which were recorded in marketing, administration and research costs. InOctober 2016 ,Altria announced the consolidation of certain of its operating companies' manufacturing facilities to streamline operations and achieve greater efficiencies. The consolidation was completed in the first quarter of 2018 and deliveredAltria 's goal of approximately$50 million in annualized cost savings as ofDecember 31, 2018 . InJanuary 2016 ,Altria announced a productivity initiative designed to maintain its operating companies' leadership and cost competitiveness. The initiative, which reduced spending on certain selling, general and administrative infrastructure and implemented a leaner organizational structure, deliveredAltria 's goal of approximately$300 million in annualized productivity savings as ofDecember 31, 2017 . 22
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For further discussion on asset impairment, exit and implementation costs, including a breakdown of these costs by segment, see Note 5. Asset Impairment, Exit and Implementation Costs to the consolidated financial statements in Item 8. ?Gain/loss on ABI/SABMiller Business Combination: For the years endedDecember 31, 2018 and 2017,Altria recorded a pre-tax loss of$33 million and a pre-tax gain of$445 million , respectively, related to ABI's divestitures of certain SABMiller assets and businesses in connection with ABI obtaining necessary regulatory clearances for the ABI Transaction. ?NPM Adjustment Items: For a discussion of NPM Adjustment Items and a breakdown of these items by segment, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 19 and NPM Adjustment Items in Note 16, respectively. ?Tobacco and Health Litigation Items: For a discussion of tobacco and health litigation items and a breakdown of these costs by segment, see Note 19 and Tobacco and Health Litigation Items in Note 16, respectively. ?Settlement for Lump Sum Pension Payments: In the third quarter of 2017,Altria made a voluntary, limited-time offer to former employees with vested benefits in theAltria Retirement Plan who had not commenced receiving benefit payments and who met certain other conditions. Eligible participants were offered the opportunity to make a one-time election to receive their pension benefit as a single lump sum payment or as a monthly annuity. As a result of the 2017 lump sum distributions, a one-time pre-tax settlement charge of$81 million was recorded in 2017 in net periodic benefit (income) cost, excluding service cost, inAltria 's consolidated statement of earnings (losses). For further discussion, see Note 17. ?Impairment ofJUUL Equity Securities : For the year endedDecember 31, 2019 ,Altria recorded pre-tax impairment charges of$8,600 million reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). A full tax valuation allowance was recorded in 2019 attributable to the tax benefit associated with the impairment charges. For further discussion, see Note 7 and Note 15. ?ABI-Related Special Items:Altria 's earnings from its equity investment in ABI for the year endedDecember 31, 2019 included net pre-tax income of$354 million , consisting primarily of a gain related to the completion inSeptember 2019 of ABI's initial public offering of a minority stake of itsAsia Pacific subsidiary, Budweiser Brewing Company APAC Limited, andAltria 's share of ABI's mark-to-market gains on ABI's derivative financial instruments used to hedge certain share commitments.Altria 's earnings from its equity investment in ABI for the year endedDecember 31, 2018 included net pre-tax income of$85 million , consisting primarily ofAltria 's share of ABI's estimated effect of the Tax Reform Act and gains related to ABI's merger and acquisition activities, partially offset byAltria 's share of ABI's mark-to-market losses on ABI's derivative financial instruments used to hedge certain share commitments.Altria 's earnings from its equity investment in ABI for the year endedDecember 31, 2017 included net pre-tax charges of$160 million , consisting primarily ofAltria 's share of ABI's Brazilian tax item andAltria 's share of ABI's mark-to-market losses on ABI's derivative financial instruments used to hedge certain share commitments. ?Cronos-Related Special Items: For the year endedDecember 31, 2019 ,Altria recorded net pre-tax losses of$928 million consisting of the following: (in millions) 2019
Loss on Cronos-related financial instruments(1)
(514 )
Total Cronos-related special items - (Income) Expense
(1) Of this amount,$1,411 million represents the changes in fair value related to the warrant and certain anti-dilution protections (the "Fixed-price Preemptive Rights") acquired in the Cronos transaction. (2) Substantially all of these amounts representAltria 's share of Cronos's changes in fair value of Cronos's derivative financial instruments associated with the issuance of additional shares. For further discussion, see Note 7 and Note 8. Financial Instruments to the consolidated financial statements in Item 8. ?Tax Items: Tax items for the year endedDecember 31, 2019 included net tax benefits of$99 million , due primarily to tax benefits of$105 million for adjustments as a result of amended returns and tax benefits of$100 million for the reversal of tax accruals no longer required, partially offset by tax expense of$84 million for a tax basis adjustment toAltria 's equity investment in ABI and$38 million for a valuation allowance on foreign tax credits not realizable. Tax items for the year endedDecember 31, 2018 included tax expense of$188 million related to the Tax Reform Act as follows: (i) tax expense of$140 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017; (ii) tax expense of$34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017; and (iii) tax expense of$14 million for an adjustment to the provisional estimates for the repatriation tax recorded in 2017. 23
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Tax items for the year endedDecember 31, 2017 included net tax benefits of$3,367 million related to the Tax Reform Act recorded in the fourth quarter of 2017 as follows: (i) a tax benefit of$3,017 million to re-measureAltria and its consolidated subsidiaries' net deferred tax liabilities based on the newU.S. federal statutory rate; and (ii) a net tax benefit of$763 million for a tax basis adjustment associated with the deemed repatriation tax, partially offset by tax expense of$413 million for the deemed repatriation tax. Additional tax items for 2017 included tax benefits for the release of a valuation allowance related to deferred income tax assets for foreign tax credit carryforwards; and tax benefits related primarily to the effective settlement in 2017 of the Internal Revenue Service ("IRS") audit ofAltria and its consolidated subsidiaries' 2010-2013 tax years ("IRS 2010-2013 Audit"), partially offset by tax expense for tax reserves related to the calculation of certain foreign tax credits. For further discussion, see Note 15. 2019 Compared with 2018 Net revenues, which include excise taxes billed to customers, decreased$254 million (1.0%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the smokeless products segment. Cost of sales decreased$288 million (3.9%), due primarily to lower shipment volume in the smokeable products segment and lower costs as a result ofAltria 's decision in 2018 to refocus its innovative product efforts, partially offset by favorable NPM Adjustment Items in 2018 and higher per unit settlement costs. Excise taxes on products decreased$423 million (7.4%), due primarily to lower smokeable products shipment volume. Marketing, administration and research costs decreased$530 million (19.2%), due primarily to lower spending as a result of the cost reduction program andAltria 's decision in 2018 to refocus its innovative product efforts, acquisition-related costs to effect the investment in JUUL in 2018 and lower tobacco and health litigation items. Operating income increased$1,211 million (13.3%), due primarily to higher operating results from the smokeable and smokeless products segments (which included lower spending as a result of the cost reduction program) and lower spending as a result ofAltria 's decision in 2018 to refocus its innovative product efforts (which included lower asset impairment, exit and implementation costs) and acquisition-related costs to effect the investment in JUUL in 2018. Interest and other debt expense, net, increased$615 million (92.5%), due primarily to higher interest costs and debt issuance costs for borrowings associated with the Cronos and JUUL transactions. Earnings fromAltria 's equity investments, which increased$835 million (93.8%), were positively impacted by special items related toAltria 's equity investments in Cronos and ABI.Altria 's income tax rate increased 244.1 percentage points to 269.5%, due primarily to a valuation allowance on a deferred tax asset recorded in 2019 attributable toAltria 's impairment of its investment in JUUL equity securities. For further discussion, see Note 15. Net losses attributable toAltria of$1,293 million as compared with 2018 net earnings attributable toAltria of$6,963 million changed by$8,256 million (100.0%+), due primarily to the 2019 impairment of JUUL equity securities, 2019 loss on Cronos-related financial instruments and higher interest and other debt expense, net, partially offset by higher operating income, higher earnings fromAltria 's equity investments in Cronos and ABI and favorable tax items. Diluted and basic net losses per share attributable toAltria of$0.70 , each decreased by 100.0%+, due to lower net earnings attributable toAltria , partially offset by fewer shares outstanding. 2018 Compared with 2017 Net revenues, which include excise taxes billed to customers, decreased$212 million (0.8%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the smokeless products segment. Cost of sales decreased$158 million (2.1%), due primarily to lower shipment volume in the smokeable products segment and higher NPM Adjustment Items, partially offset by higher costs in the smokeable products segment and higher implementation costs. Excise taxes on products decreased$345 million (5.7%), due primarily to lower smokeable products segment shipment volume. Marketing, administration and research costs increased$418 million (17.9%), due primarily to higher costs in the smokeable products segment and the wine segment, acquisition-related costs to effect the investment in JUUL and higher investment spending in the innovative tobacco products businesses. Operating income decreased$478 million (5.0%), due primarily to lower operating results from the innovative tobacco products businesses (which included asset impairment, exit and implementation costs) and wine segment, and acquisition-related costs to effect the investment in JUUL, partially offset by higher operating results from the smokeless products segment. Earnings fromAltria 's equity investment in ABI, which increased$358 million (67.3%), were positively impacted by ABI special items.Altria 's effective income tax rate increased 29.5 percentage points to an effective income tax provision rate of 25.4%, substantially all of which was due to the Tax Reform Act. For further discussion, see Note 15. 24
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Net earnings attributable toAltria of$6,963 million decreased$3,259 million (31.9%), due primarily to a higher effective income tax rate, lower operating income and a 2017 gain on the ABI Transaction, partially offset by higher earnings fromAltria 's equity investment in ABI. Basic and diluted EPS attributable toAltria of$3.69 and$3.68 , respectively, decreased by 30.5% and 30.7%, respectively, due to lower net earnings attributable toAltria , partially offset by fewer shares outstanding. Operating Results by Business Segment Tobacco Space Business Environment Summary TheU.S. tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume ofAltria 's tobacco subsidiaries and investees andAltria 's consolidated results of operations, cash flows or financial position. These challenges, some of which are discussed in more detail below in Note 19, Item 1A and Item 3, include: ? pending and threatened litigation and bonding requirements;
? restrictions and requirements imposed by the FSPTCA, and restrictions and
requirements (and related enforcement actions) that have been, and in the
future will be, imposed by the FDA; ? actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
? bans and restrictions on tobacco use imposed by governmental entities and
private establishments and employers;
? other federal, state and local government actions, including:
? restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;
? additional restrictions on the advertising and promotion of tobacco products;
? other actual and proposed tobacco product legislation and regulation; and
? governmental investigations;
? the diminishing prevalence of cigarette smoking;
? increased efforts by tobacco control advocates and other private sector
entities (including retail establishments) to further restrict the availability and use of tobacco products;
? changes in adult tobacco consumer purchase behavior, which is influenced
by various factors such as economic conditions, excise taxes and price gap
relationships, may result in adult tobacco consumers switching to discount
products or other lower-priced tobacco products;
? the highly competitive nature of the tobacco categories in which
tobacco subsidiaries operate, including competitive disadvantages related
to cigarette price increases attributable to the settlement of certain
litigation;
? illicit trade in tobacco products; and
? potential adverse changes in prices, availability and quality of tobacco,
other raw materials and components.
In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences pose challenges forAltria 's tobacco subsidiaries.Altria 's tobacco subsidiaries believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. In fact, a growing number of adult smokers are converting from cigarettes to exclusive use of non-combustible tobacco product alternatives. The e-vapor category has experienced significant growth in recent years, and the number of adults who exclusively use e-vapor products also has increased which, along with growth in oral nicotine pouches, has negatively impacted consumption levels and sales volume of cigarettes and smokeless tobacco.(1) Continued growth in the e-vapor category may be negatively impacted by legislative and regulatory activities discussed below. Based on the accelerated adult smoker movement across categories and the federal government raising the legal age to purchase tobacco products to 21, as discussed below under Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products,Altria expects theU.S. adjusted cigarette industry volume for 2020 to decline by 4% - 6%. Due to the expected continued volatility across tobacco categories,Altria is no longer providing a multi-year forecast forU.S. cigarette industry volume decline.Altria and its tobacco subsidiaries believe the innovative tobacco product categories will continue to be dynamic as adult tobacco consumers explore a variety of tobacco product options and as the regulatory environment for these innovative tobacco products evolves. ___________________________ (1) "Smokeless tobacco," as used in this section of this Annual Report on Form 10-K, refers to smokeless tobacco products first regulated by the FDA in 2009. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016. 25
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Altria and its tobacco subsidiaries work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside theU.S. through innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties). FSPTCA and FDA Regulation ?The Regulatory Framework: The FSPTCA expressly establishes certain restrictions and prohibitions on our tobacco businesses and authorizes or requires further FDA action. Under the FSPTCA, the FDA has broad authority to (1) regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of tobacco products; (2) require disclosures of related information; and (3) enforce the FSPTCA and related regulations. The FSPTCA applies to cigarettes, cigarette tobacco and smokeless tobacco products, and as of 2016, Other Tobacco Products. See FDA Regulatory Actions - Deeming Regulations below. Among other measures, the FSPTCA or its implementing regulations: ? imposes restrictions on the advertising, promotion, sale and distribution
of tobacco products, including at retail;
? bans descriptors such as "light," "mild" or "low" or similar descriptors
when used as descriptors of modified risk unless expressly authorized by
the FDA;
? requires extensive product disclosures to the FDA and may require public
disclosures; ? prohibits any express or implied claims that a tobacco product is or may
be less harmful than other tobacco products without FDA authorization;
? imposes reporting obligations relating to contraband activity and grants
the FDA authority to impose recordkeeping and other obligations to address
illicit trade in tobacco products;
? changes the language of the cigarette and smokeless tobacco product health
warnings, enlarges their size and requires the development by the FDA of
graphic warnings for cigarettes, establishes warning requirements for Other Tobacco Products and gives the FDA the authority to require new
warnings for any type of tobacco products (see FDA Regulatory Actions -
Graphic Warnings below); ? authorizes the FDA to adopt product regulations and related actions,
including imposing tobacco product standards that are appropriate for the
protection of the public health and imposing manufacturing standards for
tobacco products (see
Nicotine Regulation and FDA Regulatory Actions - Potential Product Standards below); ? establishes pre-market review pathways for new and modified tobacco
products for the FDA to follow (see Pre-Market Review Pathways Including
Substantial Equivalence below); and
? equips the FDA with a variety of investigatory and enforcement tools,
including the authority to inspect tobacco product manufacturing and other
facilities.
?Pre-Market Review Pathways for Tobacco Products, Including Substantial Equivalence: The FSPTCA permits the sale of tobacco products that were commercially marketed as ofFebruary 15, 2007 , and for which no modifications have been made to the products since that date ("Grandfathered Products"). For new and modified tobacco products, however, the FSPTCA imposes restrictions on marketing, requiring FDA review and authorization before marketing a new or modified product. Specifically, cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced into the market afterMarch 22, 2011 , and Other Tobacco Products modified or first introduced into the market afterAugust 8, 2016 , are subject to new tobacco product application and pre-market review and authorization requirements unless a manufacturer can demonstrate they are "substantially equivalent" to products commercially marketed as ofFebruary 15, 2007 . The FDA could deny any such new tobacco product application or determine lack of substantial equivalence, thereby preventing the distribution and sale of any product affected by such denial. A manufacturer is permitted, however, to introduce Grandfathered Products into the marketplace. For cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced into the market betweenFebruary 15, 2007 andMarch 22, 2011 ("Provisional Products") for which a manufacturer submitted substantial equivalence reports, the FDA may determine that such products are not "substantially equivalent" to products commercially marketed as ofFebruary 15, 2007 . In such cases, the FDA could require the removal of such products from the marketplace (see FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways - Cigarettes and Smokeless Tobacco Products below). Similarly, the FDA could determine that Other Tobacco Products modified or first introduced into the market betweenFebruary 15, 2007 andAugust 8, 2016 for which a manufacturer submits substantial equivalence reports, are not "substantially equivalent" to products commercially marketed as ofFebruary 15, 2007 , or reject a new tobacco product application submitted by a manufacturer, both of which could require the removal of such products from the marketplace (seeFDA's Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation, and FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways - Other Tobacco Products below). Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency 26
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required in ingredients, can trigger theFDA's pre-market review process described above. As noted, adverse determinations by the FDA during that process could restrict a manufacturer's ability to continue marketing such products. ?FDA's Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation: InJuly 2017 , the FDA announced a comprehensive plan for tobacco and nicotine regulation designed to strike a balance between regulation and encouraging the development of innovative tobacco products that may be less risky than cigarettes. Since then, the FDA has issued additional information about its comprehensive plan in response to concerns associated with the rise in the use of e-vapor products by youth, and the potential youth appeal of flavored tobacco products. The FDA said it is monitoring youth tobacco usage rates, particularly e-vapor product use, and exercised its regulatory authority by implementing measures designed to decrease youth tobacco use, including the removal of certain e-vapor products from the market (see FDA Regulatory Actions - Underage Access and Use of Certain Tobacco Products below). Major components of theFDA's comprehensive plan include the following: ? issuing advance notices of proposed rulemaking ("ANPRM") relating to potential product standards for nicotine in cigarettes, flavors in all tobacco products (including menthol in cigarettes and characterizing
flavors in all cigars); and, for e-vapor products, protection against
known public health risks such as concerns about youth exposure to liquid
nicotine;
? taking actions to restrict youth access to e-vapor products;
? establishing content requirements for "new tobacco product" and "modified
risk tobacco product" applications;
? reconsidering the FDA review processes of substantial equivalence reports
for Provisional Products and establishing review processes for e-vapor new
product applications; and ? revisiting the timelines (previously extended by the FDA) to submit applications for Other Tobacco Products. See FDA Regulatory Actions below for further discussion. ?Rulemaking and Guidance: The provisions of the FSPTCA that require the FDA to take action through rulemaking generally involve consideration of public comment and, for some issues, scientific review. As required by the FSPTCA, the FDA has established a tobacco product scientific advisory committee (the "TPSAC"), which consists of voting and non-voting members, to provide advice, reports, information and recommendations to the FDA on certain scientific and health issues relating to tobacco products. TPSAC votes are considered by the FDA, but are not binding. From time to time, the FDA issues guidance, which may be issued in draft or final form, and generally involves public comment.Altria 's tobacco subsidiaries participate actively in processes established by the FDA to develop and implement the FSPTCA's regulatory framework, including submission of comments to various FDA proposals and participation in public hearings and engagement sessions. The implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts byU.S. states, territories and localities of their laws and regulations as well as of the State Settlement Agreements discussed below (see State Settlement Agreements below). Such enforcement efforts may adversely affect the ability ofAltria 's tobacco subsidiaries and investees to market and sell regulated tobacco products in those states, territories and localities. ?Impact on Our Business; Compliance Costs and User Fees: Regulations imposed and other regulatory actions taken by the FDA under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries in a number of different ways. For example, actions by the FDA could: ? impact the consumer acceptability of tobacco products;
? delay, discontinue or prevent the sale or distribution of existing, new or
modified tobacco products;
? limit adult tobacco consumer choices;
? impose restrictions on communications with adult tobacco consumers;
? create a competitive advantage or disadvantage for certain tobacco companies;
? impose additional manufacturing, labeling or packaging requirements;
? impose additional restrictions at retail;
? result in increased illicit trade in tobacco products; or
? otherwise significantly increase the cost of doing business.
The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries, including adversely affecting the value ofAltria 's investment in JUUL. The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA regulation and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the 27
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statute and FDA regulations. Payments for user fees are adjusted for several factors, including inflation, market share and industry volume. For a discussion of the impact of the FDA user fee payments onAltria , see Off-Balance Sheet Arrangements and Aggregate Contractual Obligations - Payments Under State Settlement Agreements and FDA Regulation below. In addition, compliance with the FSPTCA's regulatory requirements has resulted and will continue to result in additional costs forAltria 's tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter or year to date period but could become material, either individually or in the aggregate, to one or more ofAltria 's tobacco subsidiaries. ?Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. The use of any of these investigatory or enforcement tools by the FDA could result in significant costs or otherwise have a material adverse effect on the business, consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries, including adversely affecting the value ofAltria 's investment in JUUL. ?Final Tobacco Marketing Rule: As required by the FSPTCA, the FDA re-promulgated inMarch 2010 a wide range of advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to aUnited States Supreme Court ruling) (the "Final Tobacco Marketing Rule"). TheMay 2016 amendments to the Final Tobacco Marketing Rule apply certain provisions to certain "covered tobacco products," which include cigars, e-vapor products containing nicotine or other tobacco derivatives, pipe tobacco and oral nicotine pouches, but do not include any component or part that is not made or derived from tobacco. The Final Tobacco Marketing Rule as so amended: ? bans the use of color and graphics in cigarette and smokeless tobacco
product labeling and advertising;
? prohibits the sale of cigarettes, smokeless tobacco and covered tobacco
products to persons under the age of 18; ? restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products; ? requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions; ? prohibits sampling of cigarettes and covered tobacco products and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities;
? prohibits the sale or distribution of items such as hats and tee shirts
with cigarette or smokeless tobacco brands or logos; and ? prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event. Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect inJune 2010 for cigarettes and smokeless tobacco products and inAugust 2016 for covered tobacco products. At the time of the re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an ANPRM regarding the so-called "1000 foot rule," which would establish restrictions on the placement of outdoor tobacco advertising in relation to schools and playgrounds. ?FDA Regulatory Actions ? Graphic Warnings: InJune 2011 , as required by the FSPTCA, the FDA issued its
final rule to modify the required warnings that appear on cigarette packages
and in cigarette advertisements. The FSPTCA specifies nine new textual
warning statements to be accompanied by color graphics depicting the negative
health consequences of smoking. The graphic health warnings will (i) be
located beneath the cellophane, and comprise the top 50% of the front and
rear panels of cigarette packages and (ii) occupy 20% of a cigarette
advertisement and be located at the top of the advertisement. After a legal
challenge to the rule, the FDA announced its plans to propose a new graphic
warnings rule in the future.
InMarch 2019 , in a case filed by theAmerican Academy of Pediatrics and other plaintiffs, a federal district court inMassachusetts ordered the FDA to propose a new rule relating to graphic health warnings byAugust 2019 , and to submit the final version of the rule for publication byMarch 2020 . InMay 2019 , the FDA appealed the district court's order to theUnited States Court of Appeals for the First Circuit . Currently, the appeal is stayed pending theFDA's timely issuance of a final rule on graphic health warnings. InAugust 2019 , the FDA proposed a new graphic warnings rule, which was subject to public comment.PM USA andNat Sherman filed comments with the FDA. As ofFebruary 21, 2020 , the FDA has not issued a final rule. ?Substantial Equivalence and Other New Product Processes/Pathways ? Cigarettes and Smokeless Tobacco Products: In general, in order to
continue marketing Provisional Products, manufacturers of such products
were required to send to the FDA reports demonstrating substantial
equivalence by
products are "substantially equivalent" to products commercially available
as of
currently marketed by
some of the products currently marketed by
subsidiaries submitted timely substantial equivalence reports for these
Provisional Products and can continue marketing these products unless the
FDA makes a determination that a specific Provisional Product is not substantially equivalent. If the FDA ultimately makes such a determination, it could 28
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require the removal of such products from the marketplace, leavingAltria 's cigarette and smokeless tobacco subsidiaries with the option of marketing other products that have received FDA pre-market authorization or Grandfathered Products. The FDA has communicated that it will not review a certain subset of Provisional Product substantial equivalence reports and that the products that are the subject of those reports can generally continue to be legally marketed without further FDA review.PM USA and USSTC have Provisional Products included in this subset of products, but also have a number of Provisional Products that will continue to be subject to the substantial equivalence review process. In addition,PM USA and USSTC have submitted, and continue to submit, substantial equivalence reports on products proposed to be marketed afterMarch 22, 2011 ("Non-Provisional Products").PM USA and USSTC have received substantial equivalence determinations on certain Provisional and Non-Provisional Products. The Provisional Products that were found to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to theFDA's determinations; therefore, the determinations did not impact business results. WhileAltria 's cigarette and smokeless tobacco subsidiaries believe all of their current products meet the statutory requirements of the FSPTCA, they cannot predict whether, when or how the FDA ultimately will apply its guidance to their various respective substantial equivalence reports or seek to enforce the law and regulations. ShouldAltria 's cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any substantial equivalence reports currently pending with the FDA, they believe they have the ability to replace most of their respective product volumes that could be impacted by these determinations with other products that have received FDA pre-market authorization or with Grandfathered Products. ? Other Tobacco Products: In 2016, the FDA said that it would permit manufacturers to continue marketing Other Tobacco Products modified or introduced into the market for the first time betweenFebruary 15, 2007
and
substantial equivalence reports and new tobacco product applications. A
number of cigars were on the market as of
certain cigars manufactured by
able to file new tobacco product applications, certain cigar
manufacturers, including
reports with the FDA for products that were on the market as of
2016. Few if any e-vapor products or oral nicotine pouches, however, were
on the market as of
products may not be able to file substantial equivalence reports with the
FDA on e-vapor products or oral nicotine pouches that were on the market
as of
Helix, have to file new tobacco product applications that, among other
things, demonstrate that the marketing of the products would be
appropriate for the protection of the public health.
Previously, the deadlines to file all substantial equivalence reports and new tobacco product applications for combustible Other Tobacco Products, such as cigars and pipe tobacco, and for non-combustible Other Tobacco Products, such as e-vapor products and oral nicotine pouches, were at various points in 2018. The FDA extended these deadlines toAugust 8, 2021 for combustible Other Tobacco Products andAugust 8, 2022 for non-combustible Other Tobacco Products through guidance rather than by providing notice and allowing for public comment. InMay 2019 , in a lawsuit filed by theAmerican Academy of Pediatrics , among other plaintiffs, a federal court inMaryland found that theFDA's failure to engage in the notice and comment process violated the Administrative Procedures Act. InJuly 2019 , the court ordered that: (1) the FDA require that for Other Tobacco Products on the market as ofAugust 8, 2016 , applications must be filed with the FDA byMay 12, 2020 ; (2) at theFDA's discretion, Other Tobacco Products for which applications are not timely filed will be subject to FDA enforcement action; (3) applications for Other Tobacco Products that are timely filed can remain on the market during FDA review without being subject to FDA enforcement action for up to one year from the date of the application; and (4) on a case-by-case basis, the FDA can exempt Other Tobacco Products from filing requirements for good cause. The court's ruling did not, however, prevent the FDA from taking enforcement action against Other Tobacco Products prior to theMay 12, 2020 filing deadline. The FDA and other parties appealed the court's ruling to theUnited States Court of Appeals for the Fourth Circuit . If JUUL is unable to meet theMay 12, 2020 filing deadline or if JUUL's new tobacco product applications are timely filed but subsequently denied, it could adversely affect the value ofAltria 's investment in JUUL and have a material adverse effect onAltria 's consolidated financial position or earnings. Manufacturers of cigars and oral nicotine pouches also must file substantial equivalence reports or new tobacco product applications by theMay 12, 2020 filing deadline in order for their products to remain on the market.Middleton has received market authorizations from the FDA that cover a significant portion of its cigar product volume and has filed substantial equivalence reports with the FDA that cover nearly all of its remaining cigar product volume.Middleton continues to prepare and file substantial equivalence reports with the FDA and plans to submit all required filings by theMay 12, 2020 filing deadline. Helix plans to file all required new tobacco product applications for its oral nicotine pouches by theMay 12, 2020 filing deadline. Failure of Other Tobacco Product manufacturers, includingMiddleton , Helix and JUUL, to meet theMay 12, 2020 filing deadline for currently marketed products or to ultimately obtain market authorization from the FDA following proper submission, could result in Other Tobacco Products being removed from the market. 29
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InJanuary 2020 , in an effort to address youth usage of certain Other Tobacco Products, the FDA issued final guidance (the "January 2020 Final Guidance") in which it stated that certain cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) would be prioritized for FDA enforcement action beginning earlyFebruary 2020 ; effectively requiring the removal of these products from the market unless these products receive FDA market authorization. E-vapor product manufacturers may still, however, file new tobacco product applications for these products. In itsJanuary 2020 Final Guidance, independent of the above-mentioned federal court order, the FDA adopted theMay 12, 2020 filing deadline and stated that after that deadline, it would prioritize its enforcement against any e-vapor product (in any format or flavor) offered for sale but for which either no new tobacco product application has been filed or for which an application was timely filed but for which the FDA issued a negative decision. See FDA Regulation - Underage Access and Use of Certain Tobacco Products below for further discussion. The effect of this guidance is to restrict the sale of certain flavored cartridge-based e-vapor products including those manufactured by JUUL, but permit the continued sale (subject to the exceptions discussed above) of other flavored e-vapor products, including flavored disposable e-vapor products. If these other flavored e-vapor products are sold in higher volumes than JUUL's e-vapor products, it could adversely affect the value ofAltria 's investment in JUUL and have a material adverse effect onAltria 's consolidated financial position or earnings. ? All Tobacco Products: InMarch 2019 , the FDA issued a proposed rule that
would, if finalized, require that all substantial equivalence reports
filed after the effective date of the final rule meet certain content and
format requirements. Such requirements would not apply to substantial
equivalence reports for Provisional Products or to any substantial
equivalence report submitted to the FDA before this proposed rule becomes
final. Various products marketed by
within the scope of this proposed rule if finalized.
InSeptember 2019 , the FDA issued a proposed rule in which it set forth requirements for content, format andFDA's procedures for reviewing new tobacco product applications.PM USA ,Nat Sherman ,Middleton , USSTC and Helix filed comments with the FDA. As ofFebruary 21, 2020 , no final rule has issued. It is not possible to predict how long reviews by the FDA of substantial equivalence reports or new tobacco product applications for any tobacco product will take. A "not substantially equivalent" determination or denial of a new tobacco product application on one or more products could have a material adverse impact on the business, consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries, including adversely affecting the value ofAltria 's investment in JUUL. ? Deeming Regulations: As discussed above under FSPTCA and FDA Regulation - The
Regulatory Framework, in 2016, the FDA issued final regulations for all Other
Tobacco Products, imposing the FSPTCA regulatory framework on the cigar
products manufactured, marketed and sold by
same time the FDA issued its final deeming regulations, it also amended the
Final Tobacco Marketing Rule as described above in FSPTCA and FDA Regulation
- Final Tobacco Marketing Rule.
Among the FSPTCA requirements that apply to Other Tobacco Products is a ban on descriptors, including "mild," when used as descriptors of modified risk unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated byMiddleton , theDepartment of Justice , on behalf of the FDA, informedMiddleton that at present, the FDA does not intend to bring an enforcement action againstMiddleton for the use of the term "mild" in the trademark "Black & Mild." Consequently,Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date,Middleton would have the opportunity to make a submission to the FDA and ultimately, if necessary, to bring another lawsuit. ? Underage Access and Use of Certain Tobacco Products: The FDA announced in
access and use of e-vapor products.
in 2018 before discontinuing its
acquiring a 35% economic interest in JUUL in
to the FDA its ongoing and long-standing investment in underage tobacco use
prevention efforts. For example, during 2019,
minimum legal age to purchase all tobacco products to 21 at the federal and
state levels to further address underage tobacco use, which is now federal
law. See Federal, State and Local Legislation to Increase the Legal Age to
Purchase Tobacco Products below for further discussion.
InMarch 2019 , the FDA issued draft guidance (the "March 2019 Draft Guidance") further reflecting, among other things, its concerns about youth e-vapor use. The FDA finalized this guidance in the form of theJanuary 2020 Final Guidance discussed above, which revises theFDA's compliance policy and states that the FDA intends to prioritize enforcement action against: ? cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and
? all e-vapor products (in any format or flavor):
? for which a manufacturer has failed or is failing to take
adequate
measures to prevent access by those under the age of 21
(referred to
in the FDA guidance as "minors"); ? that are targeted to minors and the marketing for which is likely to promote use of such products by minors; or 30
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? offered for sale after theMay 12, 2020 filing deadline and for which the manufacturer has either not submitted a pre-market application or for which an application was timely filed but a negative decision on the application was issued by the FDA. TheJanuary 2020 Final Guidance became effective in earlyFebruary 2020 . FDA enforcement action could result in tobacco products that are subject to such action being removed from the market unless and until these products receive pre-market authorization from the FDA. JUUL ceased its sales of all of its cartridge-based, flavored e-vapor products (other than tobacco and menthol) in 2019. If FDA enforcement action is taken against currently marketed JUUL e-vapor products, and a significant number of those products are removed from the market or if the FDA does not ultimately allow for the reintroduction of flavors other than tobacco and menthol, it could adversely affect the value ofAltria 's investment in JUUL and have a material adverse effect onAltria 's consolidated financial position or earnings. ? Potential Product Standards
? Nicotine in cigarettes and potentially other combustible tobacco products: In
potential public health benefits and any possible adverse effects of lowering
nicotine in combustible cigarettes to non-addictive or minimally addictive
levels through achievable product standards. Specifically, the FDA sought
comments on the consequences of such a product standard, including (i)
smokers compensating by smoking more cigarettes to obtain the same level of
nicotine as with their current product and (ii) the illicit trade of
cigarettes containing nicotine at levels higher than a non-addictive
threshold that may be established by the FDA. The FDA also sought comments on
whether a nicotine product standard should apply to other combustible tobacco
products, including cigars.
This ANPRM process may ultimately lead to theFDA's development of product standards for nicotine in combustible tobacco products such as cigarettes and cigars. If such regulations were to become final and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries. ? Flavors in tobacco products: InMarch 2018 , the FDA issued an ANPRM seeking
comments on the role that flavors (including menthol) in tobacco products
play in attracting youth and may play in helping some smokers switch to
potentially less harmful forms of nicotine delivery. The FDA previously
released its preliminary scientific evaluation on menthol, which states "that
menthol cigarettes pose a public health risk above that seen with non-menthol
cigarettes." The
TPSAC on the impact of the use of menthol in cigarettes on the public health
and included a recommendation that the "[r]emoval of menthol cigarettes from
the marketplace would benefit public health in
observation that any ban on menthol cigarettes could lead to an increase in
contraband cigarettes and other potential unintended consequences. As
discussed above under
Nicotine Regulation, the FDA indicated that it is considering proposing
rulemaking for a product standard that would seek to ban menthol in
combustible tobacco products, including cigarettes and cigars, and that it
intends to propose a product standard that would ban characterizing flavors
in all cigars. While the FDA has yet to define "characterizing flavors" with
respect to cigars, most of
and may be subject to any action by the FDA to ban flavors in cigars. No
future action can be taken by the FDA to ban characterizing flavors in all
cigars or regulate the manufacture, marketing or sale of menthol cigarettes
(including a possible ban) until the completion of a full rulemaking process.
In theMarch 2019 Draft Guidance, noted above under FDA Regulatory Action - Underage Access and Use of Certain Tobacco Products, the FDA also announced its intention to prioritize enforcement action against flavored cigars (other than tobacco flavor) that either are not Grandfathered Products or have not received market authorization from the FDA to remain on the market. In theJanuary 2020 Final Guidance, the FDA declined to take enforcement action against such cigars before theMay 12, 2020 filing deadline. Instead, the FDA reiterated its intention to issue a proposed rule for a product standard banning all cigars with characterizing flavors. In itsMarch 2019 Draft Guidance, the FDA indicated that such a rule would include Grandfathered Products and cigars that have received market authorization from the FDA.Altria 's tobacco subsidiaries submitted public comments in response to the ANPRM regarding flavors in tobacco products and to theMarch 2019 Draft Guidance. Any proposed rules ultimately may lead to the FDA banning characterizing flavors in not only cigars, but in all tobacco products including oral nicotine pouches. If these regulations become final and are upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries, including adversely affecting the value ofAltria 's investment in JUUL. ? NNN in Smokeless Tobacco: InJanuary 2017 , the FDA proposed a product
standard for N-nitrosonornicotine ("NNN") levels in finished smokeless
tobacco products. If the proposed rule, in present form, were to become
final and upheld in the courts, it could have a material adverse effect on
the business, consolidated results of operations, cash flows or financial
position of
? Good Manufacturing Practices: The FSPTCA requires that the FDA promulgate
good manufacturing practice regulations (referred to by the FDA as
"Requirements for Tobacco Product Manufacturing Practice") for tobacco
product manufacturers, but does not specify a timeframe for such regulations.
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Excise Taxes Tobacco products are subject to substantial excise taxes in theU.S. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within theU.S. Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation. Between the end of 1998 andFebruary 21, 2020 , the weighted-average state cigarette excise tax increased from$0.36 to$1.82 per pack. As ofFebruary 21, 2020 , no state has increased cigarette excise taxes in 2020, but various increases are under consideration or have been proposed. A majority of states currently tax smokeless tobacco products using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight.Altria 's subsidiaries support legislation to convert ad valorem taxes on smokeless tobacco to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As ofFebruary 21, 2020 , the federal government, 23 states,Puerto Rico ,Philadelphia, Pennsylvania andCook County, Illinois have adopted a weight-based tax methodology for smokeless tobacco. Tax increases are expected to continue to have an adverse impact on sales of cigarettes and smokeless tobacco products ofAltria 's tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments, or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of cigarettes and smokeless tobacco products ofAltria 's tobacco subsidiaries. An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As ofFebruary 21, 2020 , 21 states, theDistrict of Columbia ,Puerto Rico and a number of cities and counties tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, nine states and theDistrict of Columbia tax oral nicotine pouches. International Treaty on Tobacco ControlThe World Health Organization's Framework Convention on Tobacco Control (the "FCTC") entered into force inFebruary 2005 . As ofFebruary 21, 2020 , 180 countries, as well as the European Community, have become parties to the FCTC. While theU.S. is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, theUnited States Senate . The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues. There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in theU.S. , either indirectly or as a result of theU.S. becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement. State Settlement Agreements As discussed in Note 19, during 1997 and 1998,PM USA and other major domestic tobacco product manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. For a discussion of the impact of the State Settlement Agreements onAltria , see Off-Balance Sheet Arrangements and Aggregate Contractual Obligations - Payments Under State Settlement Agreements and FDA Regulation below and Note 19. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers' business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry's ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations. InNovember 1998 , USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the "STMSA") with the attorneys general of various states andU.S. territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA. 32
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Other International, Federal, State and Local Regulation and Governmental and Private Activity ?International, Federal, State and Local Regulation: A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including e-vapor and other innovative tobacco products), such as legislation that (1) prohibits the sale of tobacco product categories, such as e-vapor, and/or the sale of tobacco products with certain characterizing flavors, such as menthol cigarettes, (2) requires the disclosure of health information separate from or in addition to federally mandated health warnings and (3) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales). The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As ofFebruary 21, 2020 , 23 states and theDistrict of Columbia have proposed legislation to ban flavors in one or more tobacco products, including e-vapor products, oral nicotine pouches and cigarettes and two states,Massachusetts andNew Jersey , have passed such legislation. Additionally,Massachusetts has passed legislation capping the amount of nicotine in e-vapor products. Similar legislation has been proposed in six other states. In addition to legislation, some state governors have imposed restrictions on tobacco products through executive action. For example, in response to reports of lung injuries and deaths related to e-vapor product use, the governors of eight states exercised executive action to temporarily prohibit either the sale of all e-vapor products or e-vapor products with flavors other than tobacco. Some of those executive actions have been challenged in the courts. Similar executive action and/or proposed legislation is being considered in 12 additional states. Restrictions on e-vapor products also have been instituted or proposed internationally. For example, inSeptember 2019 ,India instituted a ban on e-vapor products.Altria 's tobacco subsidiaries have challenged and will continue to challenge certain state and local legislation and other governmental action, including through litigation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries, including adversely affecting the value ofAltria 's investment in JUUL. ?Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products: After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, inDecember 2019 , the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. Although an increase in the minimum age to purchase tobacco products may have a negative impact on sales volume of our tobacco businesses, as discussed above under Underage Access and Use of Certain Tobacco Products,Altria supported raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, reflecting its longstanding commitment to combat underage tobacco use. ?Health Effects of Tobacco Products, Including E-vapor Products: Reports with respect to the health effects of smoking have been publicized for many years, including various reports by theU.S. Surgeon General. More recently, there have been public health advisories concerning vaping-related lung injuries and deaths.Altria and its tobacco subsidiaries believe that the public should be guided by the messages of theU.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products. Most jurisdictions within theU.S. have restricted smoking in public places and some have restricted vaping in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking and vaping in outdoor places, in private apartments and in cars transporting children. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on regulation. ?Other Legislation or Governmental Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards; establish educational campaigns relating to tobacco consumption or tobacco control programs or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes; require tax stamping of smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and Other Tobacco Products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful. It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position ofAltria and its tobacco subsidiaries, including adversely affecting the value ofAltria 's investment in JUUL. 33
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?Governmental Investigations: From time to time,Altria , its subsidiaries and investees are subject to governmental investigations on a range of matters. For example, (i) theFTC issued a Civil Investigative Demand toAltria while conducting its antitrust review ofAltria 's investment in JUUL seeking information regarding, among other things,Altria 's role in the resignation of JUUL's former chief executive officer and the hiring by JUUL of any current or formerAltria director, executive or employee and (ii) theSEC has commenced an investigation relating toAltria 's disclosures and controls in connection with the JUUL investment. Additionally, JUUL is currently under investigation by various federal and state agencies, including the FDA and theFTC , and state attorneys general. Such investigations vary in scope but at least some appear to include JUUL's marketing practices, particularly as such practices relate to youth. Private Sector Activity An increasing number of retailers, including national chains, have discontinued or are in the process of discontinuing the sale of e-vapor products. Reasons for the discontinuation include reported illnesses related to e-vapor product use and the uncertain regulatory environment. It is possible that this private sector activity could adversely affect the value ofAltria 's investment in JUUL and have a material adverse effect onAltria 's consolidated financial position or earnings. Illicit Trade in Tobacco Products Illicit trade in tobacco products can have an adverse impact on the businesses ofAltria , its tobacco subsidiaries and investees. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in theU.S. that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our tobacco subsidiaries' and investees' products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investmentAltria 's tobacco subsidiaries and investees have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes; imposing legislative or regulatory requirements that may adversely impactAltria 's consolidated results of operations and cash flows, including adversely affecting the value ofAltria 's investment in JUUL, and the businesses of its tobacco subsidiaries and investees; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold.Altria 's tobacco subsidiaries communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect their trademarks. Price, Availability and Quality of Tobacco, Other Raw Materials and Component Parts Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, economic trade sanctions, import duties and tariffs, geopolitical instability and production control programs may increase or decrease the cost or reduce the supply or quality of tobacco, other raw materials or component parts used to manufacture our companies' products. Any significant change in the price, quality or availability of tobacco, other raw materials or component parts used to manufacture our products could restrict our subsidiaries' ability to continue marketing existing products or impact adult consumer product acceptability and adversely affect our subsidiaries' profitability and businesses. With respect to tobacco, as with other agricultural commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand, and crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could impact tobacco leaf prices and tobacco supply. Certain types of tobacco are only available in limited geographies, including geographies experiencing political instability, and loss of their availability could impair our subsidiaries' ability to continue marketing existing products or impact adult tobacco consumer product acceptability. Timing of Sales In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases. 34
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Operating Results The following table summarizes operating results for the smokeable and smokeless products segments: For the Years Ended December 31, Net Revenues Operating Companies Income (in millions) 2019 2018 2017 2019 2018 2017 Smokeable products$ 21,996 $ 22,297 $ 22,636 $ 9,009 $ 8,408 $ 8,426 Smokeless products 2,367 2,262 2,155 1,580 1,431 1,306 Total smokeable and smokeless products$ 24,363 $ 24,559 $ 24,791 $ 10,589 $ 9,839 $ 9,732 Smokeable Products Segment The following table summarizes the smokeable products segment shipment volume performance: Shipment Volume For the Years Ended December 31, (sticks in millions) 2019 2018 2017 Cigarettes: Marlboro 88,473 94,770 99,974 Other premium 4,869 5,552 5,967 Discount 8,457 9,469 10,665 Total cigarettes 101,799 109,791 116,606 Cigars: Black & Mild 1,641 1,590 1,527 Other 10 11 15 Total cigars 1,651 1,601 1,542 Total smokeable products 103,450 111,392 118,148 Cigarettes shipment volume includesMarlboro ; Other premium brands, such as Virginia Slims,Parliament and Benson & Hedges and Nat's; and Discount brands, which include L&M, Basic and Chesterfield. Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution toPuerto Rico , and units sold inU.S. Territories, to overseas military and byPhilip Morris Duty Free Inc. , none of which, individually or in the aggregate, is material to the smokeable products segment. The following table summarizes cigarettes retail share performance: Retail Share For the Years Ended December 31, 2019 2018 2017 Cigarettes: Marlboro 43.1 % 43.2 % 43.5 % Other premium 2.4 2.6 2.7 Discount 4.2 4.4 4.6 Total cigarettes 49.7 % 50.2 % 50.8 % Retail share results for cigarettes are based on data fromIRI/Management Science Associate Inc. , a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System ("STARS"). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI's standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service. For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above.PM USA andMiddleton executed the following pricing and promotional allowance actions during 2019, 2018 and 2017: ?EffectiveOctober 20, 2019 ,PM USA increased the list price on all of its cigarette brands by$0.08 per pack. 35
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?EffectiveAugust 4, 2019 ,Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately$0.04 per five-pack. ?EffectiveJune 16, 2019 ,PM USA increased the list price on all of its cigarette brands by$0.06 per pack, except for L&M, which had no list price change. ?EffectiveFebruary 24, 2019 ,PM USA increased the list price onMarlboro and L&M by$0.11 per pack andParliament and Virginia Slims by$0.16 per pack. In addition,PM USA increased the list price on all of its other cigarette brands by$0.31 per pack. ?EffectiveSeptember 23, 2018 ,PM USA increased the list price onMarlboro and L&M by$0.10 per pack andParliament and Virginia Slims by$0.15 per pack. In addition,PM USA increased the list price on all of its other cigarette brands by$0.50 per pack. ?EffectiveMay 6, 2018 ,Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately$0.11 per five-pack. ?EffectiveMarch 25, 2018 ,PM USA increased the list price on all of its cigarette brands by$0.09 per pack. ?EffectiveSeptember 24, 2017 ,PM USA increased the list price on all of its cigarette brands by$0.10 per pack. ?EffectiveMay 21, 2017 ,Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately$0.10 per five-pack. ?EffectiveMarch 19, 2017 ,PM USA increased the list price onParliament by$0.12 per pack. In addition,PM USA increased the list price on all of its other cigarette brands by$0.08 per pack. In addition: ?EffectiveFebruary 16, 2020 ,PM USA increased the list price on all of its cigarette brands by$0.08 per pack. ?EffectiveJanuary 12, 2020 ,Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately$0.08 per five-pack. 2019 Compared with 2018 Net revenues, which include excise taxes billed to customers, decreased$301 million (1.3%), due primarily to lower shipment volume ($1,780 million ), partially offset by higher pricing ($1,497 million ), which includes lower promotional investments. Operating companies income increased$601 million (7.1%), due primarily to higher pricing, which includes lower promotional investments, and lower costs ($420 million ), partially offset by lower shipment volume ($996 million ), 2018 NPM Adjustment Items ($145 million ), and higher per unit settlement charges. Marketing, administration and research costs for the smokeable products segment includePM USA's cost of administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, including the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For further discussion on these matters, see Note 19 and Item 3. For the years endedDecember 31, 2019 , 2018 and 2017, product liability defense costs forPM USA were$151 million ,$179 million and$179 million , respectively. The factors that have influenced past product liability defense costs are expected to continue to influence future costs.PM USA does not expect future product liability defense costs to be significantly different from product liability defense costs incurred in the last few years. The smokeable products segment's reported domestic cigarettes shipment volume decreased 7.3%, driven primarily by the industry's rate of decline, retail share losses, trade inventory movements and other factors. When adjusted for trade inventory movements and other factors, the smokeable products segment's domestic cigarettes shipment volume decreased by an estimated 7%. When adjusted for trade inventory movements and other factors, total domestic cigarette industry volumes declined by an estimated 5.5%. Shipments of premium cigarettes accounted for 91.7% of smokeable products' reported domestic cigarettes shipment volume for 2019, versus 91.4% for 2018. Total cigarettes industry discount category retail share was 24.2% in 2019, an increase of 0.4 percentage points versus 2018. 2018 Compared with 2017 Net revenues, which include excise taxes billed to customers, decreased$339 million (1.5%), due primarily to lower shipment volume ($1,438 million ), partially offset by higher pricing ($1,104 million ), which includes lower promotional investments. Operating companies income was essentially unchanged as lower shipment volume ($779 million ), higher costs ($343 million , which includes investments in strategic initiatives, higher asset impairment, exit and implementation costs and higher tobacco and health litigation items) and higher per unit settlement charges, were offset by higher pricing ($1,092 million ), which includes lower promotional investments, and higher NPM Adjustment Items ($140 million ). The smokeable products segment's reported domestic cigarettes shipment volume decreased 5.8%, driven primarily by the industry's rate of decline, retail share losses and trade inventory movements, partially offset by one extra shipping day. When adjusted for trade inventory 36
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movements and one extra shipping day, the smokeable products segment's domestic cigarettes shipment volume decreased an estimated 5.5%. Total domestic cigarette industry volumes declined by an estimated 4.5%. Shipments of premium cigarettes accounted for 91.4% of smokeable products' reported domestic cigarettes shipment volume for 2018, versus 90.9% for 2017.PM USA stabilizedMarlboro retail share in 2018 at a full-year share of 43.2 share points, unchanged compared toMarlboro's share in the fourth quarter of 2017. Smokeless Products Segment The following table summarizes smokeless products segment shipment volume performance: Shipment Volume For the Years Ended December 31, (cans and packs in millions) 2019 2018 2017 Copenhagen 522.2 531.7 531.6 Skoal 217.8 231.1 241.9 Copenhagen and Skoal 740.0 762.8 773.5 Other 67.0 69.8 67.8 Total smokeless products 807.0 832.6 841.3 Smokeless products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume and oral nicotine pouch volume, which are currently not material to the smokeless products segment. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST. The following table summarizes smokeless products segment retail share performance (excluding international and oral nicotine pouch volume): Retail Share For the Years Ended December 31, 2019 2018 2017 Copenhagen 34.8 % 34.5 % 34.0 % Skoal 15.6 16.2 16.7 Copenhagen and Skoal 50.4 50.7 50.7 Other 3.5 3.3 3.2 Total smokeless products 53.9 % 54.0 % 53.9 % Retail share results for smokeless products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Smokeless products is defined by IRI as moist smokeless and spit-free tobacco products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI's standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service. For a discussion of volume trends and factors that impact volume and retail share performance, see Tobacco Space - Business Environment above. USSTC executed the following pricing actions during 2019, 2018 and 2017: ?EffectiveOctober 22, 2019 , USSTC increased the list price on its Skoal X-TRA products and selectCopenhagen products by$0.09 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of itsCopenhagen and Skoal products by$0.04 per can. ?EffectiveJuly 23, 2019 , USSTC increased the list price on its Skoal X-TRA products and selectCopenhagen products by$0.08 per can. USSTC also increased the list price on its Husky and Red Seal brands and the balance of itsCopenhagen and Skoal products by$0.03 per can. ?EffectiveApril 30, 2019 , USSTC increased the list price on its Skoal X-TRA products and selectCopenhagen products by$0.17 per can. USSTC also increased the list price on its Husky and Red Seal brands and itsCopenhagen and Skoal popular price products by$0.12 per can. In addition, USSTC increased the list price on the balance of itsCopenhagen and Skoal products by$0.07 per can. 37
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?EffectiveNovember 20, 2018 , USSTC increased the list price on its Skoal X-TRA products and selectCopenhagen products by$0.17 per can. USSTC also increased the list price on its Husky brand and on the balance of itsCopenhagen and Skoal products by$0.07 per can. In addition, USSTC decreased the price on its Red Seal brand by$0.08 per can. ?EffectiveJune 5, 2018 , USSTC increased the list price on all its brands by$0.07 per can. ?EffectiveSeptember 26, 2017 , USSTC increased the list price onCopenhagen and Skoal popular price products by$0.12 per can. In addition, USSTC increased the list price on all its brands, except forCopenhagen and Skoal popular price products, by$0.07 per can. ?EffectiveApril 25, 2017 , USSTC increased the list price on all its brands by$0.07 per can. In addition, effectiveFebruary 18, 2020 , USSTC increased the list price on its Skoal X-TRA products by$0.56 per can. USSTC also increased the list price on its Skoal Blend products by$0.16 cents per can and increased the list price on its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products by$0.07 per can. 2019 Compared with 2018 Net revenues, which include excise taxes billed to customers, increased$105 million (4.6%), due primarily to higher pricing ($197 million ), which includes lower promotional investments, partially offset by lower shipment volume ($98 million ). Operating companies income increased$149 million (10.4%), due primarily to higher pricing, which includes lower promotional investments, and lower costs, partially offset by lower shipment volume ($87 million ). The smokeless products segment's reported domestic shipment volume declined 3.1%, driven primarily by the industry's rate of decline, calendar differences, retail share losses and other factors, partially offset by trade inventory movements. When adjusted for trade inventory movements and calendar differences, the smokeless products segment's domestic shipment volume declined an estimated 3%. The smokeless products category industry volume declined an estimated 1% over the six months endedDecember 31, 2019 . 2018 Compared with 2017 Net revenues, which include excise taxes billed to customers, increased$107 million (5.0%), due primarily to higher pricing ($138 million ), which includes lower promotional investments, partially offset by lower shipment volume. Operating companies income increased$125 million (9.6%), due primarily to higher pricing ($138 million ), which includes lower promotional investments, and lower asset impairment, exit and implementation costs ($33 million ), partially offset by lower shipment volume and higher costs (including investments in strategic investments). The smokeless products segment's reported domestic shipment volume decreased 1.0%, driven primarily by the industry's rate of decline. When adjusted for trade inventory movements and calendar differences, the smokeless products segment's domestic shipment volume declined an estimated 1%. The smokeless products category industry volume declined an estimated 1.5% over the six months endedDecember 31, 2018 . Wine Segment Business Environment Ste. Michelle is a leading producer ofWashington state wines, primarily Chateau Ste. Michelle and 14 Hands, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest inMichelle-Antinori, LLC , which ownsStag's Leap Wine Cellars inNapa Valley . Ste. Michelle also ownsConn Creek inNapa Valley , Patz & Hall inSonoma andErath inOregon . In addition, Ste. Michelle imports and markets Antinori andVilla Maria Estate wines and Champagne Nicolas Feuillatte inthe United States . Key elements of Ste. Michelle's strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products. Ste. Michelle works to meet evolving adult consumer preferences over time by developing, marketing and distributing products through innovation. Ste. Michelle's business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle's sales occur inthe United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors. Adult consumer preferences among alcohol categories and within the wine category can shift due to a variety of factors, including changes in taste preferences, demographics or social trends, and changes in leisure, dining and beverage consumption patterns. Evolving adult consumer preferences pose challenges to the wine category, which has seen slowing volume growth in the premium wine category and increases in inventory levels. 38
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Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages could have an adverse effect on Ste. Michelle's wine business. Operating Results The following table summarizes operating results for the wine segment: For the Years Ended December 31, (in millions) 2019 2018 2017 Net revenues$ 689 $ 691 $ 698 Operating companies income (loss)$ (3 ) $
50
2019 Compared with 2018 Net revenues, which include excise taxes billed to customers, were essentially unchanged as higher promotional investments were mostly offset by higher shipment volume and favorable premium mix. Operating companies income decreased$53 million (100.0%+), due primarily to the 2019 impairment of the wine segment goodwill ($74 million ), higher costs and higher promotional investments, partially offset by the 2018 impairment of the Columbia Crest trademark ($54 million ). For 2019, Ste. Michelle's reported wine shipment volume of 8,294 thousand cases increased 0.6%. 2018 Compared with 2017 Net revenues, which include excise taxes billed to customers, decreased$7 million (1.0%), due primarily to lower shipment volume, partially offset by favorable premium mix. Operating companies income decreased$96 million (65.8%), due primarily to the impairment of the Columbia Crest trademark ($54 million ), higher costs and lower shipment volume, partially offset by favorable premium mix. For 2018, Ste. Michelle's reported wine shipment volume of 8,246 thousand cases decreased 3.3%. Financial Review Net Cash Provided by/Used in Operating Activities During 2019, net cash provided by operating activities was$7.8 billion compared with$8.4 billion during 2018. This decrease was due primarily to the following: ? lower payments of settlement charges in 2018;
? lower dividends received from ABI; and
? higher payments of interest on long-term debt in 2019;
partially offset by: ? lower costs as a result of the cost reduction program announced in
? lower federal income tax payments in 2019.
During 2018, net cash provided by operating activities was$8.4 billion compared with$4.9 billion during 2017. This increase was due primarily to lower payments of settlement charges and income taxes in 2018.Altria had a working capital deficit atDecember 31, 2019 and 2018.Altria 's management believes thatAltria has the ability to fund working capital deficits with cash provided by operating activities and/or short-term borrowings under its commercial paper program and borrowings through its access to credit and capital markets. Net Cash Provided by/Used in Investing Activities During 2019, net cash used in investing activities was$2.4 billion compared with$13.0 billion during 2018. This decrease was due primarily to the following: ?Altria 's$12.8 billion investment in JUUL in 2018; partially offset by: ?Altria 's$1.9 billion investment in Cronos in 2019; and
? Helix's acquisition of the
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During 2018, net cash used in investing activities was$13.0 billion compared with$0.5 billion during 2017. This increase was due primarily toAltria 's$12.8 billion investment in JUUL in 2018. Capital expenditures for 2019 increased 3.4% to$246 million . Capital expenditures for 2020 are expected to be in the range of$225 million to$275 million , and are expected to be funded from operating cash flows. Net Cash Provided by/Used in Financing Activities During 2019, net cash used in financing activities was$4.7 billion compared with net cash provided by financing activities of$4.7 billion during 2018. This change was due primarily to the following: ? proceeds of$12.8 billion from short-term borrowings in 2018;
? repayments of
? higher dividends paid during 2019; and
? higher repayments of long-term debt at maturity in 2019;
partially offset by:
? proceeds of
notes during 2019; and
? lower repurchases of common stock during 2019.
During 2018, net cash provided by financing activities was$4.7 billion compared with net cash used in financing activities of$7.8 billion during 2017. This change was due primarily to the following: ?$12.8 billion of short-term borrowings used to financeAltria 's investment
in JUUL in 2018; and
? lower repurchases of common stock during 2018;
partially offset by: ? higher dividends paid during 2018; and ?$0.9 billion repayment ofAltria senior unsecured notes at scheduled maturity in 2018. Debt and Liquidity Credit Ratings -Altria 's cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings underAltria 's credit agreement is discussed in Note 9. See the discussion in Item 1A regarding the potential adverse impact of certain events onAltria 's credit ratings. AtDecember 31, 2019 , the credit ratings and outlook forAltria 's indebtedness by major credit rating agencies were: Short-term Debt Long-term Debt
Outlook
Moody's Investor Service, Inc. ("Moody's") P-2 A3
Negative
Standard & Poor's Ratings Services A-2 BBB Stable ("Standard & Poor's") Fitch Ratings Ltd. ("Fitch") F2 BBB Stable Credit Lines - From time to time,Altria has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs. AtDecember 31, 2019 and 2018,Altria had no short-term borrowings under its commercial paper program. InDecember 2018 ,Altria entered into a senior unsecured term loan agreement (the "Term Loan Agreement") in connection with its investments in JUUL and Cronos. AtDecember 31, 2018 ,Altria had aggregate short-term borrowings under the Term Loan Agreement of$12.8 billion at an interest rate of approximately 3.5%. Borrowings under the Term Loan Agreement were set to mature onDecember 19, 2019 . InFebruary 2019 ,Altria repaid all of the outstanding$12.8 billion of short-term borrowings under the Term Loan Agreement with net proceeds from the issuance of long-term senior unsecured notes. Upon such repayment, the Term Loan Agreement terminated in accordance with its terms. For further discussion, see the Debt section below. AtDecember 31, 2019 ,Altria had in place a senior unsecured 5-year revolving credit agreement (the "Credit Agreement"). The Credit Agreement, which is used for general corporate purposes, provides for borrowings up to an aggregate principal amount of$3.0 billion . The Credit Agreement expires onAugust 1, 2023 and includes an option, subject to certain conditions, forAltria to extend the Credit Agreement for two additional one-year periods. AtDecember 31, 2019 and 2018,Altria had no borrowings under the Credit Agreement. AtDecember 31, 2019 , credit available toAltria under the Credit Agreement was$3.0 billion . AtDecember 31, 2019 ,Altria was in compliance with its covenants associated with the Credit Agreement.Altria expects to continue to meet its covenants associated with the Credit Agreement. For further discussion, see Note 9. Any commercial paper issued byAltria and borrowings under the Credit Agreement are guaranteed byPM USA as further discussed in Note 20. Condensed Consolidating Financial Information to the consolidated financial statements in Item 8 ("Note 20"). Financial Market Environment -Altria believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future.Altria monitors the credit quality of its bank group and is not aware of any potential 40
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non-performing credit provider in that group.Altria believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations. See Item 1A for the risk factor relating to disruption and uncertainty in the credit and capital markets. Debt - AtDecember 31, 2019 and 2018,Altria 's total debt was$28.0 billion and$25.7 billion , respectively. The increase in debt was due toAltria 'sFebruary 2019 issuance of long-term senior unsecured notes, partially offset by the repayment in full inFebruary 2019 of$12.8 billion of short-term borrowings under the Term Loan Agreement and the repayment in full of$1.1 billion of long-term senior unsecured notes at scheduled maturity inAugust 2019 . All ofAltria 's long-term debt outstanding atDecember 31, 2019 and 2018 was fixed-rate debt. The weighted-average coupon interest rate on total long-term debt was approximately 4.2% and 4.6% atDecember 31, 2019 and 2018, respectively. InFebruary 2019 ,Altria issued USD and Euro denominated long-term senior unsecured notes in the aggregate principal amounts of$11.5 billion and €4.25 billion, respectively.Altria immediately converted the proceeds of the Euro denominated notes into USD of$4.8 billion . The net proceeds from the Euro notes and a portion of the net proceeds from the USD notes were used to repay in full the$12.8 billion of short-term borrowings under the Term Loan Agreement. The remaining net proceeds from the USD notes were used to financeAltria 's investment in Cronos in the first quarter of 2019 and for other general corporate purposes.Altria designated its Euro denominated notes as a net investment hedge of its investment in ABI. InJanuary 2020 ,Altria repaid in full at maturity notes in the aggregate principal amount of$1.0 billion . For further details on short-term borrowings and long-term debt, see Note 9 and Note 10, respectively. InOctober 2017 ,Altria filed a registration statement on Form S-3 with theSEC , under whichAltria may offer debt securities or warrants to purchase debt securities from time to time over a three-year period from the date of filing. Off-Balance Sheet Arrangements and Aggregate Contractual ObligationsAltria has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below. Guarantees and Other Similar Matters - As discussed in Note 19,Altria and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding atDecember 31, 2019 . From time to time, subsidiaries ofAltria also issue lines of credit to affiliated entities. In addition, as discussed in Note 20,PM USA has issued guarantees relating toAltria 's obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program. These items have not had, and are not expected to have, a significant impact onAltria 's liquidity. For further discussion regardingAltria 's liquidity, see the Debt and Liquidity section above. 41
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Aggregate Contractual Obligations - The following table summarizes
Payments Due 2025 and (in millions) Total 2020 2021 - 2022 2023 - 2024 Thereafter Long-term debt (1)$ 28,275 $ 1,000 $ 4,400 $ 4,152 $ 18,723 Interest on borrowings (2) 17,923 1,194 2,182 1,909 12,638 Operating leases (3) 196 53 72 28 43 Purchase obligations: (4) Inventory and production costs 4,038 1,039 1,343 761 895 Other 886 585 247 54 - 4,924 1,624 1,590 815 895 Other long-term liabilities (5) 1,944 81 180 198 1,485$ 53,262 $ 3,952 $ 8,424 $ 7,102 $ 33,784 (1) Amounts represent the expected cash payments ofAltria 's long-term debt. (2) Amounts represent the expected cash payments ofAltria 's interest expense on its long-term debt. Interest onAltria 's long-term debt, which was all fixed-rate debt atDecember 31, 2019 , is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts and debt issuance costs, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net in the consolidated statements of earnings. (3) Amounts represent the minimum rental commitments under non-cancelable operating leases. (4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and services, contract manufacturing, packaging, storage and distribution) are commitments for projected needs to be used in the normal course of business. Other purchase obligations include commitments for marketing, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. (5) Other long-term liabilities primarily consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table above for accrued pension costs consist of the actuarially determined anticipated minimum funding requirements for each year from 2020 through 2024. Contributions beyond 2024 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals.Altria is unable to estimate the timing of payments for these items. The State Settlement Agreements and related legal fee payments, and payments for FDA user fees, as discussed below and in Note 19, are excluded from the table above, as the payments are subject to adjustment for several factors, including inflation, operating income, market share and industry volume. Litigation escrow deposits, as discussed below and in Note 19, are also excluded from the table above since these deposits will be returned toPM USA should it prevail on appeal. Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 19,PM USA andNat Sherman have entered into State Settlement Agreements with the states and territories ofthe United States that call for certain payments. In addition,PM USA ,Middleton ,Nat Sherman and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA.Altria 's subsidiaries recorded approximately$4.5 billion ,$4.5 billion and$4.7 billion of charges to cost of sales for each of the years endedDecember 31, 2019 , 2018 and 2017, respectively, in connection with the State Settlement Agreements and FDA user fees. For further discussion of the resolutions of certain disputes with states and territories related to the NPM Adjustment provision under the MSA, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 19. Based on current agreements, 2019 market share and estimated annual industry volume decline rates, the estimated amounts thatAltria 's subsidiaries may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees approximate$4.5 billion in 2020 and$4.4 billion each year thereafter. These amounts exclude the potential impact of the NPM Adjustment provision applicable under the MSA and the revised NPM Adjustment provisions applicable under the resolutions of the NPM Adjustment disputes. The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer's market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results. Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as ofDecember 31, 2019 ,PM USA had posted appeal bonds totaling$43 million , which have been collateralized with restricted cash that are included in assets on the consolidated balance sheet. Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations ofPM USA , UST orAltria in a particular fiscal quarter or fiscal year, as more fully 42
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disclosed in Note 19, Item 3 and Item 1A, management expects cash flow from operations, together withAltria 's access to capital markets, to provide sufficient liquidity to meet ongoing business needs. Equity and Dividends As discussed in Note 12. Stock Plans to the consolidated financial statements in Item 8, during 2019Altria granted an aggregate of 0.7 million restricted stock units and 0.2 million performance stock units to eligible employees. AtDecember 31, 2019 , the number of shares to be issued upon vesting of restricted stock units and performance stock units was not significant. Dividends paid in 2019 and 2018 were approximately$6.1 billion and$5.4 billion , respectively, an increase of 12.1%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased byAltria under its share repurchase programs. During the third quarter of 2019, the Board of Directors approved a 5% increase in the quarterly dividend rate to$0.84 per share ofAltria common stock versus the previous rate of$0.80 per share.Altria expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is$3.36 per share. Future dividend payments remain subject to the discretion of the Board of Directors. For a discussion ofAltria 's share repurchase programs, see Note 11. Capital Stock to the consolidated financial statements in Item 8 and Part II, Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities of this Annual Report on Form 10-K. New Accounting Guidance Not Yet Adopted See Note 2 for a discussion of issued accounting guidance applicable to, but not yet adopted by,Altria . Contingencies See Note 19 and Item 3 for a discussion of contingencies.
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