# Altria Group, Inc.: Form 10-Q for the period ended Jun 30, 2021 - Company: [Altria Group, Inc.](/companies/mo.md) (CIK 764180) - Form: 10-Q - Filed: 2021-07-29 - Accepted by EDGAR: Jul 29, 2021, 10:42 ET - Period: 2021-06-30 - Accession: 0000764180-21-000108 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/764180/000076418021000108/mo-20210630.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/764180/000076418021000108/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2021-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2021-04-01 to 2021-06-30 | $6.94bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 6 months, 2021-01-01 to 2021-06-30 | $12.97bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2021-04-01 to 2021-06-30 | $1.88bn | us-gaap:CostOfGoodsAndServicesSold | | Cost of revenue | 6 months, 2021-01-01 to 2021-06-30 | $3.49bn | us-gaap:CostOfGoodsAndServicesSold | | Gross profit | 3 months, 2021-04-01 to 2021-06-30 | $3.73bn | us-gaap:GrossProfit | | Gross profit | 6 months, 2021-01-01 to 2021-06-30 | $7.00bn | us-gaap:GrossProfit | | Operating income | 3 months, 2021-04-01 to 2021-06-30 | $3.19bn | us-gaap:OperatingIncomeLoss | | Operating income | 6 months, 2021-01-01 to 2021-06-30 | $5.88bn | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2021-04-01 to 2021-06-30 | $759.0m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2021-01-01 to 2021-06-30 | $1.27bn | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2021-04-01 to 2021-06-30 | $2.15bn | us-gaap:NetIncomeLoss | | Net income | 6 months, 2021-01-01 to 2021-06-30 | $3.57bn | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2021-04-01 to 2021-06-30 | $1.16 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2021-01-01 to 2021-06-30 | $1.93 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2021-04-01 to 2021-06-30 | $1.16 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2021-01-01 to 2021-06-30 | $1.93 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2021-04-01 to 2021-06-30 | 1,849,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2021-01-01 to 2021-06-30 | 1,853,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2021-01-01 to 2021-06-30 | $2.68bn | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2021-01-01 to 2021-06-30 | $53.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 6 months, 2021-01-01 to 2021-06-30 | $3.20bn | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 6 months, 2021-01-01 to 2021-06-30 | $650.0m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2021-06-30 | $1.88bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2021-06-30 | $4.18bn | us-gaap:AssetsCurrent | | Total assets | at 2021-06-30 | $44.39bn | us-gaap:Assets | | Current liabilities | at 2021-06-30 | $5.78bn | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2021-06-30 | $41.09bn | us-gaap:Liabilities | | Long-term debt | at 2021-06-30 | $28.24bn | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2021-06-30 | $0 | us-gaap:LongTermDebtCurrent | | Short-term borrowings | at 2021-06-30 | $0 | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2021-06-30 | $3.26bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 154,623 characters. ### Description of the Company *When used in this Quarterly Report on Form 10-Q (“Form 10-Q”), the terms “Altria,” “we” and “our” refer to Altria Group, Inc. and its subsidiaries, unless the context requires otherwise.* For a description of Altria, see *Background* in Note 1. *Background and Basis of Presentation* to the condensed consolidated financial statements in Part I, Item 1. Financial Statements of this Form 10-Q (“Item 1”). For a detailed description of Altria’s reportable segments, see Note 8. *Segment Reporting* to the condensed consolidated financial statements in Item 1 (“Note 8”). ### Executive Summary In this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, Altria refers to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted OCI margins; adjusted net earnings attributable to Altria; adjusted diluted earnings per share (“EPS”) attributable to Altria; and adjusted effective tax rates. These adjusted financial measures are not required by, or calculated in accordance with, United States generally accepted accounting principles (“GAAP”) and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Except as noted in the *2021 Forecasted Results* section below, when Altria provides a non-GAAP measure in this Form 10-Q, it also provides a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure. OCI for the segments is defined as operating income before general corporate expenses and amortization of intangibles. For a further description of these non-GAAP financial measures, see the *Non-GAAP Financial Measures* section below. Ste. Michelle Transaction On July 8, 2021, UST LLC (“UST”) entered into a Share Purchase Agreement pursuant to which UST agreed to sell its subsidiary, International Wine & Spirits Ltd. (“IWS”), which includes Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), in the Ste. Michelle Transaction (as defined in *Wine Segment Business Environment).* For further discussion, see Note 13. *Subsequent Event* to the condensed consolidated financial statements in Item 1 (“Note 13”). COVID-19 Pandemic The COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and continues to create economic uncertainty even as COVID-19 vaccines have been and continue to be administered in 2021 and the U.S. and global economies have begun to operate with reduced restrictions on consumer movements and business operations. Although much uncertainty still surrounds the pandemic (including its duration, the impact of COVID-19 variants and ultimate overall impact on U.S and global economies, Altria and its subsidiaries’ operations and those of its investees), Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic and continues to carefully evaluate potential outcomes and work to mitigate risks. Specifically, Altria remains focused on any potential impact to its liquidity, operations, supply and distribution chains and on economic conditions. In terms of Altria’s liquidity, despite some volatility in commercial paper markets in 2020, Altria has not experienced a material adverse impact to its liquidity. As with so many other companies throughout the U.S. and globally, Altria’s operations have been affected by the COVID-19 pandemic. To date, Altria believes its tobacco businesses have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but continues to monitor these factors. Altria has implemented remote working for many employees and aligned with the social distancing protocols recommended by public health authorities for employees working at Altria facilities. Altria continues to believe that remote working due to the COVID-19 pandemic has had minimal impact on productivity. Also, Altria’s critical information technology systems have remained operational. Although Altria’s tobacco businesses previously suspended operations temporarily at several of their manufacturing facilities in March 2020, the businesses resumed operations at those facilities under enhanced safety protocols in April 2020 and all manufacturing facilities are currently operational under enhanced safety protocols. Altria continues to monitor the risks associated with facility disruptions and workforce availability as a result of uncertainty related to the COVID-19 pandemic. Altria’s suppliers and those within its distribution chain are also subject to potential facility closures, remote working protocols and labor shortages. To date, Altria has not experienced any material disruptions to its supply chains or distribution systems, but is continuing to monitor these factors. The majority of retail stores in which Altria’s tobacco products are sold, including convenience stores, were deemed to be essential businesses by authorities and remained open. Altria continues to monitor the risk that one or more suppliers, distributors or any other entities within its supply and distribution chain closes temporarily or permanently. Altria believes that the COVID-19 pandemic has altered adult tobacco consumer behaviors and purchasing patterns. Many adult tobacco consumers have adopted stay-at-home practices, which Altria believes have contributed to more tobacco usage occasions compared to pre-pandemic levels. Altria also believes that many adult tobacco consumers have had higher tobacco discretionary spending during the COVID-19 pandemic due to a variety of factors, including federal government stimulus payments and enhanced unemployment benefit payments, and lower non-tobacco discretionary spend due to their stay-at-home practices. Altria also estimates that, due to the COVID-19 pandemic, the number of adult tobacco consumers trips to the store to purchase tobacco products has decreased versus pre-pandemic levels, but the tobacco expenditures per trip have increased. Although Altria’s tobacco businesses have not experienced a material adverse impact to date by the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic (including changes in COVID-19-related restrictions and guidelines) may impact adult tobacco consumers in the future. Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic (including risks associated with the timing and extent of vaccine administration and the impact of COVID-19 variants), and their effect on adult tobacco consumers, including stay-at-home practices and disposable income, which may be further impacted by unemployment rates, fiscal stimulus and inflation. Altria also continues to monitor adult tobacco consumers’ purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of smoke-free products. Altria has experienced adverse impacts to its alcohol assets due to the COVID-19 pandemic. In the wine business in 2020, Ste. Michelle’s direct-to-consumer sales and on-premise wine sales in restaurants, bars and hospitality venues and on cruise lines were adversely impacted by disruptions arising from the COVID-19 pandemic. The adverse impacts in 2020 contributed to Ste. Michelle recording pre-tax inventory-related charges of $392 million in the first quarter of 2020 in connection with its strategic reset of the wine business. In the first half of 2021, Ste. Michelle’s operations continued to be adversely impacted by disruptions arising from the COVID-19 pandemic. However, as the U.S. Center for Disease Control and Prevention relaxed COVID-19 guidelines and local government ordinances eased, Ste. Michelle restarted certain on-premise events and its on-premise wine sales improved compared to prior quarters. Ste. Michelle continues to monitor the impact of the COVID-19 pandemic associated risks to its business, results of operations, cash flows and financial position. Anheuser-Busch InBev SA/NV (“ABI”) continues to be impacted by the COVID-19 pandemic. In 2020, these impacts included: (i) a 50% reduction to its final 2019 dividend and a decision to forgo its interim 2020 dividend; (ii) the withdrawal of its earnings guidance for 2020 due to uncertainty and volatility related to the impact of the COVID-19 pandemic; and (iii) a goodwill impairment charge related to its Africa businesses. However, ABI’s performance in the first half of 2021 improved meaningfully versus the same period in 2020, including top-line growth in the second quarter of 2021 ahead of second quarter of 2019 pre-pandemic levels. The extreme market disruption and volatility associated with the COVID-19 pandemic resulted in a steep decline in ABI’s stock price in the first half of 2020. While there has been significant recovery in ABI’s stock price since the first half of 2020, including renewed momentum in the second quarter of 2021, ABI’s stock price remains volatile as demonstrated by its recent decline in July 2021. The fair value of Altria’s investment in ABI continues to be below the carrying value. Altria believes that this decline is temporary and will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic on ABI’s business and market valuation. Altria has considered the impact of the COVID-19 pandemic on the business of JUUL Labs, Inc. (“JUUL”), including its sales, distribution, operations, supply chain and liquidity, in conducting its periodic impairment assessment and quantitative valuations. JUUL’s operations were negatively impacted in 2020 by the COVID-19 pandemic due to stay-at-home practices and government-mandated restrictions. While the impact was considered in Altria’s quantitative valuations conducted in connection with the preparation of its financial statements for the six months ended June 30, 2021 and during 2020, Altria does not believe the COVID-19 pandemic was a primary driver of the non-cash, pre-tax impairment charge recorded during 2020 or any quarterly changes in fair value recorded since the fourth quarter of 2020. Altria will continue to monitor the impact of the COVID-19 pandemic on JUUL’s business in Altria’s quarterly quantitative valuations of JUUL. Altria has considered the impact of the COVID-19 pandemic on the business of Cronos Group Inc. (“Cronos”), including its sales, distribution, operations, supply chain and liquidity. During 2020 and the first half of 2021, Cronos has been impacted by the COVID-19 pandemic, due in part to government actions limiting access to retail stores in the United States and Canada, including the recording in 2020 of an impairment charge on certain goodwill and intangible assets. However, the continued rollout of vaccines in the United States and Canada has resulted in the removal of COVID-19 related restrictions in most of the United States and the gradual easing of COVID-19 restrictions in Canada at the end of the second quarter of 2021. Altria will continue to monitor its investment in Cronos, including the impact of the COVID-19 pandemic on Cronos’s business and market valuation. ### Consolidated Results of Operations for the Six Months Ended June 30, 2021 The changes in net earnings attributable to Altria and diluted EPS attributable to Altria for the six months ended June 30, 2021, from the six months ended June 30, 2020, were due primarily to the following: *(in millions, except per share data)* | | Net Earnings | Diluted EPS | | --- | ---: | ---: | | For the six months ended June 30, 2020 | $3,495 | $1.88 | | 2020 Implementation and acquisition-related costs | 306 | 0.16 | | 2020 Tobacco and health litigation items | 32 | 0.02 | | 2020 ABI-related special items | 139 | 0.07 | | 2020 Cronos-related special items | 1 | — | | 2020 COVID-19 special items | 37 | 0.02 | | 2020 Tax items | 51 | 0.03 | | Subtotal 2020 special items | 566 | 0.30 | | 2021 NPM Adjustment Items | **24** | **0.01** | | 2021 Implementation and acquisition-related costs | **(43)** | **(0.02)** | | 2021 Tobacco and health litigation items | **(33)** | **(0.02)** | | 2021 JUUL changes in fair value | **(100)** | **(0.05)** | | 2021 ABI-related special items | **71** | **0.04** | | 2021 Cronos-related special items | **(116)** | **(0.06)** | | 2021 Loss on early extinguishment of debt | **(496)** | **(0.27)** | | 2021 Tax items | **(3)** | **—** | | Subtotal 2021 special items | **(696)** | **(0.37)** | | Fewer shares outstanding | **—** | **0.01** | | Change in tax rate | **(44)** | **(0.02)** | | Operations | **252** | **0.13** | | For the six months ended June 30, 2021 | **$3,573** | **$1.93** | | 2021 Reported Net Earnings | **$3,573** | **$1.93** | | 2020 Reported Net Earnings | $3,495 | $1.88 | | % Change | **2.2%** | **2.7%** | | 2021 Adjusted Net Earnings and Adjusted Diluted EPS | **$4,269** | **$2.30** | | 2020 Adjusted Net Earnings and Adjusted Diluted EPS | $4,061 | $2.18 | | % Change | **5.1%** | **5.5%** | *For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.* - **Fewer Shares Outstanding:** Fewer shares outstanding were due primarily to shares repurchased by Altria under its share repurchase program in 2021. - **Change in Tax Rate:** The change in the tax rate (which excludes the impact of special items shown in the table above) was driven primarily by lower dividends from ABI. - **Operations:** The increase of $252 million in operations (which excludes the impact of special items shown in the table above) was due primarily to higher OCI in all reportable segments. *For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.* ### Consolidated Results of Operations for the Three Months Ended June 30, 2021 The changes in net earnings attributable to Altria and diluted EPS attributable to Altria for the three months ended June 30, 2021, from the three months ended June 30, 2020, were due primarily to the following: *(in millions, except per share data)* | | Net Earnings | Diluted EPS | | --- | ---: | ---: | | For the three months ended June 30, 2020 | $1,943 | $1.04 | | 2020 Implementation and acquisition-related costs | 6 | — | | 2020 Tobacco and health litigation items | 13 | 0.01 | | 2020 ABI-related special items | 95 | 0.05 | | 2020 Cronos-related special items | (94) | (0.05) | | 2020 COVID-19 special items | 37 | 0.02 | | 2020 Tax items | 27 | 0.02 | | Subtotal 2020 special items | 84 | 0.05 | | 2021 Implementation and acquisition-related costs | **(6)** | **—** | | 2021 Tobacco and health litigation items | **(7)** | **—** | | 2021 JUUL changes in fair value | **100** | **0.05** | | 2021 ABI-related special items | **(29)** | **(0.02)** | | 2021 Cronos-related special items | **(186)** | **(0.10)** | | 2021 Tax items | **(9)** | **—** | | Subtotal 2021 special items | **(137)** | **(0.07)** | | Change in tax rate | **(17)** | **(0.01)** | | Operations | **276** | **0.15** | | For the three months ended June 30, 2021 | **$2,149** | **$1.16** | | 2021 Reported Net Earnings | **$2,149** | **$1.16** | | 2020 Reported Net Earnings | $1,943 | $1.04 | | % Change | **10.6%** | **11.5%** | | 2021 Adjusted Net Earnings and Adjusted Diluted EPS | **$2,286** | **$1.23** | | 2020 Adjusted Net Earnings and Adjusted Diluted EPS | $2,027 | $1.09 | | % Change | **12.8%** | **12.8%** | *For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings attributable to Altria and adjusted diluted EPS attributable to Altria, see the Consolidated Operating Results section below.* - **Change in Tax Rate:** The change in the tax rate (which excludes the impact of special items shown in the table above) was driven primarily by lower dividends from ABI. - **Operations:** The increase of $276 million in operations (which excludes the impact of special items shown in the table above) was due primarily to higher OCI in all reportable segments. *For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.* ### 2021 Forecasted Results Altria narrows its guidance for 2021 full-year adjusted diluted EPS to be in a range of $4.56 to $4.62, representing a growth rate of 4.5% to 6% over its 2020 full-year adjusted diluted EPS base of $4.36, as shown in the first table below. This range includes the estimated impact of the recently announced Ste. Michelle Transaction (see Note 13), which is expected to close in the second half of 2021. While the 2021 full-year adjusted diluted EPS guidance accounts for a range of scenarios, the external environment remains dynamic. Altria will continue to monitor conditions related to (i) the economy (including unemployment rates and the impact of increased inflation), (ii) fiscal stimulus, (iii) adult tobacco consumer dynamics, including stay-at-home practices, disposable income, purchasing patterns and adoption of smoke-free products, (iv) regulatory and legislative (including excise tax) developments, (v) the timing and extent of COVID-19 vaccine administration and the impact of COVID-19 variants and (vi) expectations for adjusted earnings contributions from its alcohol assets. Altria’s 2021 full-year adjusted diluted EPS guidance range includes planned investments in support of its vision to responsibly lead the transition of adult smokers to a smoke-free future, such as (i) marketplace investments to expand the availability and awareness of Altria’s smoke-free products, (ii) costs associated with building an industry-leading consumer engagement platform that enhances data collection and insights in support of adult tobacco consumer conversion to smoke-free products and (iii) increased smoke-free product research and development expense. This forecasted growth rate excludes the (income) expense items in the second table below. Altria continues to expect its 2021 full-year adjusted effective tax rate will be in a range of 24.5% to 25.5%. | Reconciliation of 2020 Reported Diluted EPS to 2020 Adjusted Diluted EPS | | | --- | ---: | | 2020 Reported diluted EPS | $2.40 | | Asset impairment, exit, implementation and acquisition-related costs | 0.18 | | Tobacco and health litigation items | 0.03 | | Impairment of JUUL equity securities | 1.40 | | JUUL changes in fair value | (0.05) | | ABI-related special items | 0.32 | | Cronos-related special items | 0.03 | | COVID-19 special items | 0.02 | | Tax items | 0.03 | | 2020 Adjusted diluted EPS | $4.36 | The following (income) expense items are excluded from Altria’s 2021 forecasted adjusted diluted EPS growth rate: | (Income) Expense Excluded from 2021 Forecasted Adjusted Diluted EPS | | | --- | ---: | | NPM Adjustment Items | **$(0.01)** | | Implementation and acquisition-related costs | **0.02** | | Tobacco and health litigation items | **0.02** | | JUUL changes in fair value | **0.05** | | ABI-related special items | **(0.04)** | | Cronos-related special items | **0.06** | | Loss on early extinguishment of debt | **0.27** | | | **$0.37** | Note: The amounts in the table above do not include the charge that Altria will record in the second half of 2021, which Altria does not expect to be material to its financial statements, related to the Ste. Michelle Transaction. For further discussion, see Note 13. *For a discussion of certain income and expense items excluded from the forecasted results above, see the Consolidated Operating Results section below.* Altria’s full-year adjusted diluted EPS guidance and full-year forecast for its adjusted effective tax rate exclude the impact of certain income and expense items, including those items noted in the *Non-GAAP Financial Measures* section below, that management believes are not part of underlying operations. Altria’s management cannot estimate on a forward-looking basis the impact of these items on its reported diluted EPS or its reported effective tax rate because these items, which could be significant, may be unusual or infrequent, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding GAAP measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast. ### Non-GAAP Financial Measures While Altria reports its financial results in accordance with GAAP, its management also reviews certain financial results, including OCI, OCI margins, net earnings attributable to Altria and diluted EPS, on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset impairment charges, acquisition-related and disposition-related costs, COVID-19 special items, equity investment-related special items (including any changes in fair value of the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain non-participating manufacturer (“NPM”) adjustment disputes under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items”). Altria’s management does not view any of these special items to be part of Altria’s underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s adjusted effective tax rate may exclude certain tax items from its reported effective tax rate. Altria’s management believes that adjusted financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to Altria’s chief operating decision maker (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 required by, or calculated in accordance with GAAP and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. ### Discussion and Analysis ### Critical Accounting Policies and Estimates Altria’s critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”); there have been no material changes to these critical accounting policies and estimates, except as noted below. #### Investment in ABI At June 30, 2021, Altria’s investment in ABI consisted of 185 million restricted shares (the “Restricted Shares”) and 12 million ordinary shares of ABI. The fair value of Altria’s equity investment in ABI is based on (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and, at June 30, 2021, was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets, for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder were to foreclose on the Restricted Shares, the encumbered Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share. The fair value of Altria’s equity investment in ABI at June 30, 2021 and December 31, 2020 was $14.2 billion (carrying value of $17.2 billion) and $13.8 billion (carrying value of $16.7 billion), respectively, which was less than its carrying value by approximately 17% in both periods. At July 26, 2021, the fair value of Altria’s investment had decreased to approximately $13.6 billion. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value and at July 26, 2021 has not recovered. Altria evaluated the factors related to the fair value decline, including the impact on the fair value of ABI’s shares during the COVID-19 pandemic, which has negatively impacted ABI’s business. Altria evaluated the duration and magnitude of the fair value decline at June 30, 2021, ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded, both at June 30, 2021 and December 31, 2020, that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded. This conclusion was based on the following factors: - a history of significant recovery in ABI’s stock price during 2019 and recoveries during the second half of 2020 (following the steep decline in the first half of 2020 associated with the impacts of the COVID-19 pandemic on its business) and renewed momentum in the second quarter of 2021, all of which Altria believes indicate investor confidence in ABI’s ability to implement its business strategies and deleveraging plans as well as its ability to recover from the impacts of the COVID-19 pandemic; - the continued industry disruption and volatility associated with the COVID-19 pandemic, including the impact of COVID-19 variants, which Altria believes is resulting in stock price performance for ABI that has continued into July 2021 and is not reflective of actual underlying equity values; - ABI’s proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative, including the following actions since December 31, 2019: (i) ABI’s 50% reduction to its final 2019 dividend and its decision to forgo its interim 2020 dividend; (ii) ABI’s completion of the sale of its Australia subsidiary and of a minority stake in its U.S.-based metal container operations; and (iii) ABI’s continuation of its refinancing efforts through issuance and redemption activity, specifically front-end maturities into longer dated maturities and reduction in gross debt levels; - ABI’s global platform (world’s largest brewer by volume and one of the world’s top ten consumer products companies by revenue) with strong market positions in key markets, new product innovations, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and - the strategic plans implemented by ABI in response to the adverse impacts of the COVID-19 pandemic, including its ability to leverage learnings from recovering markets and respond quickly to the evolving environment to better position ABI for a robust recovery. This was evidenced by: - ABI’s performance in the second half of 2020, which represented improvement over the first half of 2020 and reinforced its confidence in the future potential of the beer category and its business; and - ABI’s performance in the first half of 2021, which improved meaningfully versus the same period in 2020, including top-line growth in the second quarter of 2021 ahead of second quarter of 2019 pre-pandemic levels. This is consistent with the performance and resilience of the category that ABI anticipated when it reported its 2020 earnings and provided its outlook for 2021. ABI continues to state that its 2021 outlook, which is subject to change as it continues to monitor for ongoing developments, reflects, among other factors, its current assessment of the scale and magnitude of the COVID-19 pandemic. Altria will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic and subsequent recovery on ABI’s business and market valuation. If Altria were to conclude that the decline in fair value is other than temporary, Altria would determine and recognize, in the period identified, the impairment of its investment, which could result in a material adverse effect on Altria’s consolidated financial position or earnings. For further discussion of Altria’s investment in ABI, see Note 3. *Investments in Equity Securities* to the condensed consolidated financial statements in Item 1 (“Note 3”). ### Consolidated Operating Results *(in millions)* | Net Revenues: | For the Six Months Ended June 30, 2021 | 2020 | For the Three Months Ended June 30, 2021 | 2020 | | --- | ---: | ---: | ---: | ---: | | Smokeable products | **$11,300** | $11,209 | **$6,050** | $5,603 | | Oral tobacco products | **1,319** | 1,261 | **693** | 660 | | Wine | **317** | 277 | **167** | 131 | | All other | **36** | (21) | **26** | (27) | | Net revenues | **$12,972** | $12,726 | **$6,936** | $6,367 | | **Excise Taxes on Products:** | | | | | | Smokeable products | **$2,402** | $2,543 | **$1,281** | $1,265 | | Oral tobacco products | **66** | 65 | **35** | 34 | | Wine | **9** | 9 | **5** | 5 | | All other | **1** | 1 | **1** | 1 | | Excise taxes on products | **$2,478** | $2,618 | **$1,322** | $1,305 | | **Operating Income:** | | | | | | OCI: | | | | | | Smokeable products | **$5,148** | $4,820 | **$2,776** | $2,450 | | Oral tobacco products | **864** | 861 | **472** | 447 | | Wine | **45** | (366) | **27** | 13 | | All other | **(26)** | (56) | **(12)** | (51) | | Amortization of intangibles | **(35)** | (37) | **(18)** | (18) | | General corporate expenses | **(120)** | (90) | **(59)** | (45) | | Operating income | **$5,876** | $5,132 | **$3,186** | $2,796 | As discussed further in Note 8, the CODM reviews OCI to evaluate the performance of, and allocate resources to, the segments. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments. The following table provides a reconciliation of adjusted net earnings attributable to Altria and adjusted diluted EPS attributable to Altria for the six months ended June 30: *(in millions of dollars, except per share data)* | | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Net Earnings Attributable to Altria | Diluted EPS | | --- | ---: | ---: | ---: | ---: | ---: | | 2021 Reported | **$4,846** | **$1,275** | **$3,571** | **$3,573** | **$1.93** | | NPM Adjustment Items | **(32)** | **(8)** | **(24)** | **(24)** | **(0.01)** | | Implementation and acquisition-related costs | **56** | **13** | **43** | **43** | **0.02** | | Tobacco and health litigation items | **43** | **10** | **33** | **33** | **0.02** | | JUUL changes in fair value | **100** | **—** | **100** | **100** | **0.05** | | ABI-related special items | **(89)** | **(18)** | **(71)** | **(71)** | **(0.04)** | | Cronos-related special items | **111** | **(5)** | **116** | **116** | **0.06** | | Loss on early extinguishment of debt | **649** | **153** | **496** | **496** | **0.27** | | Tax items | **—** | **(3)** | **3** | **3** | **—** | | 2021 Adjusted for Special Items | **$5,684** | **$1,417** | **$4,267** | **$4,269** | **$2.30** | | 2020 Reported | $4,673 | $1,185 | $3,488 | $3,495 | $1.88 | | Implementation and acquisition-related costs | 403 | 97 | 306 | 306 | 0.16 | | Tobacco and health litigation items | 42 | 10 | 32 | 32 | 0.02 | | ABI-related special items | 176 | 37 | 139 | 139 | 0.07 | | Cronos-related special items | 1 | — | 1 | 1 | — | | COVID-19 special items | 50 | 13 | 37 | 37 | 0.02 | | Tax items | — | (51) | 51 | 51 | 0.03 | | 2020 Adjusted for Special Items | $5,345 | $1,291 | $4,054 | $4,061 | $2.18 | The following table provides a reconciliation of adjusted net earnings attributable to Altria and adjusted diluted EPS attributable to Altria for the three months ended June 30: *(in millions of dollars, except per share data)* | | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Net Earnings Attributable to Altria | Diluted EPS | | --- | ---: | ---: | ---: | ---: | ---: | | 2021 Reported | **$2,909** | **$759** | **$2,150** | **$2,149** | **$1.16** | | Implementation and acquisition-related costs | **8** | **2** | **6** | **6** | **—** | | Tobacco and health litigation items | **8** | **1** | **7** | **7** | **—** | | JUUL changes in fair value | **(100)** | **—** | **(100)** | **(100)** | **(0.05)** | | ABI-related special items | **39** | **10** | **29** | **29** | **0.02** | | Cronos-related special items | **181** | **(5)** | **186** | **186** | **0.10** | | Tax items | **—** | **(9)** | **9** | **9** | **—** | | 2021 Adjusted for Special Items | **$3,045** | **$758** | **$2,287** | **$2,286** | **$1.23** | | 2020 Reported | $2,565 | $627 | $1,938 | $1,943 | $1.04 | | Implementation and acquisition-related costs | 8 | 2 | 6 | 6 | — | | Tobacco and health litigation items | 18 | 5 | 13 | 13 | 0.01 | | ABI-related special items | 120 | 25 | 95 | 95 | 0.05 | | Cronos-related special items | (88) | 6 | (94) | (94) | (0.05) | | COVID-19 special items | 50 | 13 | 37 | 37 | 0.02 | | Tax items | — | (27) | 27 | 27 | 0.02 | | 2020 Adjusted for Special Items | $2,673 | $651 | $2,022 | $2,027 | $1.09 | 46 The following special items affected the comparability of statements of earnings amounts for the six and three months ended June 30, 2021 and 2020: - **NPM Adjustment Items:** For a discussion of NPM Adjustment Items and a breakdown of these items by segment, see *Health Care Cost Recovery Litigation* in Note 11. *Contingencies* to the condensed consolidated financial statements in Item 1 (“Note 11”) and *NPM Adjustment Items* in Note 8, respectively. - **Implementation and Acquisition-Related Costs:** Pre-tax implementation and acquisition-related costs were $56 million and $8 million for the six and three months ended June 30, 2021, respectively. Pre-tax implementation and acquisition-related costs were $403 million and $8 million for the six and three months ended June 30, 2020, respectively. For a discussion of implementation and acquisition-related costs, see Note 8. - **Tobacco and Health Litigation Items:** For a discussion of tobacco and health litigation items and a breakdown of these costs by segment, see Note 11 and *Tobacco and Health Litigation Items* in Note 8, respectively. - **JUUL Changes in Fair Value:** For the six and three months ended June 30, 2021, Altria recorded a non-cash, pre-tax unrealized loss of $100 million and a non-cash, pre-tax unrealized gain of $100 million, respectively, reported as (income) losses from equity investments in its condensed consolidated statements of earnings as a result of changes in the estimated fair value of Altria’s investment in JUUL. Corresponding adjustments were made to the JUUL tax valuation allowance. For further discussion, see Note 3. - **ABI-Related Special Items:** Altria’s earnings from its equity investment in ABI for the six months ended June 30, 2021 included net pre-tax income of $89 million, consisting primarily of ABI’s completion of the issuance of a minority stake in its U.S.-based metal container operations and net mark-to-market gains on certain ABI financial instruments associated with its share commitments, partially offset by charges associated with early bond terminations by ABI. Altria’s earnings from its equity investment in ABI for the three months ended June 30, 2021 included net pre-tax charges of $39 million, consisting primarily of charges associated with early bond terminations by ABI. Altria’s earnings from its equity investment in ABI for the six months ended June 30, 2020 included net pre-tax charges of $176 million, consisting primarily of net mark-to-market losses on certain ABI financial instruments associated with its share commitments, partially offset by a gain resulting from ABI’s hedge on a portion of the expected proceeds from ABI’s sale of its Australia subsidiary and an additional net gain related to the completion in October 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited. Altria’s earnings from its equity investment in ABI for the three months ended June 30, 2020 included net pre-tax charges of $120 million, consisting primarily of net mark-to-market losses on certain ABI financial instruments associated with its share commitments, partially offset by a gain resulting from ABI’s hedge on a portion of the expected proceeds from ABI’s sale of its Australia subsidiary. These amounts include Altria’s respective share of amounts recorded by ABI and may also include additional adjustments related to (i) conversion from international financial reporting standards to GAAP and (ii) adjustments to Altria’s investment required under the equity method of accounting. - **Cronos-Related Special Items:** For the six and three months ended June 30, 2021 and 2020, Altria recorded net pre-tax (income) expense consisting of the following: *(in millions)* | | For the Six Months Ended June 30, 2021 | 2020 | For the Three Months Ended June 30, 2021 | 2020 | | --- | ---: | ---: | ---: | ---: | | (Gain) loss on Cronos-related financial instruments (1) | **$(7)** | $97 | **$103** | $(40) | | (Income) losses from equity investments (2) | **118** | (96) | **78** | (48) | | Total Cronos-related special items - (income) expense | **$111** | $1 | **$181** | $(88) | (1) The 2021 and 2020 amounts are related to the non-cash change in the fair value of the warrant and certain anti-dilution protections (the “Fixed-price Preemptive Rights”) acquired in the Cronos transaction. (2) Amounts primarily include Altria’s share of Cronos’s non-cash change in the fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares. For further discussion, see Note 3 and Note 4. *Financial Instruments* to the condensed consolidated financial statements in Item 1. - **Loss on Early Extinguishment of Debt:** During the first quarter of 2021, Altria recorded pre-tax losses of $649 million as a result of the completed debt tender offers and redemption of certain long-term senior unsecured notes. For further discussion, see Note 9. *Debt* to the condensed consolidated financial statements in Item 1 (“Note 9”). - **COVID-19 Special Items:** For the six and three months ended June 30, 2020, Altria recorded net pre-tax charges totaling $50 million directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic. For further discussion and a breakdown of these costs by segment, see *COVID-19 Special Items* in Note 8. - **Tax Items:** Tax items for the six and three months ended June 30, 2020 included net tax expense of $51 million and $27 million, respectively, due primarily to tax expense of $34 million and $13 million, respectively, for a tax basis adjustment to Altria’s investment in ABI and net tax expense of $12 million for both periods for adjustments resulting from amended returns and audit adjustments related to prior years. ### Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $246 million (1.9%), due primarily to higher net revenues in all reportable segments. Cost of sales decreased $458 million (11.6%), due primarily to the inventory-related charges in the wine segment in 2020 (as discussed in Note 8), COVID-19 special items in 2020, NPM Adjustment Items in 2021 and lower shipment volume in the smokeable products segment, partially offset by higher per unit settlement charges and higher shipment volume in the wine segment. Excise taxes on products decreased $140 million (5.3%), due primarily to lower shipment volume in the smokeable products segment. Marketing, administration and research costs increased $100 million (9.7%), due primarily to higher spending in the oral tobacco products (including higher acquisition-related costs - as discussed in Note 8) and smokeable products segments and higher spending associated with the retail expansion of *IQOS* and *Marlboro HeatSticks.* Operating income increased $744 million (14.5%), due primarily to higher operating results in the wine and smokeable products segments. Income (losses) from equity investments, which decreased $40 million (24.1%), were negatively impacted by unfavorable special items from Altria’s equity investment in Cronos (as shown above) and the non-cash, pre-tax unrealized loss of $100 million as a result of a decrease in the estimated fair value of Altria’s investment in JUUL, partially offset by favorable ABI-related special items. Altria’s income tax rate increased 0.9 percentage points to 26.3%. For further discussion, see Note 10. *Income Taxes* to the condensed consolidated financial statements in Item 1 (“Note 10”). Reported net earnings attributable to Altria of $3,573 million increased $78 million (2.2%), due primarily to higher operating income and favorable ABI-related special items, partially offset by the loss on early extinguishment of debt, higher net charges on Cronos-related special items, the non-cash unrealized loss as a result of a decrease in the estimated fair value of Altria’s investment in JUUL and higher income taxes. Reported diluted and basic EPS attributable to Altria of $1.93, each increased by 2.7%, due to higher reported net earnings attributable to Altria and fewer shares outstanding. Adjusted net earnings attributable to Altria of $4,269 million increased $208 million (5.1%), due primarily to higher operating income, partially offset by higher income taxes. Adjusted diluted EPS attributable to Altria of $2.30 increased by 5.5%, due to higher adjusted net earnings attributable to Altria and fewer shares outstanding. ### Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $569 million (8.9%), due primarily to higher net revenues in all reportable segments. Cost of sales increased $107 million (6.0%), due primarily to higher per unit settlement charges, higher shipment volume in the smokeable products and wine segments and higher manufacturing costs in the smokeable products segment. Marketing, administration and research costs increased $55 million (11.2%), due primarily to higher spending in the smokeable products and oral tobacco products segments and higher spending associated with the retail expansion of *IQOS* and *Marlboro HeatSticks.* Operating income increased $390 million (13.9%), due primarily to higher operating results in all reportable segments. Income (losses) from equity investments, which increased $66 million (100.0%+), were positively impacted by the non-cash, pre-tax unrealized gain of $100 million as a result of an increase in the estimated fair value of Altria’s investment in JUUL and lower net charges on ABI-related special items, partially offset by unfavorable special items from Altria’s equity investment in Cronos (as shown above). Altria’s income tax rate increased 1.7 percentage points to 26.1%. For further discussion, see Note 10. Reported net earnings attributable to Altria of $2,149 million increased $206 million (10.6%), due primarily to higher operating income, the non-cash unrealized gain as a result of an increase in the estimated fair value of Altria’s investment in JUUL and lower net charges on ABI-related special items, partially offset by unfavorable Cronos-related special items. Reported diluted and basic EPS attributable to Altria of $1.16, each increased by 11.5%, due to higher reported net earnings attributable to Altria. Adjusted net earnings attributable to Altria of $2,286 million increased $259 million (12.8%), due primarily to higher operating income. Adjusted diluted EPS attributable to Altria of $1.23 increased by 12.8%, due to higher adjusted net earnings attributable to Altria. ### Operating Results by Business Segment ### Tobacco Space ### Business Environment ### Summary The U.S. tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume of Altria’s tobacco subsidiaries and investees and Altria’s consolidated results of operations, cash flows or financial position. These challenges, some of which are discussed in more detail in Note 11, and in Part I, Item 1A. Risk Factors of the 2020 Form 10-K, include: - pending and threatened litigation and bonding requirements; - restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”), and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the United States Food and Drug Administration (the “FDA”); - actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements; - bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers; - other federal, state and local government actions, including: - restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of tobacco products with characterizing flavors and the sale of tobacco products in certain package sizes; - additional restrictions on the advertising and promotion of tobacco products; - other actual and proposed tobacco-related legislation and regulation; and - governmental investigations; - the diminishing prevalence of cigarette smoking; - increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products; - changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price gap relationships, may result in adult tobacco consumers switching to discount products or other lower-priced tobacco products; - the highly competitive nature of all tobacco categories, including, without limitation, competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation and the proliferation of innovative tobacco products, including e-vapor and oral nicotine pouch products; - illicit trade in tobacco products; - potential adverse changes in prices, availability and quality of tobacco, other raw materials and components; and - the COVID-19 pandemic. In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences are continuing to impact the tobacco industry. Altria’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. Adult smokers continue to convert from cigarettes to exclusive use of smoke-free tobacco product alternatives. Until the second half of 2019, the e-vapor category experienced significant growth, and the number of adults who exclusively used e-vapor products also increased during that time, which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes and moist smokeless tobacco products (“MST”). Over the past eighteen months, the legislative and regulatory activities discussed below negatively impacted growth in the e-vapor category. While these activities continue to impact the e-vapor category, the category has recently been experiencing a moderate rate of growth and has become increasingly competitive. Oral nicotine pouch retail share of the total oral tobacco category has nearly doubled in the past year. The oral nicotine pouch category is becoming increasingly competitive, and we are also monitoring the introduction of unregulated synthetic nicotine pouches, which may lead to further competition for oral nicotine pouches. Altria and its tobacco subsidiaries believe the innovative tobacco products categories (in particular, e-vapor) will continue to be dynamic due to adult tobacco consumer exploration of a variety of tobacco product options, adult consumer perceptions of the relative risks of smoke-free products compared to cigarettes, FDA determinations on product applications and legislative actions. Domestic cigarette industry volume for 2020 was unchanged versus the prior year, which Altria believes was the result of stay-at-home practices due to the COVID-19 pandemic and higher tobacco discretionary spending. In the six months ended June 30, 2021, we estimate that, when adjusted for calendar differences, trade inventory movements and other factors, domestic cigarette industry volume declined by 4%. Altria expects 2021 cigarette industry volume trends to continue to be most influenced by (i) changes to adult smoker stay-at-home practices, disposable income, purchasing patterns and adoption of smoke-free products, (ii) the economy (including unemployment rates and the impact of increased inflation), (iii) fiscal stimulus, (iv) cross-category movement, (v) the timing and extent of COVID-19 vaccine administration and the impact of COVID-19 variants, (vi) adult smoker purchasing behavior of those who receive the vaccine and (vii) regulatory and legislative (including excise tax) developments. Economic conditions also impact adult tobacco consumer purchase behavior. Prior economic downturns have resulted in adult tobacco consumers choosing discount products and other lower-priced tobacco products. Although the economic impact resulting from the COVID-19 pandemic has not meaningfully increased the growth of discount and lower priced tobacco products, in part due to stimulus payments, adult tobacco consumers may still increasingly choose these products if economic conditions do not continue to improve. See *Executive Summary* in Item 7 above for further discussion. Altria and its tobacco subsidiaries work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the U.S. through innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties). ### FSPTCA and FDA Regulation - **The Regulatory Framework:** The FSPTCA, its implementing regulations and its 2016 deeming regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions: - impose restrictions on the advertising, promotion, sale and distribution of tobacco products (see *Final Tobacco Marketing Rule* below); - establish pre-market review pathways for new and modified tobacco products (see *Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement* below); - prohibit any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization; - authorize the FDA to impose tobacco product standards that are appropriate for the protection of the public health; and - equip the FDA with a variety of investigatory and enforcement tools, including the authority to inspect product manufacturing and other facilities. The FSPTCA also bans descriptors such as “light,” “low” or “mild” when used as descriptors of modified risk, unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by John Middleton Co. (“Middleton”), the Department of Justice, on behalf of the FDA, informed Middleton that the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to bring another lawsuit. - **Final Tobacco Marketing Rule:** As required by the FSPTCA, in March 2010 the FDA promulgated a wide range of advertising and promotion restrictions for cigarettes and smokeless tobacco (1) products (the “Final Tobacco Marketing Rule”). The May 2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives, but do not include any component or part that is not made or derived from tobacco. The Final Tobacco Marketing Rule, as amended, among other things: - restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products; - prohibits sampling of all tobacco products except that sampling of smokeless tobacco products is permitted in qualified adult-only facilities; - prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos; - prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and - requires the development by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and gives the FDA the authority to require new warnings for any type of tobacco product (see *FDA Regulatory Actions - Graphic Warnings* below). Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products and in August 2016 for all other tobacco products, including e-vapor and oral nicotine pouch products (excluding unregulated synthetic oral nicotine pouch products). - **Rulemaking and Guidance:** From time to time, the FDA issues proposed regulations and guidance, which may be issued in draft or final form, generally involve public comment and may include scientific review. The FDA also may request comments on broad topics through an Advanced Notice of Proposed Rulemaking (“ANPRM”). Altria’s tobacco subsidiaries actively engage with the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA policies and proposals and participation in public hearings and engagement sessions. The FDA’s implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by U.S. states, territories and localities of their laws and regulations as well as of the State Settlement Agreements discussed below (see *State Settlement Agreements* below). Such enforcement efforts may adversely affect the ability of Altria’s tobacco subsidiaries and investees to market and sell regulated tobacco products in those states, territories and localities. - **FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation:** In July 2017, the FDA announced a “Comprehensive Plan for Tobacco and Nicotine Regulation” (“Comprehensive Plan”) designed to strike a balance between regulation and encouraging the development of innovative tobacco products that may be less risky than cigarettes. Since then, the FDA has issued additional information about its Comprehensive Plan in response to concerns associated with the rise in the use of e-vapor products by youth and the potential youth appeal of flavored tobacco products (see *Underage Access and Use of Certain Tobacco Products* below). As part of the Comprehensive Plan, the FDA: - issued ANPRMs relating to potential product standards for nicotine in cigarettes, flavors in all tobacco products (including menthol in cigarettes and characterizing flavors in all cigars); and, for e-vapor products, to protect against known public health risks such as concerns about youth exposure to liquid nicotine; - took actions to restrict youth access to e-vapor products; - reconsidered the processes used by the FDA to review certain reports and new product applications; and (1) “*Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.* - revisited the timelines (previously extended by the FDA) to submit applications for tobacco products first regulated by the FDA in 2016. - **Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement:** The FSPTCA permits the sale of tobacco products commercially marketed as of February 15, 2007 and not subsequently modified (“Grandfathered Products”) and new or modified products authorized through the pre-market tobacco product application (“PMTA”), Substantial Equivalence (“SE”) or SE Exemption pathways. The FDA pre-market authorization enforcement policy varies based on product type and date of availability in the market, specifically: - all tobacco products on the market as of February 15, 2007, and not subsequently modified, are Grandfathered Products and exempt from the pre-market authorization requirement; - cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health; and - tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Grandfathered Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020. Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier being unable to maintain the consistency required in ingredients, could trigger the FDA’s pre-market or SE review processes. Through these processes, a manufacturer could receive (i) a “not substantially equivalent” determination, (ii) a denial of a PMTA or (iii) a marketing order withdrawal by the FDA on one or more products, which would require the removal of the product or products from the market. Such actions could have a material adverse impact on the business and consolidated results of operations of our tobacco subsidiaries and investees, and the cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. *Provisional Products:* Most cigarette and smokeless tobacco products currently marketed by Philip Morris USA Inc. (“PM USA”) and U.S. Smokeless Tobacco Company LLC (“USSTC”) are Provisional Products. Altria’s subsidiaries timely submitted SE reports for these Provisional Products. PM USA and USSTC have received SE determinations on certain Provisional Products. Those products that were found by the FDA to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent. In addition, the FDA has communicated that it will not review a certain subset of Provisional Product SE reports and that the products that are the subject of those reports can continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products. While Altria’s cigarette and smokeless tobacco subsidiaries believe their current Provisional Products meet the statutory requirements of the FSPTCA, they cannot predict how the FDA will ultimately apply law, regulation and guidance to their various SE reports. Should Altria’s cigarette and smokeless tobacco subsidiaries receive unfavorable determinations on any SE reports currently pending with the FDA, they believe they can replace the vast majority of their respective product volumes with other FDA authorized products or with Grandfathered Products. *Non-Provisional Products*: Cigarette and smokeless tobacco products introduced into the market or modified after March 22, 2011 are “Non-Provisional Products” and must receive a marketing order from the FDA prior to being offered for sale. Marketing orders for Non-Provisional Products may be obtained by filing an SE report, PMTA or using another pre-market pathway established by the FDA. Altria’s cigarette and smokeless tobacco subsidiaries may not be able to obtain a marketing order for non-provisional products because the FDA may determine that any such product does not meet the statutory requirements for approval. *Products Regulated in 2016*: Manufacturers of products first regulated by the FDA in 2016, including cigars, oral nicotine pouches and e-vapor products, that were on the market as of August 8, 2016 and not subsequently modified must have filed an SE report or PMTA by the filing deadline of September 9, 2020 in order for their products to remain on the market. At the FDA’s discretion, these products can remain on the market during FDA review for up to one year from the date of the application with additional case-by-case discretion to remain on the market after that time, so long as the report or application was timely filed with the FDA. Due to the large number of applications received by September 9, 2020, the FDA has indicated that it does not expect to complete reviewing all applications by September 9, 2021. It is uncertain when and for how long the FDA may permit such products to remain on the market pursuant to its case-by-case discretion. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing the product. Helix Innovations LLC (“Helix”) submitted PMTAs for *on!* oral nicotine pouches in May 2020, which are currently under review by the FDA. JUUL submitted PMTAs to the FDA for its e-vapor device and the related tobacco and menthol flavors in July 2020. Middleton has received market orders or exemptions that cover over 98% of its cigar product volume and filed SE reports for its remaining cigar product volume by the filing deadline. In December 2013, Altria’s subsidiaries entered into a series of agreements with Philip Morris International Inc. (“PMI”), including an agreement that grants Altria an exclusive right to commercialize certain of PMI’s heated tobacco products in the United States, subject to FDA authorization of the applicable products. PMI submitted a PMTA and a modified risk tobacco product application with the FDA for its electronically heated tobacco products comprising the *IQOS Tobacco Heating System*. In April 2019, the FDA authorized the PMTA for the *IQOS Tobacco Heating System* and in July 2020, the FDA authorized the marketing of this system as a modified risk tobacco product (“MRTP”) with a reduced exposure claim. The *IQOS* electronic device heats but does not burn tobacco. In December 2020, the FDA authorized the PMTA for *IQOS* 3, an updated version of the *IQOS* electronic device. The MRTP authorization for the original *IQOS* electronic device currently does not apply to the *IQOS* 3 device. PMI submitted an MRTP application for the *IQOS* 3 electronic device in March 2021, which is currently under review by the FDA. *Post-Market Surveillance*: Manufacturers that receive product authorizations through the PMTA process must submit to the FDA post-market records and reports, as detailed in market orders. This includes notification of all marketing activities. The FDA may amend requirements of a market order or withdraw the market order based on this information if, among other reasons, it determines that the continued marketing of the products is no longer appropriate for the protection of the public health. *Effect of Adverse FDA Determinations*: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. Failure of manufacturers to submit applications by the applicable deadline, an unfavorable determination on an application or the withdrawal by the FDA of a prior marketing order could result in the removal of products from the market. These manufacturers would have the option of marketing products that have received FDA pre-market authorization or Grandfathered Products. A “not substantially equivalent” determination, a denial of a PMTA or a marketing order withdrawal by the FDA on one or more products (which would require the removal of the product or products from the market) could have a material adverse impact on the business and consolidated results of operations of our tobacco subsidiaries and investees, and the cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. - **FDA Regulatory Actions** - *Graphic Warnings:* In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting certain negative health consequences of smoking on cigarette packaging and advertising. As a result of a March 2021 court order related to the COVID-19 pandemic and a May 2021 court order resulting from a lawsuit brought by R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and others against the FDA, the final rule will be effective July 13, 2022. PM USA and other cigarette manufacturers have filed lawsuits challenging the final rule on substantive and procedural grounds. In the preamble to the final rule, the FDA stated that it would not exempt *HeatSticks,* a heated tobacco product used with the *IQOS* electronic device, as part of the rulemaking, but would consider the *HeatSticks* marketing order, and other marketing orders, on a case-by-case basis. To date, the FDA has not taken any action to exempt *HeatSticks* from the graphic health warnings requirements. - *Underage Access and Use of Certain Tobacco Products:* The FDA announced regulatory actions in September 2018 to address underage access and use of e-vapor products. Altria has engaged with the FDA on this topic and has reaffirmed to the FDA its ongoing and long-standing commitment to preventing underage use. For example, during 2019, Altria advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage use, which is now federal law. See *Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products* below for further discussion. In March 2019, the FDA issued draft guidance further proposing restrictions to address underage e-vapor use. This guidance, which the FDA finalized in January 2020, states that the FDA intends to prioritize enforcement action against: - cartridge-based, flavored e-vapor products (other than tobacco and menthol flavors) unless such products have received market authorization from the FDA; and - all e-vapor products (in any format or flavor): - for which a manufacturer has failed or is failing to take adequate measures to prevent access by those under the age of 21 (referred to in the FDA guidance as “minors”); - targeted to minors and the marketing for which is likely to promote use of such products by minors; or - offered for sale after the court-ordered filing deadline and for which the manufacturer has either not submitted a PMTA or for which an application was timely filed but an adverse decision on the application was issued by the FDA. Some e-vapor product manufacturers filed PMTAs for flavored tobacco products. FDA enforcement action could result in tobacco products being removed from the market unless and until these products receive pre-market authorization from the FDA. If FDA enforcement action is taken against currently marketed JUUL e-vapor products (tobacco and menthol), and a significant number of those products are removed from the market or if the FDA does not ultimately allow for the reintroduction of flavors other than tobacco and menthol, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings. The January 2020 guidance effectively permits the continued sale (subject to the exceptions discussed above) of certain flavored e-vapor products, including flavored disposable e-vapor products. If, as a result, these flavored e-vapor products are sold in higher volumes than JUUL’s e-vapor products, it could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings. - **Potential Product Standards** - *Nicotine in Cigarettes and Other Combustible Tobacco Products:* In March 2018, the FDA issued an ANPRM seeking comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels. Among other issues, the FDA sought comments on (i) whether smokers would compensate by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) whether the proposed rule would create an illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars. Were the FDA to develop and finalize a product standard for nicotine in combustible products, and if the standard was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries. - *Flavors in Tobacco Products:* As discussed above under *FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation,* the FDA indicated that it is considering proposing rulemaking for a product standard that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, and that it intends to propose a product standard that would ban characterizing flavors in all cigars, including Grandfathered Products and those that have received SE determinations from the FDA - an intention reiterated in the FDA’s January 2020 guidance. In March 2018, the FDA issued an ANPRM seeking comments on the role, if any, that flavors (including menthol) in tobacco products may play in attracting youth and in helping some smokers switch to potentially less harmful forms of nicotine delivery. In the context of litigation, in April 2021, the FDA issued a response to a 2013 citizen petition requesting that the FDA prohibit menthol as a characterizing flavor in cigarettes. In the response, the FDA announced it intends to develop and propose two product standards within one year that would (i) ban menthol as a characterizing flavor in cigarettes and (ii) ban all characterizing flavors (including menthol) in cigars. While the FDA has yet to define “characterizing flavors” with respect to cigars, most of Middleton’s cigar products contain added flavors and may be subject to any action by the FDA to ban flavors in cigars. If any such product standards become final and are appealed and upheld in the courts, it could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. - *NNN in Smokeless Tobacco:* In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. If the proposed rule, in present form, were to become final and was appealed and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and USSTC. - **Good Manufacturing Practices:** The FSPTCA requires that the FDA promulgate good manufacturing practice regulations (referred to by the FDA as “Requirements for Tobacco Product Manufacturing Practice”) for tobacco product manufacturers, but does not specify a timeframe for such regulations. Compliance with any such regulations could result in increased costs, which could have a material adverse effect on the financial position of Altria, its tobacco subsidiaries and its investees, including adversely affecting the value of Altria’s investment in JUUL. - **Impact on Our Business; Compliance Costs and User Fees:** FDA regulatory actions under the FSPTCA could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries in various ways. For example, actions by the FDA could: - impact the consumer acceptability of tobacco products; - delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products; - limit adult tobacco consumer choices; - impose restrictions on communications with adult tobacco consumers; - create a competitive advantage or disadvantage for certain tobacco companies; - impose additional manufacturing, labeling or packaging requirements; - impose additional restrictions at retail; - result in increased illicit trade in tobacco products; and/or - otherwise significantly increase the cost of doing business. The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including market share and industry volume. For a discussion of the impact of the FDA user fee payments on Altria, see *Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation* below. In addition, compliance with the FSPTCA’s regulatory requirements has resulted, and will continue to result, in additional costs for Altria’s tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter or year to date period but could become material, either individually or in the aggregate, to one or more of Altria’s tobacco subsidiaries. - **Investigation and Enforcement:** The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. Investigations or enforcement actions could result in significant costs or otherwise have a material adverse effect on the business of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. ### Excise Taxes Tobacco products are subject to substantial excise taxes in the U.S. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the U.S. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies. Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation. Between the end of 1998 and July 26, 2021, the weighted-average state cigarette excise tax increased from $0.36 to $1.89 per pack. As of July 26, 2021, one state, Maryland, has enacted new legislation increasing cigarette excise taxes in 2021, but various increases are under consideration or have been proposed at the federal, state and local levels. A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria’s subsidiaries support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of July 26, 2021, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST. An increasing number of states and localities also are imposing excise taxes on e-vapor and oral nicotine pouches. As of July 26, 2021, 30 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, 11 states and the District of Columbia have enacted legislation to tax oral nicotine pouches. Tax increases could have an adverse impact on the sales of these products. Tax increases are expected to continue to have an adverse impact on sales of cigarettes and MST products of Altria’s tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments, or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of cigarettes and MST products of Altria’s tobacco subsidiaries. ### International Treaty on Tobacco Control The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of July 26, 2021, 181 countries, as well as the European Community, have become parties to the FCTC. While the U.S. is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues. There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the U.S., either indirectly or as a result of the U.S. becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement. ### State Settlement Agreements As discussed in Note 11, during 1997 and 1998, PM USA and other major domestic cigarette manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. For a discussion of the impact of the State Settlement Agreements on Altria, see *Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation* below and Note 11. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). The State Settlement Agreements also place restrictions on the use of brand name sponsorships and brand name non-tobacco products and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations. In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA. ### Other International, Federal, State and Local Regulation and Governmental and Private Activity - **International, Federal, State and Local Regulation:** A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including cigarettes, smokeless tobacco, cigars, e-vapor products and oral nicotine pouches), such as legislation that (i) prohibits the sale of all tobacco products or certain tobacco categories, such as e-vapor, (ii) prohibits the sale of tobacco products with characterizing flavors, such as menthol cigarettes and flavored e-vapor products, (iii) requires the disclosure of health information separate from or in addition to federally mandated health warnings and (iv) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products. The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As of July 26, 2021, three states are considering legislation to ban flavors in one or more tobacco products, and six states (California, Massachusetts, New Jersey, Utah, New York and Illinois) and the District of Columbia have passed such legislation. Some of these states, such as New York, Utah and Illinois, exempt certain products that have received FDA market authorization through the PMTA pathway. The legislation in California bans the sale of most tobacco products with characterizing flavors, including menthol, mint and wintergreen. Following enactment of the flavor ban in August 2020, several registered California voters filed a referendum against the legislation. In January 2021 the requisite number of registered California voters signed a petition to place the question of whether the legislation should be affirmed or overturned on the next statewide general election ballot, which will likely take place in 2022, unless a special statewide election is called earlier. As a result, the implementation of the legislation is delayed until after a vote on the referendum occurs. Additionally, in October 2020, Altria’s tobacco operating companies, along with several other parties including R.J. Reynolds, filed a lawsuit challenging the flavor ban and seeking to enjoin its implementation. Massachusetts passed legislation capping the amount of nicotine in e-vapor products. Similar legislation is pending in one other state. Restrictions on e-vapor products also have been instituted or proposed internationally. For example, India and Singapore have instituted bans on e-vapor products. Altria’s tobacco subsidiaries have challenged and will continue to challenge certain federal, state and local legislation and other governmental action, including through litigation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. - **Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products:** After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, in December 2019, the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. As of July 26, 2021, 39 states and the District of Columbia have enacted laws increasing the legal age to purchase tobacco products to 21. Although an increase in the minimum age to purchase tobacco products may have a negative impact on sales volume of our tobacco businesses, as discussed above under *Underage Access and Use of Certain Tobacco Products,* Altria supported raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, reflecting its longstanding commitment to combat underage tobacco use. - **Health Effects of Tobacco Products, Including E-vapor Products:** Reports with respect to the health effects of smoking have been publicized for many years, including various reports by the U.S. Surgeon General. In 2019, there were public health advisories concerning vaping-related lung injuries and deaths and, more recently, there have been health concerns raised about potential increased risks associated with COVID-19 among smokers and vapers. Altria and its tobacco subsidiaries believe that the public should be guided by the messages of the U.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products, including e-vapor products. Most jurisdictions within the U.S. have restricted smoking in public places and some have restricted vaping in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking and vaping in outdoor places, in private apartments and in cars transporting children. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on legislation and regulation. - **Other Legislation or Governmental Initiatives:** In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, during the COVID-19 pandemic, state and local governments required additional health and safety requirements of all businesses, including tobacco manufacturing and other facilities. State and local governments also mandated the temporary closure of some businesses. While many restrictions have eased, it is possible that tobacco manufacturing and other facilities and the facilities of our suppliers, our suppliers’ suppliers and our trade partners could be subject to additional government-mandated temporary closures. Additionally, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards; establish educational campaigns relating to tobacco consumption or tobacco control programs or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes; require tax stamping of smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful. It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and investees, and the consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries, including adversely affecting the value of Altria’s investment in JUUL. - **Governmental Investigations:** From time to time, Altria, its subsidiaries and investees are subject to governmental investigations on a range of matters. For example: (i) the U.S. Federal Trade Commission (the “FTC”) issued a Civil Investigative Demand (“CID”) to Altria while conducting its antitrust review of Altria’s investment in JUUL seeking information regarding, among other things, Altria’s role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee (see Note 11 for a description of the FTC’s administrative complaint against Altria and JUUL); (ii) the U.S. Securities and Exchange Commission (“SEC”) commenced an investigation relating to Altria’s acquisition, disclosures and accounting controls in connection with the JUUL investment; and (iii) the New York State Office of the Attorney General issued a subpoena to Altria seeking documents relating to Altria’s investment in and provision of services to JUUL. Additionally, JUUL is currently under investigation by various federal and state agencies, including the SEC, the FDA and the FTC, and state attorneys general. Such investigations vary in scope but at least some appear to include JUUL’s marketing practices, particularly as such practices relate to youth, and Altria may be asked in the context of those investigations to provide information concerning its investment in JUUL or relating to its marketing of Nu Mark LLC e-vapor products. In June 2021, JUUL reached a settlement with the North Carolina Attorney General, agreeing to pay the state approximately $40 million and to alter its business practices in the state by, among other restrictions, not (i) targeting its advertising to minors, (ii) using anyone in its marketing materials who is younger than 35 years old and (iii) paying for influencers to promote its products. ### Private Sector Activity on E-Vapor A number of retailers, including national chains, have discontinued the sale of e-vapor products. Reasons for the discontinuation include reported illnesses related to e-vapor product use and the uncertain regulatory environment. It is possible that this private sector activity could adversely affect the value of Altria’s investment in JUUL and have a material adverse effect on Altria’s consolidated financial position or earnings. ### Illicit Trade in Tobacco Products Illicit trade in tobacco products can have an adverse impact on the businesses of Altria, its tobacco subsidiaries and investees. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the U.S. that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our tobacco subsidiaries’ and investees’ products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment Altria’s tobacco subsidiaries and investees have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes; imposing legislative or regulatory requirements that may adversely impact Altria’s consolidated results of operations and cash flows, including adversely affecting the value of Altria’s investment in JUUL, and the businesses of its tobacco subsidiaries and investees; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold. Altria’s tobacco subsidiaries communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities, enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect their trademarks. ### Price, Availability and Quality of Tobacco, Other Raw Materials, Ingredients and Component Parts Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, production control programs, economic trade sanctions, import duties and tariffs, international trade disruptions, inflation, geopolitical instability, climate and environmental changes and disruptions due to man-made or natural disasters may increase the cost or reduce the supply or quality of tobacco or other raw materials or ingredients or component parts used to manufacture our companies’ and our investees’ products. Any significant change in the price, availability or quality of tobacco, other raw materials, ingredients or component parts used to manufacture our products and those of our investees could restrict our subsidiaries’ and investees’ ability to continue manufacturing and marketing existing products or impact adult consumer product acceptability and adversely affect our subsidiaries’ and investees’ profitability and businesses. With respect to tobacco, as with other agricultural commodities, crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Additionally, the price and availability of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand. Economic conditions, including the economic effects of the COVID-19 pandemic, are unpredictable, which, among other factors, may result in changes in the patterns of demand for agricultural products and the cost of tobacco production which could impact tobacco leaf prices and tobacco supply. In addition, as consumer demand increases for smoke-free products and decreases for combustible products, the volume of tobacco leaf required for production may decrease. The reduced demand for tobacco leaf may result in the reduced supply and availability of domestic tobacco as growers divert resources to other crops. Tobacco production in certain countries also is subject to a variety of controls, including government-mandated prices and production control programs. Moreover, certain types of tobacco are only available in limited geographies, including geographies experiencing political instability or government prohibitions on the import or export of tobacco, and loss of their availability could impair our subsidiaries’ ability to continue marketing existing products or impact adult tobacco consumer product acceptability. The COVID-19 pandemic also may limit access to and increase the cost of raw materials, component parts and personal protective equipment as U.S. and global suppliers temporarily shut down facilities in order to address exposure to the virus or as a result of a government mandate. In addition, the COVID-19 pandemic has also led to labor shortages with employers in a number of industries having difficulty employing workers. These shortages have led to certain increases in raw material, ingredient and component part prices and potential disruptions in the supply chain; however, to date, the impact has been immaterial. ### Timing of Sales In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases. ### Operating Results ### Smokeable Products Segment ### Financial Results The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the smokeable products segment: *(in millions)* | | Operating Results For the Six Months Ended June 30, 2021 | 2020 | Change | For the Three Months Ended June 30, 2021 | 2020 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Net revenues | **$11,300** | $11,209 | 0.8% | **$6,050** | $5,603 | 8.0% | | Excise taxes | **(2,402)** | (2,543) | | **(1,281)** | (1,265) | | | Revenues net of excise taxes | **$8,898** | $8,666 | | **$4,769** | $4,338 | | | Reported OCI | **$5,148** | $4,820 | 6.8% | **$2,776** | $2,450 | 13.3% | | NPM Adjustment Items | **(32)** | — | | **—** | — | | | Tobacco and health litigation items | **43** | 39 | | **8** | 17 | | | COVID-19 special items | **—** | 41 | | **—** | 41 | | | Adjusted OCI | **$5,159** | $4,900 | 5.3% | **$2,784** | $2,508 | 11.0% | | Reported OCI margins (1) | **57.9%** | 55.6% | 2.3 pp | **58.2%** | 56.5% | 1.7 pp | | Adjusted OCI margins (1) | **58.0%** | 56.5% | 1.5 pp | **58.4%** | 57.8% | 0.6 pp | (1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes. #### Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $91 million (0.8%), due primarily to higher pricing ($704 million), which includes higher promotional investments, partially offset by lower shipment volume ($614 million). Reported OCI increased $328 million (6.8%), due primarily to higher pricing ($696 million), which includes higher promotional investments, COVID-19 special items in 2020 ($41 million) and 2021 NPM Adjustment Items ($32 million), partially offset by lower shipment volume ($377 million) and higher per unit settlement charges. Adjusted OCI increased $259 million (5.3%), due primarily to higher pricing, which includes higher promotional investments, partially offset by lower shipment volume and higher per unit settlement charges. #### Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $447 million (8.0%), due primarily to higher pricing ($336 million), which includes higher promotional investments, and higher shipment volume ($101 million). Reported OCI increased $326 million (13.3%), due primarily to higher pricing ($332 million), which includes higher promotional investments, higher shipment volume ($51 million) and COVID-19 special items in 2020 ($41 million), partially offset by higher per unit settlement charges and higher costs. Adjusted OCI increased $276 million (11.0%), due primarily to higher pricing, which includes higher promotional investments, and higher shipment volume, partially offset by higher per unit settlement charges and higher costs. ### Shipment Volume and Retail Share Results The following table summarizes the smokeable products segment shipment volume performance: *(sticks in millions)* | Cigarettes: | Shipment Volume For the Six Months Ended June 30, 2021 | 2020 | Change | For the Three Months Ended June 30, 2021 | 2020 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Marlboro | **41,754** | 43,632 | (4.3)% | **22,339** | 21,790 | 2.5% | | Other premium | **2,138** | 2,265 | (5.6)% | **1,157** | 1,128 | 2.6% | | Discount | **3,428** | 4,075 | (15.9)% | **1,810** | 2,030 | (10.8)% | | Total cigarettes | **47,320** | 49,972 | (5.3)% | **25,306** | 24,948 | 1.4% | | Cigars: | | | | | | | | Black & Mild | **932** | 849 | 9.8% | **453** | 419 | 8.1% | | Other | **4** | 5 | (20.0)% | **3** | 3 | —% | | Total cigars | **936** | 854 | 9.6% | **456** | 422 | 8.1% | | Total smokeable products | **48,256** | 50,826 | (5.1)% | **25,762** | 25,370 | 1.5% | Note: Cigarettes shipment volume includes *Marlboro*; Other premium brands, such as *Virginia Slims, Parliament, Benson & Hedges and Nat’s*; and Discount brands, which include *L&M, Basic* and *Chesterfield.* Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment. The following table summarizes cigarettes retail share performance: | Cigarettes: | Retail Share For the Six Months Ended June 30, 2021 | 2020 | Percentage Point Change | For the Three Months Ended June 30, 2021 | 2020 | Percentage Point Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Marlboro | **43.2%** | 42.7% | 0.5 | **43.2%** | 42.7% | 0.5 | | Other premium | **2.3** | 2.3 | — | **2.3** | 2.3 | — | | Discount | **3.5** | 4.0 | (0.5) | **3.5** | 3.9 | (0.4) | | Total cigarettes | **49.0%** | 49.0% | — | **49.0%** | 48.9% | 0.1 | Note: Retail share results for cigarettes are based on data from IRI/Management Science Associates, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service. For a discussion of volume trends and factors that impact volume and retail share performance, see *Tobacco Space - Business Environment* above. #### Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020 The smokeable products segment’s reported domestic cigarettes shipment volume decreased 5.3%, driven primarily by the industry’s rate of decline, calendar differences and other factors. When adjusted for calendar differences, trade inventory movements and other factors, the smokeable products segment’s reported domestic cigarettes shipment volume decreased by an estimated 4%. When adjusted for calendar differences, trade inventory movements and other factors, total estimated domestic cigarette industry volumes decreased by an estimated 4%. Shipments of premium cigarettes accounted for 92.8% and 91.8% of the smokeable products segment’s reported domestic cigarettes shipment volume for the six months ended June 30, 2021 and 2020, respectively. Total cigarettes industry discount category retail share remained unchanged at 25.1%. #### Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020 The smokeable products segment’s reported domestic cigarettes shipment volume increased 1.4%, driven primarily by trade inventory movements, partially offset by the industry’s rate of decline. When adjusted for trade inventory movements, the smokeable products segment’s reported domestic cigarettes shipment volume decreased by an estimated 4.5%. When adjusted for trade inventory movements, total estimated domestic cigarette industry volumes decreased by an estimated 5%. Shipments of premium cigarettes accounted for 92.8% and 91.9% of the smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended June 30, 2021 and 2020, respectively. Sequentially, *Marlboro* retail share of the total cigarette category increased 0.1 share point. Total cigarettes industry discount category retail share increased 0.1 share point to 25.0%. Sequentially, the discount category decreased 0.3 share points. ### Pricing Actions PM USA and Middleton executed the following pricing and promotional allowance actions during 2021 and 2020: - Effective January 24, 2021 PM USA increased the list price on all of its cigarette brands by $0.14 per pack. - Effective January 10, 2021, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.07 per five-pack. - Effective November 1, 2020 PM USA increased the list price on all of its cigarette brands by $0.13 per pack. - Effective June 21, 2020, PM USA increased the list price on all of its cigarette brands by $0.11 per pack. - Effective February 16, 2020, PM USA increased the list price on all of its cigarette brands by $0.08 per pack. - Effective January 12, 2020, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.08 per five-pack. ### Oral Tobacco Products Segment ### Financial Results The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the oral tobacco products segment: *(in millions)* | | Operating Results For the Six Months Ended June 30, 2021 | 2020 | Change | For the Three Months Ended June 30, 2021 | 2020 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Net revenues | **$1,319** | $1,261 | 4.6% | **$693** | $660 | 5.0% | | Excise taxes | **(66)** | (65) | | **(35)** | (34) | | | Revenues net of excise taxes | **$1,253** | $1,196 | | **$658** | $626 | | | Reported OCI | **$864** | $861 | 0.3% | **$472** | $447 | 5.6% | | Acquisition-related costs | **$37** | $2 | | **—** | — | | | COVID-19 special items | **—** | 9 | | **—** | 9 | | | Adjusted OCI | **$901** | $872 | 3.3% | **$472** | $456 | 3.5% | | Reported OCI margins (1) | **69.0%** | 72.0% | (3.0) pp | **71.7%** | 71.4% | 0.3 pp | | Adjusted OCI margins (1) | **71.9%** | 72.9% | (1.0) pp | **71.7%** | 72.8% | (1.1)pp | (1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes. #### Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $58 million (4.6%), due primarily to higher pricing ($52 million), which includes higher promotional investments in *on!.* Reported OCI was essentially unchanged as higher pricing, which includes higher promotional investments in *on!,* was mostly offset by higher costs ($47 million, which includes higher acquisition-related costs). Adjusted OCI increased $29 million (3.3%), due primarily to higher pricing, which includes higher promotional investments in *on!*, partially offset by higher costs and unfavorable shipment volume mix. Adjusted OCI margins declined by 1.0 percentage point to 71.9%, due to changes in shipment volume mix between the segment’s MST and oral nicotine pouch products. #### Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $33 million (5.0%), due primarily to higher pricing ($26 million), which includes higher promotional investments in *on!.* Reported OCI increased $25 million (5.6%), due primarily to higher pricing, which includes higher promotional investments in *on!.* Adjusted OCI increased $16 million (3.5%), due primarily to higher pricing, which includes higher promotional investments in o*n!*, partially offset by higher costs. Adjusted OCI margins declined by 1.1 percentage points to 71.7%, due to changes in shipment volume mix between the segment’s MST and oral nicotine pouch products. ### Shipment Volume and Retail Share Results The following table summarizes oral tobacco products segment shipment volume performance: *(cans and packs in millions)* | | Shipment Volume For the Six Months Ended June 30, 2021 | 2020 | Change | For the Three Months Ended June 30, 2021 | 2020 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Copenhagen | **257.0** | 263.9 | (2.6)% | **134.1** | 138.9 | (3.5)% | | Skoal | **100.5** | 104.9 | (4.2)% | **52.3** | 53.6 | (2.4)% | | Other (includes Red Seal and on!) | **58.0** | 41.7 | 39.1% | **31.2** | 21.3 | 46.5% | | Total oral tobacco products | **415.5** | 410.5 | 1.2% | **217.6** | 213.8 | 1.8% | Note: Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is currently not material to the oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. The following table summarizes oral tobacco products segment retail share performance (excluding international volume): | | Retail Share For the Six Months Ended June 30, 2021 | 2020 | Percentage Point Change | For the Three Months Ended June 30, 2021 | 2020 | Percentage Point Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Copenhagen | **30.0%** | 32.2% | (2.2) | **29.9%** | 32.0% | (2.1) | | Skoal | **12.9** | 14.3 | (1.4) | **12.8** | 14.2 | (1.4) | | Other (includes Red Seal and on!) | **5.1** | 3.7 | 1.4 | **5.1** | 3.8 | 1.3 | | Total oral tobacco products | **48.0%** | 50.2% | (2.2) | **47.8%** | 50.0% | (2.2) | Note: Retail share results for oral tobacco products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Oral tobacco products is defined by IRI as MST, snus and oral nicotine pouches. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service. For a discussion of volume trends and factors that impact volume and retail share performance, see *Tobacco Space - Business Environment* above. #### Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020 The oral tobacco products segment’s reported domestic shipment volume increased 1.2%, driven primarily by the growth of oral nicotine pouches and trade inventory movements, partially offset by retail share losses (primarily due to the growth of oral nicotine pouches), calendar differences and other factors. When adjusted for trade inventory movements and calendar differences, the oral tobacco products segment’s reported domestic shipment volume increased by an estimated 0.5%. Total oral tobacco products category industry volume increased by an estimated 5% over the six months ended June 30, 2021, driven by growth in oral nicotine pouches. Retail share losses in the oral tobacco products segment, including *Copenhage*n, were due to the growth of oral nicotine pouches. #### Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020 The oral tobacco products segment’s reported domestic shipment volume increased 1.8%, driven primarily by the growth of oral nicotine pouches, trade inventory movements, calendar differences and other factors, partially offset by retail share losses (primarily due to the growth of oral nicotine pouches). When adjusted for trade inventory movements and calendar differences, the oral tobacco products segment’s reported domestic shipment volume increased by an estimated 1%. The oral tobacco products segment’s retail share was 47.8% and *Copenhagen* continued to be the leading oral tobacco brand with retail share of 29.9%. Share losses in the oral tobacco products segment, including *Copenhage*n, were due to the growth of oral nicotine pouches. Total oral tobacco category share for *on!* was 2.0% in the second quarter, an increase of 0.3% sequentially. In the second quarter of 2021, Helix achieved unconstrained *on!* manufacturing capacity for the U.S. market. Helix plans to further increase *on!* capacity ahead of expected demand. As of the end of the second quarter, Helix had broadened the distribution of *on!* to approximately 105,000 stores, representing approximately 80% of total industry oral tobacco volume and 70% of cigarette volume. Pricing Actions USSTC executed the following pricing actions during 2021 and 2020: - Effective June 29, 2021, USSTC increased the list price on its *Skoal* Blend products by $0.46 per can. USSTC also increased the list price on its *Red Seal and Copenhagen* brands and the balance of its *Skoal* products by $0.05 per can. In addition, USSTC decreased the price on its *Husky* brand by $1.65 per can. - Effective March 2, 2021, USSTC increased the list price on its *Skoal* Blend products by $0.16 per can. USSTC also increased the list price on its *Husky, Red Seal* and *Copenhagen* brands and the balance of its *Skoal* products by $0.08 per can. - Effective October 20, 2020, USSTC increased the list price on its *Skoal* Blend products by $0.15 per can. USSTC also increased the list price on its *Husky* and *Red Seal* brands and its *Copenhagen* and *Skoal* popular price products by $0.08 per can. In addition, USSTC increased the list price on the balance of its *Copenhagen* and *Skoal* products by $0.07 per can. - Effective July 21, 2020, USSTC increased the list price on its *Skoal* Blend products by $0.15 per can. USSTC also increased the list price on its *Husky, Red Seal* and *Copenhagen* brands and the balance of its *Skoal* products by $0.07 per can. - Effective February 18, 2020, USSTC increased the list price on its *Skoal* X-TRA products by $0.56 per can. USSTC also increased the list price on its *Skoal* Blend products by $0.16 cents per can and increased the list price on its *Husky, Red Seal* and *Copenhagen* brands and the balance of its *Skoal* products by $0.07 per can. ### Wine Segment ### Business Environment Ste. Michelle is a producer and supplier of premium varietal and blended table wines and of sparkling wines. Ste. Michelle is a leading producer of Washington state wines, primarily *Chateau Ste. Michelle* and *14 Hands*, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns *Stag’s Leap Wine Cellars* in Napa Valley. Ste. Michelle also owns *Conn Creek* in Napa Valley, *Patz & Hall* in Sonoma and *Erath* in Oregon. In addition, Ste. Michelle imports and markets *Antinori* wine and *Champagne Nicolas Feuillatte* products in the United States. Ste. Michelle works to meet evolving adult consumer preferences over time by developing, marketing and distributing products through innovation. Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors. Adult consumer preferences among alcohol categories and within the wine category can shift due to a variety of factors, including changes in taste preferences, demographics or social trends, and changes in leisure, dining and beverage consumption patterns and economic conditions. Evolving adult consumer preferences pose strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increases in inventory levels in recent periods. Ste. Michelle has been experiencing product volume demand uncertainty, which was further negatively impacted in 2020 and the first half of 2021 by the COVID-19 pandemic (including economic uncertainty and government actions that restrict direct-to-consumer sales and on-premise sales). As a result of wine inventory levels significantly exceeding long-term forecasted demand, Ste. Michelle recorded pre-tax charges of $394 million in the first six months of 2020. The charges consisted primarily of (i) the write-off of inventory ($292 million) and (ii) estimated losses on future non-cancelable grape purchase commitments ($100 million) recorded in the first quarter of 2020. For further discussion, see Note 8. Evolving adult consumer preferences, an economic downturn, an extended disruption in on-premise sales or facility shutdowns, either voluntary or government-mandated, could result in a further slowdown in the wine category and otherwise have a material adverse effect on Ste. Michelle’s wine business, the consolidated results of operations, cash flows or financial position of Ste. Michelle. As with other agricultural commodities, grape quality and availability can be influenced by plant disease and infestation, as well as by variations in weather patterns, such as fires and smoke damage from fires, including those caused by climate change. For example, in 2019, freezing temperatures reduced grape production and resulted in fewer grapes being available to Ste. Michelle. Additionally, Ste. Michelle experienced some impact from the fires in the western United States during 2020. Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages could have an adverse effect on Ste. Michelle’s wine business. On July 8, 2021, UST entered into a share purchase agreement pursuant to which UST agreed to sell its subsidiary, IWS, which includes Ste. Michelle, to an entity controlled by investment funds managed by Sycamore Partners Management, L.P. (“Sycamore Partners”) in an all-cash transaction with a purchase price of approximately $1.2 billion and the assumption of certain liabilities of IWS and its subsidiaries (the “Ste. Michelle Transaction”). For further discussion, see Note 13. ### Operating Results ### Financial Results and Shipment Volume The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for the wine segment: *(in millions)* | | Operating Results For the Six Months Ended June 30, 2021 | 2020 | Change | For the Three Months Ended June 30, 2021 | 2020 | Change | | --- | ---: | ---: | --- | ---: | ---: | --- | | Net revenues | **$317** | $277 | 14.4% | **$167** | $131 | 27.5% | | Excise taxes | **(9)** | (9) | | **(5)** | (5) | | | Revenues net of excise taxes | **$308** | $268 | | **$162** | $126 | | | Reported OCI (Loss) | **$45** | $(366) | 100.0+ % | **$27** | $13 | 100.0+ % | | Implementation costs | **1** | 394 | | **—** | 2 | | | Adjusted OCI | **$46** | $28 | 64.3% | **$27** | $15 | 80.0% | | Reported OCI margins (1) | **14.6%** | (100.0)%+ | 100.0%+ | **16.7%** | 10.3% | 6.4 pp | | Adjusted OCI margins (1) | **14.9%** | 10.4% | 4.5 pp | **16.7%** | 11.9% | 4.8 pp | (1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes. #### Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $40 million (14.4%), due primarily to higher shipment volume, improved mix and higher pricing. Reported OCI increased $411 million (100.0%+), due primarily to 2020 inventory-related charges discussed in Note 8 (included in implementation costs and charged to cost of sales). Adjusted OCI increased $18 million (64.3%), due primarily to higher shipment volume, higher pricing and improved mix. For the six months ended June 30, 2021, Ste. Michelle’s reported wine shipment volume increased 9.5% to 3,610 thousand cases. #### Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020 Net revenues, which include excise taxes billed to customers, increased $36 million (27.5%), due primarily to higher shipment volume and improved mix. Reported and adjusted OCI increased $14 million (100.0%+) and $12 million (80.0%), respectively, due primarily to higher shipment volume and improved mix. For the three months ended June 30, 2021, Ste. Michelle’s reported wine shipment volume increased 17.9% to 1,865 thousand cases. ### Financial Review ### Cash Provided by/Used in Operating Activities During the first six months of 2021, net cash provided by operating activities was $2,679 million compared with $4,946 million during the first six months of 2020. This decrease was due primarily to higher tax payments (federal, state and excise), which were deferred in the second quarter of 2020 as permitted under federal and state COVID-19 tax relief, and higher settlement payments partially offset by higher net revenues. Altria had a working capital deficit at June 30, 2021 and December 31, 2020. Altria’s management believes that Altria has the ability to fund working capital deficits with cash provided by operating activities and borrowings through its access to credit and capital markets, as discussed in the *Debt and Liquidity* section below. ### Cash Provided by/Used in Investing Activities During the first six months of 2021, net cash used in investing activities was $9 million compared with $63 million during the first six months of 2020. This decrease was due primarily to lower capital expenditures. ### Cash Provided by/Used in Financing Activities During the first six months of 2021, net cash used in financing activities was $5,749 million compared with $2,149 million during the first six months of 2020. This change was due primarily to the following: - repayment of $5.0 billion of Altria senior unsecured notes in connection with the 2021 debt tender offers and redemption and the premiums and fees in connection with the debt tender offers described below and in Note 9; - proceeds of $2.0 billion from the issuance of long-term senior unsecured notes in 2020; - repayment of $1.5 billion in full of Altria senior unsecured notes at scheduled maturity in May 2021; - repurchases of common stock in 2021; - higher dividends paid in 2021; and - purchase of the remaining 20% interest in Helix; partially offset by: - proceeds of $5.5 billion from the issuance of long-term senior unsecured notes used to repurchase and redeem senior unsecured notes in connection with the 2021 debt tender offers and redemption; and - repayment of $1.0 billion in full of Altria senior unsecured notes at scheduled maturity in January 2020. ### Debt and Liquidity *Source of Funds* - Altria is a holding company. As a result, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria receives cash dividends on its interest in ABI and will continue to do so as long as ABI pays dividends. *Credit Ratings* - Altria’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under Altria’s senior unsecured 5-year revolving credit agreement (as amended, the “Credit Agreement”) is discussed in Note 9. At June 30, 2021, the credit ratings and outlook for Altria’s indebtedness by major credit rating agencies were: | | Short-term Debt | Long-term Debt | Outlook | | --- | --- | --- | --- | | Moody’s Investors Service, Inc. (“Moody’s”) | **P-2** | **A3** | **Stable** | | Standard & Poor’s Financial Services LLC (“S&P”) | **A-2** | **BBB** | **Stable** | | Fitch Ratings Inc. | **F2** | **BBB** | **Stable** | *Credit Lines* - From time to time, Altria has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs. At June 30, 2021, Altria’s Credit Agreement, which is used for general corporate purposes, had $3.0 billion available and Altria was in compliance with the covenants in the Credit Agreement. Altria expects to continue to meet the covenants in the Credit Agreement. For further discussion, including interest and covenants in the Credit Agreement, see Note 9. Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA. For further discussion, see *Supplemental Guarantor Financial Information* below and Note 9. *Financial Market Environment* - Altria believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria monitors the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group. *COVID-19 Pandemic -* Despite the uncertainty surrounding the COVID-19 pandemic, including its duration, severity and ultimate overall impact on the global and U.S. economies and the businesses of Altria’s operating companies, including some volatility in the commercial paper markets in March 2020, Altria has not experienced a material adverse impact to its liquidity. *Ste. Michelle Transaction* - Altria expects to use the net proceeds from the Ste. Michelle Transaction for additional share repurchases. Altria’s existing share repurchase authorization is limited to $2 billion; therefore, additional share repurchases in connection with the Ste. Michelle Transaction are subject to approval by Altria’s Board of Directors (the “Board of Directors” or “Board”). For further details, see Note 13. *Debt* - At June 30, 2021 and December 31, 2020, Altria’s total debt was $28.2 billion and $29.5 billion, respectively. In May 2021, Altria repaid in full senior unsecured notes in the aggregate principal amount of $1.5 billion at maturity. In February 2021, Altria issued long-term senior unsecured notes in the aggregate principal amount of $5.5 billion (the “Notes”). The net proceeds from the Notes were used (i) to fund the purchase and redemption of certain unsecured notes and payment of related fees and expenses, as described below, and (ii) for other general corporate purposes. During the first quarter of 2021, Altria (i) completed debt tender offers to purchase for cash certain of its long-term senior unsecured notes in the aggregate principal amount of $4,042 million and (ii) redeemed all of its outstanding 3.490% Notes due 2022 in an aggregate principal amount of $1.0 billion. As a result, for the six months ended June 30, 2021, Altria recorded pre-tax losses on early extinguishment of debt of $649 million, which included premiums and fees of $623 million and the write-off of related unamortized debt discounts and debt issuance costs of $26 million. As a result of the first quarter debt transactions, Altria reduced its near-term maturity towers and extended the weighted-average maturity of its debt. In addition, the weighted-average coupon interest rate on total long-term debt decreased to 4.0% at June 30, 2021 from 4.1% at December 31, 2020. For further details on long-term debt, including the terms of the Notes, the debt tender offers and the redemption, see Note 9. *Guarantees and Other Similar Matters* - As discussed in Note 11, Altria and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at June 30, 2021. From time to time, subsidiaries of Altria also issue lines of credit to affiliated entities. In addition, as discussed below in *Supplemental Guarantor Financial Information* and in Note 9, PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings under the Credit Agreement and amounts outstanding under the commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria’s liquidity. For further discussion regarding Altria’s liquidity, see the *Debt and Liquidity* section above. *Payments Under State Settlement Agreements and FDA Regulation* - As discussed previously and in Note 11, PM USA has entered into State Settlement Agreements with the states and territories of the United States that call for certain payments. In addition, PM USA, Middleton and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. Altria’s subsidiaries recorded $2.2 billion and $2.3 billion of charges to cost of sales for the six months ended June 30, 2021 and 2020, respectively, and $1.2 billion of charges to cost of sales for both the three months ended June 30, 2021 and 2020, in connection with the State Settlement Agreements and FDA user fees. For further discussion of the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement, see *Health Care Cost Recovery Litigation - NPM Adjustment Disputes* in Note 11. Based on current agreements, 2020 market share and estimated annual industry volume decline rates, the estimated amounts that Altria’s subsidiaries may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees are $4.5 billion on average for the next three years. These amounts exclude the potential impact of any NPM Adjustment Items. The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results. *Litigation-Related Deposits and Payments* - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of June 30, 2021, PM USA had posted appeal bonds totaling $50 million, which have been collateralized with restricted cash that is included in assets on the condensed consolidated balance sheet. Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST LLC or Altria in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 11, management expects cash flow from operations, together with Altria’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs. ### Equity and Dividends Dividends paid during the first six months of 2021 and 2020 were $3,196 million and $3,126 million, respectively, an increase of 2.2%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria in 2021 under its share repurchase program. The current annualized dividend rate is $3.44 per share. Altria maintains its long-term objective of a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of the Board. For a discussion of Altria’s share repurchase programs, see Note 1. *Background and Basis of Presentation* to the condensed consolidated financial statements in Item 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q. ### New Accounting Guidance Not Yet Adopted See Note 12. *New Accounting Guidance Not Yet Adopted* to the condensed consolidated financial statements in Item 1 for a discussion of issued accounting guidance applicable to, but not yet adopted by, Altria. ### Contingencies See Note 11 for a discussion of contingencies. ### Supplemental Guarantor Financial Information PM USA (the “Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (the “Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below. The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor. Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees: - received less than reasonably equivalent value or fair consideration therefor; and - either: - was insolvent or rendered insolvent by reason of such occurrence; - was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or - intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if: - the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation; - the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or - it could not pay its debts as they become due. To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent. The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of: - the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor; - the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor; - the payment in full of the Obligations pertaining to such Guarantees; and - the rating of the Parent’s long-term senior unsecured debt by S&P of A or higher. The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests. The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP. ### Summarized Balance Sheets ### (in millions of dollars) | Assets | Parent June 30, 2021 | December 31, 2020 | Guarantor June 30, 2021 | December 31, 2020 | | --- | ---: | ---: | ---: | ---: | | Due from Non-Guarantor Subsidiaries | **$130** | $112 | **$199** | $199 | | Other current assets | **2,105** | 4,896 | **712** | 734 | | Total current assets | **$2,235** | $5,008 | **$911** | $933 | | Due from Non-Guarantor Subsidiaries | **$4,790** | $4,790 | **$—** | $— | | Other assets | **17,241** | 16,883 | **1,858** | 1,983 | | Total non-current assets | **$22,031** | $21,673 | **$1,858** | $1,983 | | **Liabilities** | | | | | | Due to Non-Guarantor Subsidiaries | **$1,076** | $1,169 | **$736** | $656 | | Other current liabilities | **1,996** | 3,688 | **3,092** | 4,539 | | Total current liabilities | **$3,072** | $4,857 | **$3,828** | $5,195 | | Total non-current liabilities | **$31,387** | $30,958 | **$1,052** | $1,268 | ### Summarized Statements of Earnings (Losses) ### (in millions of dollars) | | For the Six Months Ended June 30, 2021 Parent (1) | Guarantor | | --- | ---: | ---: | | Net revenues | **$—** | **$10,784** | | Gross profit | **—** | **5,473** | | Net earnings (losses) | **(603)** | **3,581** | (1) For the six months ended June 30, 2021, net earnings includes $115 million of intercompany interest income from non-guarantor subsidiaries. ### Cautionary Factors That May Affect Future Results #### Forward-Looking and Cautionary Statements We may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the SEC, reports to security holders, press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements and whether to invest in or remain invested in Altria’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in, or implied by, any forward-looking statements made by Altria; any such statement is qualified by reference to the following cautionary statements. We elaborate on these important factors and the risks we face throughout this Form 10-Q, particularly in Item 1A and the “Business Environment” section preceding our discussion of the operating results of our segments, and in our publicly filed reports, including our 2020 Form 10-K. These factors include the following: - unfavorable litigation outcomes, including risks associated with adverse jury and judicial determinations, courts and arbitrators reaching conclusions at variance with our, our subsidiaries’ or our investees’ understanding of applicable law, bonding requirements in the jurisdictions that do not limit the dollar amount of appeal bonds, and certain challenges to bond cap statutes; - government (including the FDA) and private sector actions that impact adult tobacco consumer acceptability of, or access to, tobacco products; - tobacco product taxation, including lower tobacco product consumption levels and potential shifts in adult consumer purchases as a result of federal, state and local excise tax increases; - unfavorable outcomes of any government investigations of Altria, our subsidiaries or investees; - a successful challenge to our tax positions or an increase to the corporate income tax rate; - the risks related to our and our investees’ international business operations, including failure to prevent violations of various U.S. and foreign laws and regulations such as foreign privacy laws and laws prohibiting bribery and corruption; - the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial performance and financial condition and on our subsidiaries’ and investees’ ability to continue manufacturing and distributing products, and the impact of health epidemics and pandemics on general economic conditions (including any resulting recession or other economic crisis) and, in turn, adult consumer purchasing behavior, which may be further impacted by any changes in government stimulus or unemployment payments; - the failure of our tobacco and wine subsidiaries and our investees to compete effectively in their respective markets; - the growth of the e-vapor category and other innovative tobacco products, including oral nicotine pouches, contributing to reductions in cigarette and MST consumption levels and sales volume; - our tobacco and wine subsidiaries’ and our investees’ continued ability to promote brand equity successfully; to anticipate and respond to evolving adult consumer preferences; to develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, and investments in third parties); to improve productivity; and to protect or enhance margins through cost savings and price increases; - changes, including in economic conditions (due to the COVID-19 pandemic or otherwise), that result in adult consumers choosing lower-priced brands, including discount brands; - the unsuccessful commercialization of adjacent products or processes by our tobacco subsidiaries and investees, including innovative tobacco products that may reduce the health risks associated with cigarettes and other traditional tobacco products, and that appeal to adult tobacco consumers; - significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic; - the risks related to the reliance by our tobacco and wine subsidiaries on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers, and the risk of an extended disruption at a facility of, or of service by, a supplier, distributor or distribution chain service provider of our tobacco or wine subsidiaries or investees, including as a result of the COVID-19 pandemic; - required or voluntary product recalls as a result of various circumstances such as product contamination or FDA or other regulatory action; - the failure of our information systems or service providers’ information systems to function as intended, or cyber attacks or security breaches; - our inability to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage, tobacco control actions and other factors; - impairment losses as a result of the write down of intangible assets, including goodwill; - the risks related to Ste. Michelle’s wine business, including competition, unfavorable changes in grape supply, and changes in adult consumer preferences that have resulted and may continue to result in increased inventory levels and inventory write offs, and governmental regulations; - the adverse effect of acquisitions, investments, dispositions or other events on our credit rating; - our inability to acquire attractive businesses or make attractive investments on favorable terms, or at all, or to realize the anticipated benefits from an acquisition or investment and our inability to dispose of businesses or investments on favorable terms or at all; - our inability to consummate the sale of Ste. Michelle as expected (including uncertainties related to Sycamore Partners’ ability to obtain the necessary financing to consummate the Ste. Michelle Transaction); the risks that one or more of the conditions to the consummation of the Ste. Michelle Transaction may not be satisfied; the risks that regulatory approvals required for the Ste. Michelle Transaction may not be obtained in a timely manner, if at all; and our inability to realize our expectations regarding the timing, completion and other matters relating to the Ste. Michelle Transaction, including its expected benefits; - the risks related to disruption and uncertainty in the credit and capital markets, including risk of access to these markets both generally and at current prevailing rates, which may adversely affect our earnings or dividend rate or both; - our inability to attract and retain investors due to the impact of decreasing social acceptance of tobacco usage or unfavorable environmental, social and governance ratings; - the risk that any challenge to our investment in JUUL, if successful, could result in a broad range of resolutions, including divestiture of the investment or rescission of the transaction; - the risks generally related to our investments in JUUL and Cronos, including our inability to realize the expected benefits of our investments in the expected time frames, or at all, due to the risks encountered by our investees in their businesses, such as operational, competitive, compliance, legislative and regulatory risks at the international, federal, state and local levels, including actions by the FDA, and adverse publicity; potential disruptions to our investees’ management or current or future plans and operations; domestic or international litigation developments, government investigations, tax disputes or otherwise; and impairment of our investment in Cronos and changes in the fair value of our investment in JUUL; - the risks related to our inability to acquire a controlling interest in JUUL as a result of standstill restrictions or to control the material decisions of JUUL, restrictions on our ability to sell or otherwise transfer our shares of JUUL until December 20, 2024, and non-competition restrictions for the same time period subject to certain exceptions; - the adverse effects of risks encountered by ABI in its business, including effects of the COVID-19 pandemic, foreign currency exchange rates and the impact of movements in ABI’s stock price on our equity investment in ABI, including on our reported earnings from and carrying value of our investment in ABI, which could result in impairment of our investment, and the dividends paid by ABI on the shares we own; - the risks related to our inability to transfer our equity securities in ABI until October 10, 2021, and, if our ownership percentage decreases below certain levels, the adverse effects of additional tax liabilities, a reduction in the number of directors that we have the right to have appointed to the ABI board of directors, and our potential inability to use the equity method of accounting for our investment in ABI; - the risk of challenges to the tax treatment of the consideration we received in the ABI/SABMiller business combination and the tax treatment of our equity investment; and - the risks, including criminal, civil or tax liability for Altria, related to Altria’s or Cronos’s failure to comply with applicable laws, including cannabis laws. You should understand that it is not possible to predict or identify all factors and risks. Consequently, you should not consider the foregoing list to be complete. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law. ## Market risk As filed, 2,287 characters. ### Interest Rate Risk The fair value of Altria’s long-term debt, all of which is fixed-rate debt, is subject to fluctuations resulting from changes in market interest rates. The following table provides the fair value of Altria’s long-term debt and the change in fair value based on a 1% increase or decrease in market interest rates at June 30, 2021 and December 31, 2020: *(in billions)* | | June 30, 2021 | December 31, 2020 | | --- | ---: | ---: | | Fair value | **$31.4** | $34.7 | | Decrease in fair value from a 1% increase in market interest rates | **2.9** | 2.7 | | Increase in fair value from a 1% decrease in market interest rates | **3.4** | 3.1 | Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”), or any mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s and S&P. The applicable percentage based on Altria’s long-term senior unsecured debt ratings at June 30, 2021 borrowings under the Credit Agreement was 1.0%. At June 30, 2021 and December 31, 2020, Altria had no borrowings under the Credit Agreement. ### Equity Price Risk The estimated fair values of the Fixed-price Preemptive Rights and the Cronos warrant are subject to equity price risk. The Fixed-price Preemptive Rights and warrant are recorded at fair value, which is estimated using Black-Scholes option-pricing models. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are subject to fluctuations resulting from changes in the quoted market price of Cronos shares, the underlying equity security. The following table provides (i) fair values of the Fixed-price Preemptive Rights and Cronos warrants and (ii) the change in fair value based on a 10% increase or decrease in the quoted market price of Cronos shares at June 30, 2021 and December 31, 2020: *(in millions)* | | Fixed-price Preemptive Rights June 30, 2021 | December 31, 2020 | Cronos Warrant June 30, 2021 | December 31, 2020 | | --- | ---: | ---: | ---: | ---: | | Fair values | **$20** | $24 | **$150** | $139 | | Change in fair value based on a 10% increase/decrease in the quoted market price of Cronos shares | **5** | 6 | **34** | 28 | ## Controls and procedures As filed, 759 characters. Altria carried out an evaluation, with the participation of Altria’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Form 10-Q. Based upon that evaluation, Altria’s Chief Executive Officer and Chief Financial Officer concluded that Altria’s disclosure controls and procedures are effective. There have been no changes in Altria’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. ## Risk factors As filed, 7,208 characters. Information regarding Risk Factors appears in Part I, Item 1A. Risk Factors of the 2020 Form 10-K. Except as set forth below, there have been no material changes to the risk factors previously disclosed in the 2020 Form 10-K. ### Risks Related to Litigation, Legislative or Regulatory Action **Unfavorable litigation outcomes could materially adversely affect the consolidated results of operations, cash flows or financial position of Altria or the businesses of one or more of its subsidiaries or investees.** Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria and its subsidiaries, including PM USA and USSTC, as well as their respective indemnitees, indemnitors and Altria’s investees. Various types of claims may be raised in these proceedings, including product liability, unfair trade practices, antitrust, tax, contraband-related claims, patent infringement, employment matters, claims for contribution and claims of competitors, shareholders and distributors. Legislative action, such as changes to tort law, also may expand the types of claims and remedies available to plaintiffs. Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria or its subsidiaries may also be required to pay interest and attorneys’ fees. Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed in Note 11, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, or the businesses of one or more of its subsidiaries or investees, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges. In certain litigation, Altria, its subsidiaries and its investees may face potentially significant non-monetary remedies that could have a material adverse effect on our businesses. For example, in the lawsuit brought by the United States Department of Justice discussed in Note 11, the district court did not impose monetary penalties but ordered significant non-monetary remedies, including the issuance of “corrective statements.” In the patent lawsuit pending before the United States International Trade Commission (“ITC”) discussed in Note 11, the plaintiffs seek a prohibition on the importation of the *IQOS* electronic device, *HeatSticks* and component parts into the United States and on the sale of any such products previously imported into the United States. Due to the uncertainty of this litigation, in July 2021, PM USA decided to delay further expansion of the *IQOS* electronic device and *Marlboro HeatSticks.* In 2019, we determined that our investment in JUUL was impaired in part due to the increase in the number and type of legal cases pending against JUUL. Altria and PM USA are also defendants in many of these cases. In addition, in April 2020 the FTC issued an administrative complaint against Altria and JUUL alleging that Altria’s 35% investment in JUUL and the associated agreements constitute unreasonable restraint on trade. E-vapor litigation and the FTC action, including the remedies the FTC is seeking, are further discussed in Note 11. Altria and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty, and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria, or the businesses of one or more of its subsidiaries or investees, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria to do so. See Note 11 and Exhibits 99.1 and 99.2 to this Form 10-Q for a discussion of pending tobacco-related litigation. **Our proposed sale of our subsidiary, IWS, which includes Ste. Michelle, may not be consummated as expected and we may be unable to realize our expectations regarding the timing, completion and other matters relating to the Ste. Michelle Transaction.** On July 8, 2021, UST agreed to sell its subsidiary, IWS, which includes Ste. Michelle, to an entity controlled by Sycamore Partners. The Ste. Michelle Transaction is subject to Sycamore Partners obtaining necessary financing and the satisfaction of certain customary closing conditions, including antitrust regulatory clearance, which may take longer than expected or may not occur at all. We cannot provide any assurance that the Ste. Michelle Transaction will be completed as expected or that there will not be a delay in the completion of the Ste. Michelle Transaction. There can also be no assurance that, if we complete the Ste. Michelle Transaction, we will be able to realize its expected benefits in the manner expected or timeframe or at all. Filed Jul 29, 2021. Source: SEC EDGAR, the filing index for accession 0000764180-21-000108. Last ingested by Listed: Oct 29, 2026, 12:29 ET. No prices; not investment advice.