Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation
When used in these notes, the terms “Altria,” “we,” “us” and “our” refer to either (i) Altria Group, Inc. and its consolidated subsidiaries or (ii) Altria Group, Inc. only and not its consolidated subsidiaries, as appropriate in the context.
▪Background: At September 30, 2022, our wholly owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly owned subsidiary of PM USA; UST LLC (“UST”), which through its wholly owned subsidiary U.S. Smokeless Tobacco Company LLC (“USSTC”), is engaged in the manufacture and sale of moist smokeless tobacco products (“MST”) and snus products; Helix Innovations LLC (“Helix”), which operates in the United States and Canada, and Helix Innovations GmbH and its affiliates (“Helix ROW”), which operate internationally in the rest-of-world, are engaged in the manufacture and sale of oral nicotine pouches; and Philip Morris Capital Corporation, which has one leveraged lease remaining. Other wholly owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to our domestic tobacco operating companies, and Altria Client Services LLC (“ALCS”), which provides various support services to our companies in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs. Altria’s access to the operating cash flows of our wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by our subsidiaries. At September 30, 2022, our significant wholly owned subsidiaries were not limited by contractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests.
On October 1, 2021, UST sold its subsidiary, International Wine & Spirits Ltd., which included Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”).
At September 30, 2022, we had investments in the following equity securities: Anheuser-Busch InBev SA/NV (“ABI”), Cronos Group Inc. (“Cronos”) and JUUL Labs, Inc. (“JUUL”). We account for our investments in ABI and Cronos under the equity method of accounting using a one-quarter lag. We account for our investment in JUUL at fair value.
For further discussion of our investments in equity securities, see Note 3. Investments in Equity Securities.
▪Dividends and Share Repurchases: In August 2022, our Board of Directors (“Board of Directors” or “Board”) approved a 4.4% increase in the quarterly dividend rate to $0.94 per share of our common stock versus the previous rate of $0.90 per share. The current annualized dividend rate is $3.76. Future dividend payments remain subject to the discretion of our Board.
In January 2021, our Board of Directors authorized a $2.0 billion share repurchase program that it expanded to $3.5 billion in October 2021 (as expanded, the “January 2021 share repurchase program”). At September 30, 2022, we had $374 million remaining in the January 2021 share repurchase program. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of our Board.
Our share repurchase activity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Total number of shares repurchased | 29.9 | | | 20.2 | | | 8.5 | | | 6.7 | |
Aggregate cost of shares repurchased | $ | 1,451 | | | $ | 972 | | | $ | 368 | | | $ | 322 | |
Average price per share of shares repurchased | $ | 48.60 | | | $ | 48.17 | | | $ | 43.68 | | | $ | 48.35 | |
▪Basis of Presentation: Our interim condensed consolidated financial statements are unaudited. Our management believes that all adjustments necessary for a fair statement of the interim results presented have been reflected in our interim condensed consolidated financial statements. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.
These statements should be read in conjunction with our audited consolidated financial statements and related notes, which appear in our Annual Report on Form 10-K for the year ended December 31, 2021.
On January 1, 2022, we adopted Accounting Standards Update (“ASU”) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU No. 2020-06”). This guidance simplifies the accounting for certain financial
instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Our adoption of ASU No. 2020-06 did not have a material impact on our condensed consolidated financial statements.
For a description of issued accounting guidance applicable to, but not yet adopted by, us, see Note 12. New Accounting Guidance Not Yet Adopted.
Note 2. Revenues from Contracts with Customers
We disaggregate net revenues based on product type. For further discussion, see Note 8. Segment Reporting.
We calculate substantially all cash discounts, offered to customers for prompt payment, as a flat rate per unit based on agreed-upon payment terms. Prior to the first quarter of 2021 for USSTC and the third quarter of 2021 for PM USA, cash discounts were calculated as a percentage of the list price based on historical experience and agreed-upon payment terms. We record receivables net of the cash discounts on our condensed consolidated balance sheets.
We record payments received in advance of product shipment as deferred revenue. These payments are included in other accrued liabilities on our condensed consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $310 million and $287 million at September 30, 2022 and December 31, 2021, respectively. When cash is received in advance of product shipment, we satisfy our performance obligations within three days of receiving payment. At September 30, 2022 and December 31, 2021, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.
Receivables were $52 million and $47 million at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, there were no expected differences between amounts recorded and subsequently received, and we did not record an allowance for credit losses against these receivables.
We record an allowance for returned goods, which is included in other accrued liabilities on our condensed consolidated balance sheets. It is USSTC’s policy to accept authorized sales returns from its customers for products that have passed the freshness date printed on product packaging due to the limited shelf life of USSTC’s MST and snus products. We record estimated sales returns, which are based principally on historical volume and return rates, as a reduction to revenues. Actual sales returns will differ from estimated sales returns to the extent actual results differ from estimated assumptions. We reflect differences between actual and estimated sales returns in the period in which the actual amounts become known. These differences, if any, have not had a material impact on our condensed consolidated financial statements. All returned goods are destroyed upon return and not included in inventory. Consequently, we do not record an asset for USSTC’s right to recover goods from customers upon return.
Sales incentives include variable payments related to goods sold. We include estimates of variable consideration as a reduction to revenues upon shipment of goods to customers. The sales incentives that require significant estimates and judgments are as follows:
Price promotion payments- We make price promotion payments, substantially all of which are made to our retail partners, to incent the promotion of certain product offerings in select geographic areas.
Wholesale and retail participation payments- We make payments to our wholesale and retail partners to incent merchandising and sharing of sales data in accordance with our trade agreements.
These estimates primarily include estimated wholesale to retail sales volume and historical acceptance rates. Actual payments will differ from estimated payments to the extent actual results differ from estimated assumptions. Differences between actual and estimated payments are reflected in the period such information becomes available. These differences, if any, have not had a material impact on our condensed consolidated financial statements.
Note 3. Investments in Equity Securities
The carrying amount of our investments consisted of the following:
| | | | | | | | | | | | | | |
| (in millions) | | September 30, 2022 | | December 31, 2021 |
| ABI | | $ | 9,048 | | | $ | 11,144 | |
JUUL | | 350 | | | 1,705 | |
Cronos (1) | | 416 | | | 632 | |
Total | | $ | 9,814 | | | $ | 13,481 | |
(1) Our investment in Cronos at September 30, 2022 and December 31, 2021 consisted of our equity method investment in Cronos of $415 million and $617 million, respectively, and also included the Cronos warrant and the Fixed-price Preemptive Rights, which are measured at fair value (collectively, “Investment in Cronos”). See below for further discussion.
(Income) losses from investments in equity securities consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
ABI (1) | $ | 2,155 | | | $ | 5,644 | | | $ | 2,367 | | | $ | 6,036 | |
Cronos (1) | 197 | | | 145 | | | 11 | | | (21) | |
| (Income) losses from investments under equity method of accounting | 2,352 | | | 5,789 | | | $ | 2,378 | | | $ | 6,015 | |
JUUL (2) | 1,355 | | | — | | | 100 | | | (100) | |
| (Income) losses from investments in equity securities | $ | 3,707 | | | $ | 5,789 | | | $ | 2,478 | | | $ | 5,915 | |
(1) Includes our share of amounts recorded by our investees and additional adjustments, if required, related to (i) the conversion from international financial reporting standards to United States generally accepted accounting principles (“GAAP”) and (ii) adjustments to our investment required under the equity method of accounting.
(2) Investment in JUUL is accounted for as an investment in an equity security measured at fair value. See below for further discussion of the change from equity method of accounting in the third quarter of 2022.
Investment in ABI
At September 30, 2022, we had an approximate 10% ownership interest in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. The Restricted Shares:
▪are unlisted and not admitted to trading on any stock exchange;
▪are convertible by us into ordinary shares of ABI on a one-for-one basis;
▪rank equally with ordinary shares of ABI with regards to dividends and voting rights; and
▪have director nomination rights with respect to ABI.
The Restricted Shares were subject to a five-year lock-up period that ended October 10, 2021. As of this filing, we have not elected to convert our Restricted Shares into ordinary shares of ABI.
We account for our investment in ABI under the equity method of accounting because we have the ability to exercise significant influence over the operating and financial policies of ABI, including having active representation on ABI’s board of directors and certain ABI board committees. Through this representation, we participate in ABI’s policy making processes.
We report our share of ABI’s results using a one-quarter lag because ABI’s results are not available in time for us to record them in the concurrent period.
The fair value of our equity investment in ABI is based on (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. We can convert the Restricted Shares to ordinary shares at our discretion. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.
At December 31, 2021, the fair value of our equity investment in ABI was $11.9 billion (carrying value of $11.1 billion), which exceeded its carrying value by $0.8 billion or approximately 7%. In May 2022, the fair value of our equity investment in ABI declined below its carrying value and has not recovered. At June 30, 2022, the fair value of our equity investment in ABI was below its carrying value by $1.1 billion or approximately 9%. Accounting guidance requires the evaluation of the following factors when determining if the decline in fair value is other than temporary: (i) the duration and magnitude of the fair value decline; (ii) the financial condition and near-term prospects of the investee; and (iii) the investor’s intent and ability to hold its equity investment until recovery. In preparing our financial statements for the period ended June 30, 2022, we evaluated these factors and concluded that the decline in fair value of our equity investment in ABI at June 30, 2022 below its carrying value was temporary and, therefore, no impairment was recorded at that time.
In preparing our financial statements for the period ended September 30, 2022, we considered the same accounting guidance described above to determine if the decline in fair value is other than temporary. We evaluated the factors related to the fair value decline, including the macroeconomic and geopolitical factors that have significantly impacted certain foreign exchange rates and global equity markets. We concluded that the decline in fair value of our equity investment in ABI at September 30, 2022 was other than temporary as we now anticipate that the full recovery to the carrying value will take longer than previously expected. As a result, we recorded a non-cash, pre-tax impairment charge of $2.5 billion for the nine and three months ended September 30, 2022, which was recorded to (income) losses from investments in equity securities in our condensed consolidated statements of earnings (losses). This impairment charge reflects the difference between the fair value of our equity investment in ABI using ABI’s share price at September 30, 2022 and the carrying value of our equity investment in ABI at September 30, 2022. At September 30, 2022, prior to recording the impairment charge, the fair value of our equity investment in ABI was below its carrying value by approximately 22%. After recording the impairment charge, each of the fair value and carrying value of our equity investment in ABI at September 30, 2022 was $9.0 billion.
At September 30, 2022, the carrying value of our equity investment in ABI exceeded its share of ABI’s net assets attributable to equity holders of ABI by approximately $2.5 billion. Substantially all of this difference is comprised of goodwill and other indefinite-lived intangible assets (consisting primarily of trademarks).
At September 30, 2021, the fair value of our equity investment in ABI had declined below its carrying value by $6.2 billion. We considered the same accounting guidance described above to determine if the decline in fair value was other than temporary. In preparing our financial statements for the period ended September 30, 2021, we concluded that the decline in fair value of our equity investment in ABI at September 30, 2021 was other than temporary. As a result, we recorded a non-cash, pre-tax impairment charge of $6.2 billion for the nine and three months ended September 30, 2021, which was recorded to (income) losses from investments in equity securities in our condensed consolidated statements of earnings (losses). This impairment charge reflected the difference between the fair value of our equity investment in ABI using ABI’s share price at September 30, 2021 and the carrying value of our equity investment in ABI at September 30, 2021.
Investment in JUUL
In December 2018, we made an investment in JUUL for $12.8 billion and received a 35% economic interest in JUUL through non-voting shares, which were converted at our election into voting shares in November 2020 (“Share Conversion”), and a security convertible into additional non-voting or voting shares, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). At September 30, 2022, we had a 35% economic ownership interest in JUUL, consisting of 42 million voting shares.
We are subject to a standstill restriction under which we may not acquire additional JUUL shares above our 35% interest and agreed not to sell or transfer any of our JUUL shares until December 20, 2024. Furthermore, at the time of the investment, we agreed to non-competition obligations generally requiring that we participate in the e-vapor business only through JUUL. In January 2020, we amended certain JUUL Transaction agreements and entered into a new cooperation agreement. One of the provisions was the option to be released from our non-compete obligation under certain circumstances, including if the carrying value of our investment in JUUL was not more than 10% of its initial carrying value of $12.8 billion. At June 30, 2022, the carrying value of our investment in JUUL was $450 million, which was less than 10% of our initial carrying value of $12.8 billion. As a result, in September 2022, we exercised our option to be released from our JUUL non-competition obligations, resulting in (i) the permanent termination of our non-competition obligations to JUUL, (ii) the loss of our JUUL board designation rights (other than the right to appoint one independent director so long as our ownership continues to be at least 10%), our preemptive rights, our consent rights and certain other rights with respect to our investment in JUUL and (iii) the conversion of our JUUL shares to single vote common stock, significantly reducing our voting power. We do not currently intend to exercise our remaining governance rights or to vote our JUUL shares other than as a passive investor.
Additionally, as part of the amendment to certain JUUL Transaction agreements in January 2020, we agreed not to pursue any claims against JUUL for indemnification or reimbursement except for any non-contractual claims for contribution or indemnity where a judgment has been entered against us and JUUL with respect to certain litigation in which we and JUUL are both defendants against third-party plaintiffs.
In April 2020, the U.S. Federal Trade Commission (“FTC”) issued an administrative complaint challenging our investment in JUUL. In February 2022, the administrative law judge dismissed the FTC’s complaint. FTC complaint counsel appealed that decision to the FTC, which appeal remains pending. For further discussion, see Note 11. Contingencies - Antitrust Litigation.
In June 2022, the U.S. Food and Drug Administration (“FDA”) issued marketing denial orders (“MDOs”) to JUUL ordering all of JUUL’s products currently marketed in the United States off the market. In July 2022, the FDA administratively stayed the MDOs on a temporary basis, citing its determination that there are scientific issues unique to the JUUL pre-market tobacco applications that warrant additional review. This administrative stay temporarily suspends the MDOs and JUUL’s products currently remain on the market.
Following Share Conversion in the fourth quarter of 2020, we elected to account for our equity method investment in JUUL under the fair value option. In making this election, we believed measuring our investment at fair value provided quarterly transparency to investors as to the fair market value of our investment in JUUL, given the changes and volatility in the e-vapor category since our initial investment, as well as the lack of publicly available information regarding JUUL’s business or a market-derived valuation. As a result of our loss of certain rights due to our exercise of our option to be released from our JUUL non-competition obligations in the third quarter of 2022, we no longer have the ability to exercise significant influence over the operating and financial policies of JUUL. Therefore, we are no longer able to account for our investment in JUUL as an equity method investment. As of September 30, 2022, we accounted for our investment in JUUL as an investment in an equity security. We will continue to measure our investment in JUUL at fair value, in accordance with GAAP. Our condensed consolidated statements of earnings (losses) include any cash dividends received from our investment in JUUL and any changes in the estimated fair value of our investment, which is calculated quarterly.
We use an income approach to estimate the fair value of our investment in JUUL. The income approach reflects the discounting of future cash flows for the United States and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows.
In determining the estimated fair value of our investment in JUUL, at September 30, 2022 and December 31, 2021, we made certain judgments, estimates and assumptions, the most significant of which were likelihood of certain potential regulatory and liquidity outcomes, sales volume, operating margins, discount rates and perpetual growth rates. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. Additionally, in determining these significant assumptions, we made judgments regarding the (i) likelihood of certain potential regulatory actions impacting the e-vapor category and specifically whether the FDA will ultimately authorize JUUL’s products, which have received MDOs and are now under additional administrative review; (ii) likelihood of JUUL maintaining adequate liquidity to fund projected cash needs, the absence of which could result in JUUL seeking protection under bankruptcy or other insolvency laws; (iii) risk created by the number and types of legal cases pending against JUUL; (iv) expectations for the future state of the e-vapor category, including competitive dynamics; and (v) timing of international expansion plans. Due to these uncertainties, our future cash flow projections of JUUL are based on a range of scenarios that consider certain potential regulatory, liquidity and market outcomes.
The following table provides a reconciliation of the beginning and ending balance of our investment in JUUL, which is classified in Level 3 of the fair value hierarchy: | | | | | | | | |
| | Investment |
| (in millions) | | Balance |
| Balance at December 31, 2020 | | $ | 1,705 | |
| Unrealized gains (losses) included in (income) losses from investments in equity securities | | — | |
| Balance at December 31, 2021 | | $ | 1,705 | |
| Unrealized gains (losses) included in (income) losses from investments in equity securities | | (1,355) | |
Balance at September 30, 2022 | | $ | 350 | |
For the nine months ended September 30, 2022, we recorded non-cash, pre-tax unrealized losses of $1,355 million as a result of changes in the estimated fair value of our investment in JUUL. The decrease in the estimated fair value was primarily driven by (i) a decrease in the likelihood of a favorable outcome from the FDA for JUUL’s products that are currently marketed in the United States, which have received MDOs and are now under additional administrative review, (ii) a decrease in the likelihood of JUUL maintaining adequate liquidity to fund projected cash needs, which could result in JUUL seeking protection under bankruptcy or other insolvency law, (iii) projections of higher operating expenses resulting in lower long-term operating margins and (iv) an increase in the discount rate due to changes in market factors, partially offset by the effect of passage of time on the projected cash flows.
For the three months ended September 30, 2022, we recorded a non-cash, pre-tax unrealized loss of $100 million as a result of changes in the estimated fair value of our investment in JUUL. The decrease in the estimated fair value was primarily driven by an increase in the discount rate due to changes in market factors, partially offset by the effect of passage of time on the projected cash flows.
For the three months ended September 30, 2021, we recorded a non-cash, pre-tax unrealized gain of $100 million as a result of changes in the estimated fair value of our investment in JUUL. There were no material changes to the significant assumptions used in the valuations, as described above, during the nine and three months ended September 30, 2021, compared to the assumptions used for the December 31, 2020 valuation.
Investment in Cronos
At September 30, 2022, we had a 41.4% ownership interest in Cronos, consisting of 156.6 million shares, which we account for under the equity method of accounting. We report our share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for us to record them in the concurrent period.
The fair value of our equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value and carrying value of our equity method investment in Cronos at December 31, 2021 was $617 million.
In the second quarter of 2022, the fair value of our equity method investment in Cronos declined below its carrying value and had not recovered as of June 30, 2022. Accounting guidance requires the evaluation of the following factors when determining if the decline in fair value is other than temporary: (i) the duration and magnitude of the fair value decline; (ii) the financial condition and near-term prospects of the investee; and (iii) the investor’s intent and ability to hold its equity method investment until recovery. In preparing our financial statements for the period ended June 30, 2022, we evaluated these factors and concluded that the decline in fair value of our equity investment in Cronos below its carrying value at June 30, 2022 was other than temporary. As a result, we recorded a non-cash, pre-tax impairment charge of $107 million in the second quarter of 2022, which was recorded to (income) losses from investments in equity securities in our condensed consolidated statements of earnings (losses). The impairment charge reflects the difference between the fair value of our equity method investment in Cronos using Cronos’s share price and the Canadian dollar (“CAD”) to U.S. dollar exchange rate at June 30, 2022 and the carrying value of our equity method investment in Cronos at June 30, 2022. At June 30, 2022, prior to recording the impairment charge, the fair value of our equity method investment in Cronos was less than its carrying value by approximately 20%. After recording the impairment charge, each of the fair value and carrying value of our equity method investment in Cronos at June 30, 2022 was $437 million. At September 30, 2022, the fair value of our equity method investment in Cronos exceeded its carrying value by $22 million or approximately 5%.
As part of our Investment in Cronos, at September 30, 2022, we also owned:
▪anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain our ownership percentage. Certain of the anti-dilution protections provide us the ability to purchase additional Cronos common shares at a per share exercise price of CAD $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on our assumptions as of September 30, 2022, we estimate the Fixed-price Preemptive Rights allows us to purchase up to an additional approximately 8 million common shares of Cronos; and
▪a warrant providing us the ability to purchase an additional approximate 10% of common shares of Cronos (approximately 84 million common shares at September 30, 2022) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.
If exercised in full, the exercise prices for the warrant and Fixed-price Preemptive Rights would be approximately CAD $1.6 billion and CAD $0.1 billion, respectively (approximately U.S. dollar $1.2 billion and $0.1 billion, respectively, based on the CAD to U.S. dollar exchange rate on October 24, 2022). At September 30, 2022, upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, we would own approximately 52% of the outstanding common shares of Cronos.
The Fixed-price Preemptive Rights and Cronos warrant are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are estimated using Black-Scholes option-pricing models, adjusted for observable inputs (which are classified in Level 1 of the fair value hierarchy), including share price, and unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy). We elect to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on our condensed consolidated balance sheets in investments in equity securities.
We record in our condensed consolidated statements of earnings (losses) any changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur.
We recorded non-cash, pre-tax unrealized (gains) losses, representing the changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Fixed-price Preemptive Rights | $ | 1 | | | $ | 21 | | | $ | — | | | $ | 17 | |
| Cronos warrant | 13 | | | 107 | | | — | | | 118 | |
| Total | $ | 14 | | | $ | 128 | | | $ | — | | | $ | 135 | |
Note 4. Financial Instruments
We enter into derivative financial instruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. We use various types of derivative financial instruments, including forward contracts, options and swaps. We do not enter into or hold derivative financial instruments for trading or speculative purposes.
Our investment in ABI, whose functional currency is the Euro, exposes us to foreign currency exchange risk on the carrying value of our investment. To manage this risk, we may designate certain foreign exchange contracts, including cross-currency swap contracts and forward contracts (collectively, “foreign currency contracts”), and Euro denominated unsecured long-term notes (“foreign currency denominated debt”) as net investment hedges of our investment in ABI.
In May 2021, all outstanding foreign currency contracts matured and, at September 30, 2022 and December 31, 2021, we had no outstanding foreign currency contracts. When we have foreign currency contracts in effect, counterparties are domestic and international financial institutions. Under these contracts, we are exposed to potential losses in the event of non-performance by these counterparties. We manage our credit risk by entering into transactions with counterparties that have investment grade credit ratings, limiting the amount of exposure we have with each counterparty and monitoring the financial condition of each counterparty. The counterparty agreements contain provisions that require us to maintain an investment grade credit rating. In the event our credit rating falls below investment grade, counterparties to our foreign currency contracts can require us to post collateral.
The following table provides the aggregate carrying value and fair value of our total long-term debt:
| | | | | | | | | | | |
| (in millions) | September 30, 2022 | | December 31, 2021 |
| Carrying value | $ | 26,291 | | | $ | 28,044 | |
| Fair value | 21,614 | | | 30,459 | |
| Foreign currency denominated debt included in long-term debt above: | | | |
| Carrying value | 4,156 | | | 4,817 | |
| Fair value | 3,780 | | | 5,114 | |
Our estimate of the fair value of our total long-term debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy.
The decrease in the fair value of our long-term debt was primarily driven by (i) rising interest rates in 2022, (ii) the August 2022 $1.1 billion repayment at maturity of senior unsecured notes and (iii) changes in Euro denominated debt resulting from the strengthening of the U.S. dollar versus the Euro during the first nine months of 2022.
Net Investment Hedging
The pre-tax effects of our net investment hedges on accumulated other comprehensive losses and our condensed consolidated statements of earnings (losses) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (Gain) Loss Recognized in Accumulated Other Comprehensive Losses | | (Gain) Loss Recognized in
Net Earnings (Losses) | | (Gain) Loss Recognized in Accumulated Other Comprehensive Losses | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
| Foreign currency contracts | | $ | — | | | $ | (16) | | | $ | — | | | $ | (7) | | | $ | — | | | $ | — | | | | | |
| Foreign currency denominated debt | | (664) | | | (270) | | | — | | | — | | | (289) | | | (118) | | | | | |
| Total | | $ | (664) | | | $ | (286) | | | $ | — | | | $ | (7) | | | $ | (289) | | | $ | (118) | | | | | |
We recognized changes in the fair value of the foreign currency contracts and in the carrying value of the foreign currency denominated debt due to changes in the Euro to U.S. dollar exchange rate in accumulated other comprehensive losses related to ABI. We recognized gains on the foreign currency contracts arising from components excluded from effectiveness testing in interest and other debt expense, net in our condensed consolidated statements of earnings (losses) based on an amortization approach.
Note 5. Benefit Plans
Components of Net Periodic Benefit (Income) Cost
Net periodic benefit (income) cost consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Postretirement | | Pension | | Postretirement |
| For the Nine Months Ended
September 30, | | For the Three Months Ended
September 30, |
| (in millions) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | $ | 48 | | | $ | 51 | | | $ | 17 | | | $ | 15 | | | $ | 16 | | | $ | 17 | | | $ | 7 | | | $ | 5 | |
| Interest cost | 155 | | | 139 | | | 31 | | | 29 | | | 51 | | | 46 | | | 11 | | | 8 | |
Expected return on plan assets | (370) | | | (393) | | | (10) | | | (10) | | | (123) | | | (131) | | | (4) | | | (2) | |
| Amortization: | | | | | | | | | | | | | | | |
| Net loss | 72 | | | 99 | | | 14 | | | 16 | | | 24 | | | 33 | | | 6 | | | 2 | |
Prior service cost (credit) | 5 | | | 3 | | | (34) | | | (35) | | | 2 | | | 1 | | | (11) | | | (20) | |
| | | | | | | | | | | | | | | |
| Net periodic benefit (income) cost | $ | (90) | | | $ | (101) | | | $ | 18 | | | $ | 15 | | | $ | (30) | | | $ | (34) | | | $ | 9 | | | $ | (7) | |
Employer Contributions
We make contributions to our pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service regulations. We made employer contributions of $11 million to our pension plans and did not make any contributions to our postretirement plans during the nine months ended September 30, 2022. Currently, we anticipate making additional employer contributions of approximately $10 million to our pension plans and no additional contributions to our postretirement plans in 2022. However, the foregoing estimates of 2022 contributions to our pension and postretirement plans are subject to change as a result of changes in tax and other benefit laws, changes in interest rates, as well as asset performance significantly above or below the assumed long-term rate of return for each respective plan.
Plan amendments to our postretirement plans for the year ended December 31, 2021 included several plan changes announced in the second quarter of 2021 to our salaried retiree healthcare plans, primarily changing post-age 65 coverage to a private medicare marketplace. These amendments triggered a plan remeasurement in the second quarter of 2021, resulting in a reduction of $432 million (including discount rate impact and other changes) to our postretirement obligation in the second quarter of 2021 and a corresponding reduction to accumulated other comprehensive losses.
Note 6. Earnings (Losses) per Share
We calculated basic and diluted earnings (losses) per share (“EPS”) using the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net earnings (losses) attributable to Altria | | $ | 3,074 | | | $ | 851 | | | $ | 224 | | | $ | (2,722) | |
| Less: Distributed and undistributed earnings attributable to share-based awards | | (9) | | | (8) | | | (3) | | | (2) | |
| Earnings (losses) for basic and diluted EPS | | $ | 3,065 | | | $ | 843 | | | $ | 221 | | | $ | (2,724) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Weighted-average shares for basic and diluted EPS | | 1,808 | | | 1,849 | | | 1,799 | | | 1,842 | |
Note 7. Other Comprehensive Earnings/Losses
The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2022 |
| (in millions) | | Benefit Plans | | ABI | | Currency
Translation
Adjustments and Other | | Accumulated
Other
Comprehensive
Losses |
| Balances, December 31, 2021 | | $ | (1,612) | | | $ | (1,512) | | | $ | 68 | | | $ | (3,056) | |
| | | | | | | | |
Other comprehensive earnings (losses) before reclassifications | | — | | | 902 | | | (11) | | | 891 | |
| Deferred income taxes | | — | | | (206) | | | — | | | (206) | |
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | — | | | 696 | | | (11) | | | 685 | |
| | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 65 | | | (74) | | | (1) | | | (10) | |
| Deferred income taxes | | (17) | | | 15 | | | — | | | (2) | |
| Amounts reclassified to net earnings (losses), net of deferred income taxes | | 48 | | | (59) | | | (1) | | | (12) | |
| | | | | | | | |
Other comprehensive earnings (losses), net of deferred income taxes | | 48 | | | 637 | | (1) | (12) | | | 673 | |
| | | | | | | | |
| Balances, September 30, 2022 | | $ | (1,564) | | | $ | (875) | | | $ | 56 | | | $ | (2,383) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 |
| (in millions) | | Benefit Plans | | ABI | | Currency
Translation
Adjustments and Other | | Accumulated
Other
Comprehensive
Losses |
Balances, June 30, 2022 | | $ | (1,581) | | | $ | (869) | | | $ | 73 | | | $ | (2,377) | |
| | | | | | | | |
Other comprehensive earnings (losses) before reclassifications | | — | |
| 18 | | | (16) | | | 2 | |
| Deferred income taxes | | — | | | (11) | | | — | | | (11) | |
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | — | | | 7 | | | (16) | | | (9) | |
| | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 24 | | | (16) | | | (1) | | | 7 | |
| Deferred income taxes | | (7) | | | 3 | | | — | | | (4) | |
| Amounts reclassified to net earnings (losses), net of deferred income taxes | | 17 | | | (13) | | | (1) | | | 3 | |
| | | | | | | | |
Other comprehensive earnings (losses), net of deferred income taxes | | 17 | | | (6) | | (1) | (17) | | | (6) | |
| | | | | | | | |
| Balances, September 30, 2022 | | $ | (1,564) | | | $ | (875) | | | $ | 56 | | | $ | (2,383) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2021 |
| (in millions) | | Benefit Plans | | ABI | | Currency
Translation
Adjustments and Other | | Accumulated
Other
Comprehensive
Losses |
| Balances, December 31, 2020 | | $ | (2,420) | | | $ | (1,938) | | | $ | 17 | | | $ | (4,341) | |
| | | | | | | | |
Other comprehensive earnings (losses) before reclassifications | | 432 | | (2) | 685 | | | 35 | | | 1,152 | |
| Deferred income taxes | | (118) | | | (151) | | | — | | | (269) | |
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | 314 | | | 534 | | | 35 | | | 883 | |
| | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 92 | | | (49) | | | (2) | | | 41 | |
| Deferred income taxes | | (23) | | | 10 | | | — | | | (13) | |
| Amounts reclassified to net earnings (losses), net of deferred income taxes | | 69 | | | (39) | | | (2) | | | 28 | |
| | | | | | | | |
Other comprehensive earnings (losses), net of deferred income taxes | | 383 | | | 495 | | (1) | 33 | | | 911 | |
| | | | | | | | |
| Balances, September 30, 2021 | | $ | (2,037) | | | $ | (1,443) | | | $ | 50 | | | $ | (3,430) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2021 |
| (in millions) | | Benefit Plans | | ABI | | Currency
Translation
Adjustments and Other | | Accumulated
Other
Comprehensive
Losses |
Balances, June 30, 2021 | | $ | (2,043) | | | $ | (1,604) | | | $ | 45 | | | $ | (3,602) | |
| | | | | | | | |
Other comprehensive earnings (losses) before reclassifications | | — | | | 215 | | | 6 | | | 221 | |
| Deferred income taxes | | (9) | | | (48) | | | — | | | (57) | |
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes | | (9) | | | 167 | | | 6 | | | 164 | |
| | | | | | | | |
| Amounts reclassified to net earnings (losses) | | 20 | | | (7) | | | (1) | | | 12 | |
| Deferred income taxes | | (5) | | | 1 | | | — | | | (4) | |
| Amounts reclassified to net earnings (losses), net of deferred income taxes | | 15 | | | (6) | | | (1) | | | 8 | |
| | | | | | | | |
Other comprehensive earnings (losses), net of deferred income taxes | | 6 | | | 161 | | (1) | 5 | | | 172 | |
| | | | | | | | |
| Balances, September 30, 2021 | | $ | (2,037) | | | $ | (1,443) | | | $ | 50 | | | $ | (3,430) | |
(1) Primarily reflects our share of ABI’s currency translation adjustments and the impact of our designated net investment hedges related to our equity investment in ABI. For further discussion of designated net investment hedges, see Note 4. Financial Instruments.
(2) Reflects the remeasurement impact of salaried retiree healthcare plan amendments. For further discussion, see Note 5. Benefit Plans.
The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings (losses):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Benefit Plans: (1) | | | | | | | | |
| Net loss | | $ | 94 | | | $ | 124 | | | $ | 33 | | | $ | 39 | |
| Prior service cost/credit | | (29) | | | (32) | | | (9) | | | (19) | |
| | 65 | | | 92 | | | 24 | | | 20 | |
ABI (2) | | (74) | | | (49) | | | (16) | | | (7) | |
Currency Translation Adjustments and Other (2) | | (1) | | | (2) | | | (1) | | | (1) | |
| Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings (losses) | | $ | (10) | | | $ | 41 | | | $ | 7 | | | $ | 12 | |
| | | | | | | | |
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 5. Benefit Plans.
(2) Amounts are included in (income) losses from investments in equity securities. For further information, see Note 3. Investments in Equity Securities.
Note 8. Segment Reporting
Our products include smokeable tobacco products, consisting of combustible cigarettes manufactured and sold by PM USA, and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; and oral tobacco products, consisting of MST and snus products manufactured and sold by USSTC, and oral nicotine pouches manufactured and sold by Helix. These products constitute our reportable segments of smokeable products and oral tobacco products at September 30, 2022. The financial services and the innovative tobacco products businesses, which include the heated tobacco business and Helix ROW, are included in all other.
Prior to the sale of our wine business on October 1, 2021, wine produced and/or sold by Ste. Michelle was a reportable segment.
Our chief operating decision maker (“CODM”) reviews operating companies income (loss) (“OCI”) to evaluate the performance of, and allocate resources to, our segments. OCI for our segments is defined as operating income before general corporate expenses and amortization of intangibles. Interest and other debt expense, net, along with net periodic benefit
income/cost, excluding service cost, and provision (benefit) for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by our CODM.
Segment data were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net Revenues: | | | | | | | | |
| Smokeable products | | $ | 17,020 | | | $ | 17,275 | | | $ | 5,882 | | | $ | 5,975 | |
| Oral tobacco products | | 1,948 | | | 1,945 | | | 670 | | | 626 | |
| Wine | | — | | | 494 | | | — | | | 177 | |
| All other | | 17 | | | 44 | | | (2) | | | 8 | |
| Net revenues | | $ | 18,985 | | | $ | 19,758 | | | $ | 6,550 | | | $ | 6,786 | |
| Earnings (losses) before Income Taxes: | | | | | | | | |
| OCI: | | | | | | | | |
| Smokeable products | | $ | 8,112 | | | $ | 7,901 | | | $ | 2,791 | | | $ | 2,753 | |
| Oral tobacco products | | 1,262 | | | 1,269 | | | 425 | | | 405 | |
| Wine | | — | | | 21 | | | — | | | (24) | |
| All other | | (27) | | | (56) | | | (7) | | | (30) | |
| Amortization of intangibles | | (54) | | | (53) | | | (19) | | | (18) | |
| General corporate expenses | | (192) | | | (255) | | | (78) | | | (135) | |
| | | | | | | | |
| Operating income | | 9,101 | | | 8,827 | | | 3,112 | | | 2,951 | |
| Interest and other debt expense, net | | 832 | | | 869 | | | 271 | | | 266 | |
| Loss on early extinguishment of debt | | — | | | 649 | | | — | | | — | |
| Net periodic benefit income, excluding service cost | | (137) | | | (152) | | | (44) | | | (63) | |
| (Income) losses from investments in equity securities | | 3,707 | | | 5,789 | | | 2,478 | | | 5,915 | |
| | | | | | | | |
| (Gain) loss on Cronos-related financial instruments | | 14 | | | 128 | | | — | | | 135 | |
| Earnings (losses) before income taxes | | $ | 4,685 | | | $ | 1,544 | | | $ | 407 | | | $ | (3,302) | |
The comparability of OCI for our reportable segments was affected by the following:
▪Non-Participating Manufacturer (“NPM”) Adjustment Items: We recorded pre-tax (income) for NPM adjustment items as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Smokeable products segment | | $ | (60) | | | $ | (53) | | | $ | — | | | $ | (21) | |
| Interest and other debt expense, net | | — | | | (23) | | | — | | | (23) | |
| Total | | $ | (60) | | | $ | (76) | | | $ | — | | | $ | (44) | |
| | | | | | | | |
| | | | | | | | |
We recorded the amounts in the table shown above for the smokeable products segment as reductions in cost of sales in our condensed consolidated statements of earnings (losses), which increased OCI in our smokeable products segment. NPM adjustment items result from the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation in Note 11. Contingencies).
▪Tobacco and Health and Certain Other Litigation Items: We recorded pre-tax charges related to tobacco and health and certain other litigation items as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Smokeable products segment | | $ | 71 | | | $ | 72 | | | $ | 21 | | | $ | 29 | |
| General corporate expenses | | 27 | | | 70 | | | 20 | | | 70 | |
| Interest and other debt expense, net | | 3 | | | 6 | | | 2 | | | 6 | |
| Total | | $ | 101 | | | $ | 148 | | | $ | 43 | | | $ | 105 | |
| | | | | | | | |
| | | | | | | | |
We recorded the amounts shown in the table above for the smokeable products segment and general corporate expenses in marketing, administration and research costs in our condensed consolidated statements of earnings (losses). For further discussion, see Note 11. Contingencies.
▪Acquisition and Disposition-Related Costs:
Disposition-Related Costs: We recorded pre-tax disposition-related costs of $51 million for the nine and three months ended September 30, 2021 in our former wine segment, which consisted of a pre-tax charge of $41 million to record the assets and liabilities associated with UST’s sale of its subsidiary, International Wine & Spirits Ltd. (which included Ste. Michelle), at their fair value less costs to sell and $10 million of other disposition-related costs. We included these costs in marketing, administration and research costs in our consolidated statements of earnings (losses).
Acquisition-Related Costs: We recorded pre-tax acquisition-related costs of $37 million for the nine months ended September 30, 2021 in our oral tobacco products segment primarily for the settlement of an arbitration related to the 2019 on! transaction. We included these costs in marketing, administration and research costs in our condensed consolidated statements of earnings (losses).
Note 9. Debt
Short-term Borrowings and Borrowing Arrangements
At September 30, 2022 and December 31, 2021, we had no short-term borrowings.
In August 2022, we entered into an extension and amendment (the “Extension and Amendment”) to our $3.0 billion senior unsecured 5-year revolving credit agreement (as amended, the “Credit Agreement”). The Extension and Amendment (i) extended the maturity date of the Credit Agreement from August 1, 2024 to August 1, 2025 and (ii) amended the Credit Agreement to update the benchmark interest rate to a rate based on the Term Secured Overnight Financing Rate (“Term SOFR”) and make certain other market updates. All other terms and conditions of the Credit Agreement remain in full force and effect. The Credit Agreement is used for general corporate purposes.
At September 30, 2022, we had availability under the Credit Agreement for borrowings of up to an aggregate principal amount of $3.0 billion.
Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of our long-term senior unsecured debt. We expect interest rates on borrowings under the Credit Agreement to be based on the Term SOFR plus a percentage based on the higher of the ratings of our long-term senior unsecured debt from Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Financial Services LLC (“S&P”). The applicable percentage for borrowings under the Credit Agreement at September 30, 2022 was 1.0% based on our long-term senior unsecured debt ratings on that date. The Credit Agreement does not include any other rating triggers or any provisions that could require the posting of collateral.
The Credit Agreement includes various covenants, one of which requires us to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Consolidated Interest Expense of not less than 4.0 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. At September 30, 2022, the ratio of consolidated EBITDA to Consolidated Interest Expense, calculated in accordance with the Credit Agreement, was 10.9 to 1.0. At September 30, 2022, we were in compliance with our covenants in the Credit Agreement. The terms “Consolidated EBITDA” and “Consolidated Interest Expense,” each as defined in the Credit Agreement, include certain adjustments.
Any commercial paper issued by us and borrowings under the Credit Agreement are guaranteed by PM USA.
Long-term Debt
The aggregate carrying value of our total long-term debt at September 30, 2022 and December 31, 2021 was $26.3 billion and $28.0 billion, respectively.
In August 2022, we repaid in full our 2.85% senior unsecured notes in the aggregate principal amount of $1.1 billion at maturity.
During the first quarter of 2021, we issued long-term senior unsecured notes in the aggregate principal amount of $5.5 billion. We used the net proceeds from these notes (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, we completed debt tender offers to purchase for cash certain of our long-term senior unsecured notes in an aggregate principal amount of $4,042 million and also redeemed all of our outstanding 3.490% notes due 2022 in an aggregate principal amount of $1.0 billion.
As a result of the debt tender offers and redemption, during the first quarter of 2021, we 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 unamortized debt discounts and debt issuance costs of $26 million.
At September 30, 2022 and December 31, 2021, accrued interest on long-term debt of $196 million and $429 million, respectively, was included in other accrued liabilities on our condensed consolidated balance sheets.
For a discussion of the fair value of our long-term debt and the designation of our Euro denominated senior unsecured notes as a net investment hedge of our investment in ABI, see Note 4. Financial Instruments.
Note 10. Income Taxes
In August 2022, the U.S. Government enacted legislation commonly referred to as the Inflation Reduction Act. The main provisions of the Inflation Reduction Act that we anticipate may impact us are: (i) a 15% corporate alternative minimum tax (“Corporate AMT”) and (ii) a 1% excise tax on share repurchases, which we expect to record in equity on our consolidated statements of stockholders’ equity (deficit), in each case, effective for tax years beginning after December 31, 2022.
We will be considered an “applicable corporation” for purposes of the new Corporate AMT. We anticipate our regular federal income tax liability will generally exceed our Corporate AMT liability in future years.
Earnings (losses) before income taxes, provision (benefit) for income taxes and income tax rates consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, |
| (in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Earnings (losses) before income taxes | | $ | 4,685 | | $ | 1,544 | | $ | 407 | | $ | (3,302) |
| Provision (benefit) for income taxes | | 1,611 | | 693 | | 183 | | (582) |
| Income tax rate | | 34.4 | % | | 44.9 | % | | 45.0 | % | | 17.6 | % |
Our income tax rate for the nine and three months ended September 30, 2022 differs from the U.S. federal statutory rate of 21%, due primarily to state tax expense, including the state tax treatment of the impairment charge on our equity investment in ABI, and a valuation allowance recorded against a deferred tax asset related to the decrease in the estimated fair value of our investment in JUUL, partially offset by the release of a valuation allowance related to our Cronos warrant and tax accruals no longer required.
Our income tax rates for the nine and three months ended September 30, 2021 differ from the U.S. federal statutory rate of 21%, due primarily to the state tax treatment of the impairment charge on our equity investment in ABI.
For further information on the changes in the estimated fair value of our investment in JUUL and the impairment of our equity investment in ABI, see Note 3. Investments in Equity Securities.
The following chart provides a reconciliation of the beginning and ending valuation allowances for the period ended September 30, 2022:
| | | | | | | | |
| (in millions) | | |
| Balance at beginning of year | | $ | 3,097 | |
| Additions to valuation allowance charged to income tax expense | | 395 | |
| Releases to valuation allowance credited to income tax benefit | | (65) | |
| Foreign currency translation | | — | |
| Balance at end of period | | $ | 3,427 | |
We determine the realizability of deferred tax assets based on the weight of available evidence, that it is more-likely-than-not that the deferred tax asset will not be realized. In reaching this determination, we consider all available positive and negative evidence, including the character of the loss, carryback and carryforward considerations, future reversals of temporary differences and available tax planning strategies.
The additions in valuation allowances for the nine months ended September 30, 2022 were due primarily to deferred tax assets recorded in connection with decreases in the estimated fair value of our investment in JUUL. The releases in valuation allowances for the nine months ended September 30, 2022 were due to realizability of anticipated capital losses related to our Cronos warrant. The cumulative valuation allowance at September 30, 2022 was primarily attributable to deferred tax assets recorded in connection with our investment in JUUL and our Investment in Cronos.
Note 11. Contingencies
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria and certain of our subsidiaries, including PM USA and USSTC, as well as our indemnitees and investees. Various types of claims may be raised in these proceedings, including product liability, unfair trade practices, antitrust, income tax liability, contraband shipments, patent infringement, employment matters, claims alleging violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), claims for contribution and claims of competitors, shareholders or distributors. Legislative action, such as changes to tort law, also may expand the types of claims and remedies available to plaintiffs.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, we 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, under certain circumstances, we may have to pay more than our proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, we also may be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, also may seek to repeal or alter bond cap statutes through legislation. Although we cannot predict the outcome of such challenges, it is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
We record provisions in our condensed consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 11. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending cases; and (iii) accordingly, management has not provided any amounts in our condensed consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.
We have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. We believe, and have been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts. We have defended, and will continue to defend, vigorously against litigation challenges. However, we may enter into settlement discussions in particular cases if we believe it is in our best interests to do so.
Judgments Paid and Provisions for Tobacco and Health (Including Engle Progeny Litigation) and Certain Other Litigation Items: The changes in our accrued liability for tobacco and health and certain other litigation items, including related interest costs, for the periods specified below are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | |
| (in millions) | 2022 | | 2021 | | 2022 | | 2021 | | |
| Accrued liability for tobacco and health and certain other litigation items at beginning of period | $ | 91 | | | $ | 9 | | | $ | 25 | | | $ | — | | | |
| Pre-tax charges for: | | | | | | | | | |
Tobacco and health and certain other litigation (1) | 98 | |
| 142 | | | 41 | | | 99 | | | |
| Related interest costs | 3 | | | 6 | | | 2 | | | 6 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Payments | (137) | |
| (60) | | | (13) | | | (8) | | | |
| Accrued liability for tobacco and health and certain other litigation items at end of period | $ | 55 | | | $ | 97 | | | $ | 55 | | | $ | 97 | | | |
| | | | | | | | | |
(1) Includes judgments, settlements and fee disputes associated with tobacco and health and certain other litigation. See Shareholder Class Action and Shareholder Derivative Lawsuits below for discussions of the shareholder class action case and related settlement and the proposed settlement of the federal and state shareholder derivative lawsuits.
The accrued liability for tobacco and health and certain other litigation items, including related interest costs, was included in accrued liabilities on our condensed consolidated balance sheets. Pre-tax charges for tobacco and health and certain other litigation were included in marketing, administration and research costs on our condensed consolidated statements of earnings (losses). Pre-tax charges for related interest costs were included in interest and other debt expense, net on our condensed consolidated statements of earnings (losses).
After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid judgments and settlements (including related costs and fees) totaling approximately $941 million and interest totaling approximately $230 million as of September 30, 2022. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $432 million and related interest totaling approximately $59 million.
Security for Judgments: To obtain stays of judgments pending appeal, PM USA has posted various forms of security. As of October 24, 2022, PM USA has posted appeal bonds totaling approximately $42 million, which have been collateralized with restricted cash that are included in assets on our condensed consolidated balance sheets.
Overview of Tobacco-Related Litigation
Types and Number of U.S. Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iii) e-vapor cases alleging violation of RICO, fraud, failure to warn, design defect, negligence, antitrust and unfair trade practices; and (iv) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in tobacco-related litigation are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United States against us as of:
| | | | | | | | | | | | | |
| October 24, 2022 | | October 25, 2021 | | |
Individual Smoking and Health Cases (1) | 161 | | 179 | | |
Health Care Cost Recovery Actions (2) | 1 | | 1 | | |
E-vapor Cases (3) | 4,351 | | 2,951 | | |
Other Tobacco-Related Cases (4) | 3 | | 3 | | |
(1) Includes as of October 24, 2022, 18 cases filed in Illinois, 18 cases filed in New Mexico, 35 cases filed in Massachusetts and 54 non-Engle cases filed in Florida. Does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (these Engle progeny cases are discussed below in Smoking and Health Litigation - Engle Class Action). Also does not include 1,395 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. Class members were prohibited from filing individual lawsuits after 2000 under the court-approved settlement.
(2) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.
(3) Includes as of October 24, 2022, 58 class action lawsuits, 3,119 individual lawsuits and 1,174 “third party” lawsuits relating to JUUL e-vapor products, which include school districts, state and local government, tribal and healthcare organization lawsuits. JUUL is an additional named defendant in each of these lawsuits. The 58 class action lawsuits include 32 cases in the Northern District of California (“Multidistrict Litigation” or “MDL”) involving plaintiffs whose claims were previously included in other class action complaints but were refiled as separate stand-alone class actions for procedural and other reasons.
(4) Includes as of October 24, 2022, one inactive smoking and health case alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs and two inactive class action lawsuits alleging that use of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of RICO.
International Tobacco-Related Cases: As of October 24, 2022, (i) Altria is named as a defendant in two e-vapor class action lawsuits in Canada; (ii) PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight of which also name Altria as a defendant; and (iii) PM USA and Altria are named as defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement (defined below) between Altria and Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.
Tobacco-Related Cases Set for Trial: As of October 24, 2022, two Engle progeny cases, one individual smoking and health case and one e-vapor case are set for trial through December 31, 2022. Trial dates are subject to change.
Trial Results: Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 72 tobacco-related cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 45 of the 72 cases. These 45 cases were tried in Alaska (1), California (7), Connecticut (1), Florida (10), Louisiana (1), Massachusetts (5), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2). One case in Massachusetts, Main, where the verdict was initially returned in favor of PM USA, was reversed on appeal and remanded for a new trial.
Of the 27 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 23 have reached final resolution.
See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of verdicts in state and federal Engle progeny cases involving PM USA as of October 24, 2022.
Smoking and Health Litigation
Overview: Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of unfair trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
Non-Engle Progeny Litigation: Summarized below are the non-Engle progeny smoking and health cases pending during 2022 (or recently concluded) in which a verdict was returned in favor of plaintiff and against PM USA. Charts listing certain verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.
Mendez: In September 2022, a jury in a Florida state court returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds Tobacco Company awarding approximately $4.5 million in compensatory damages and allocating 13% of the fault to PM USA. After applying comparative fault, PM USA’s portion of the compensatory damages is less than $1 million. There was no claim for punitive damages. PM USA’s post-trial motions are pending.
Fontaine: In September 2022, a jury in a Massachusetts state court returned a verdict in favor of plaintiff and against PM USA, awarding approximately $8 million in compensatory damages and $1 billion in punitive damages. We intend to file post-trial motions challenging the award and, if necessary, an appeal.
Principe: In February 2020, a jury in a Florida state court returned a verdict in favor of plaintiff and against PM USA, awarding approximately $11 million in compensatory damages. There was no claim for punitive damages. PM USA appealed the trial court verdict to the Third District Court of Appeal and, in September 2021, the appellate court reversed the trial court’s decision and found in favor of PM USA. Plaintiff moved for a rehearing before the Third District Court of Appeal, which the court denied in March 2022. In April 2022, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In July 2022, the Florida Supreme Court denied plaintiff’s motion for discretionary review.
Greene: In September 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiffs and against PM USA, awarding approximately $10 million in compensatory damages. In May 2020, the court ruled on plaintiffs’ remaining claim and trebled the compensatory damages award to approximately $30 million. In February 2021, the trial court awarded plaintiffs attorneys’ fees and costs in the amount of approximately $2.3 million. In July 2021, following denial of PM USA’s post-trial motions, PM USA appealed the judgment to the Appeals Court of Massachusetts. In September 2022, the Massachusetts Supreme Judicial Court issued an order taking jurisdiction over the appeal, which remains pending.
Laramie: In August 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiff and against PM USA, awarding $11 million in compensatory damages and $10 million in punitive damages. PM USA appealed and, in February 2021, the Massachusetts Supreme Judicial Court asserted jurisdiction over the appeal. In September 2021, the Massachusetts Supreme Judicial Court affirmed the trial court award of $21 million in compensatory and punitive damages. PM USA recorded a pre-tax provision of approximately $27.1 million in the third quarter of 2021 and paid $30.3 million (including the judgment and interest) in December 2021.
Federal Government’s Lawsuit: See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America health care cost recovery case.
Engle Class Action: In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent.
In August 2006, PM USA and plaintiffs sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In February 2008, the trial court decertified the class.
Pending Engle Progeny Cases: The deadline for filing Engle progeny cases expired in January 2008, at which point a total of approximately 9,300 federal and state claims were pending. As of October 24, 2022, approximately 691 state court cases were pending against PM USA or Altria asserting individual claims by or on behalf of approximately 869 state court plaintiffs. Because of a number of factors, including docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. The 2015 federal Engle agreement resolved nearly all Engle progeny cases pending in federal court as of the date of the agreement, and each case excluded from that agreement subsequently has been resolved.
Engle Progeny Trial Results: As of October 24, 2022, 142 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Seventy-eight verdicts were returned in favor of plaintiffs, and seven verdicts (Skolnick, Calloway, Oshinsky-Blacker, McCoy, Mahfuz, Neff and Gloger) that were initially returned in favor of plaintiffs were reversed post-trial or on appeal and remain pending. In two cases, Kaplan (McLaughlin) and Sommers, the punitive damages awards were vacated on appeal and remanded for new trials. In Sommers, the trial court granted PM USA’s motion for summary judgment, and plaintiff has appealed.
Fifty-six verdicts were returned in favor of PM USA, of which 46 were state cases. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of October 24, 2022. The jury in one case, Garcia, awarded plaintiff compensatory damages and found plaintiff was entitled to punitive damages; however, the court declared a mistrial in the second phase of the trial regarding punitive damages because the jury was unable to determine the amount of the punitive damages. Four verdicts (Pearson, D. Cohen, Collar and Chacon) that were returned in favor of PM USA were subsequently reversed for new trials. Juries in two cases (Reider and Banks) returned zero damages verdicts in favor of PM USA. Juries in two other cases (Weingart and Hancock) returned verdicts against PM USA awarding no damages, but the trial court in each case decided to award plaintiffs damages. One case, Pollari, resulted in a verdict in favor of PM USA following a retrial of an initial verdict returned in favor of plaintiff. Plaintiff and defendants appealed the verdict and the appellate court affirmed the judgment in favor of the defendants. Three cases, Gloger, Rintoul (Caprio) and Duignan, resulted in verdicts in favor of plaintiffs following retrial of initial verdicts returned in favor of plaintiffs. A post-trial appeal is pending in Duignan. The verdicts in the retrials in Gloger and Rintoul (Caprio) were reversed upon appeal and remanded for new trials. Two cases, Freeman and Harris, resulted in an appellate reversal of a jury verdict in favor of plaintiff, and a judgment in favor of PM USA. One case, R. Douglas, was dismissed with prejudice following a verdict in favor of plaintiff.
The charts below list the verdicts and post-trial developments in certain Engle progeny cases in which verdicts were returned in favor of plaintiffs. The first chart lists cases that are pending as of October 24, 2022 where PM USA has recorded a provision in its condensed consolidated financial statements because we have determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated; the second chart lists cases that are pending as of October 24, 2022 but where PM USA has determined an unfavorable outcome is not probable and the amount of loss cannot be reasonably estimated; and the third chart lists cases that have concluded in the past 12 months. Unless otherwise noted for a particular case, the jury’s award for compensatory damages will not be reduced by any finding of plaintiff’s comparative fault. Further, the damages noted reflect adjustments based on post-trial or appellate rulings.
References below to “R.J. Reynolds,” “Lorillard” and “Liggett Group” are to R.J. Reynolds Tobacco Company, Lorillard Tobacco Company and Liggett Group, LLC, respectively.
Currently Pending Engle Cases with Accrued Liabilities
(rounded to nearest $ million)
| | | | | | | | | | | | | | | | | | | | | | | |
| Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages
(PM USA) | Post-Trial Status | Accrual (1) |
| Miller | September 2022 | PM USA and R.J. Reynolds | Miami-Dade | $2 million (<$1 million PM USA) | $0 | Defendants’ post-trial motions pending. | <$1 million in the third quarter of 2022 |
(1) Accrual amounts include interest and associated costs, if applicable. For any case with multiple defendants, if any, accrual amounts reflect the portion of compensatory damages PM USA believes it will have to pay if the case is ultimately decided in plaintiff’s favor after taking into account any portion potentially payable by the other defendant.
Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)
| | | | | | | | | | | | | | | | | | | | |
| Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages
(PM USA) | Post-Trial Status |
| Levine | September 2022 | PM USA and R.J. Reynolds | Miami-Dade | $1 million ($1 million PM USA) | $0 | Defendants’ post-trial motions pending. |
| Schertzer | April 2022 | PM USA and R.J. Reynolds | Miami-Dade | $3 million | $0 | Appeal by defendants to the Third District Court of Appeal pending. |
| Lipp | September 2021 | PM USA | Miami-Dade | $15 million | $28 million | Appeal by defendant to Third District Court of Appeal pending. |
| | | | | | | | | | | | | | | | | | | | |
| Plaintiff | Verdict Date | Defendant(s) | Court | Compensatory Damages (1) | Punitive Damages
(PM USA) | Post-Trial Status |
Garcia | May 2021 | PM USA | Miami-Dade | $6 million | Mistrial | Appeals by plaintiff and defendant to Third District Court of Appeal pending. |
| Duignan | February 2020 (2) | PM USA and R.J. Reynolds | Pinellas | $3 million | $12 million | Appeal by defendants to Third District Court of Appeal pending. |
| McCall | March 2019 | PM USA | Broward | <$1 million (<$1 million PM USA) | $0 | Awaiting new trial date on punitive damages. |
| Holliman | February 2019 | PM USA | Miami-Dade | $3 million | $0 | Appeal by defendant to Third District Court of Appeal pending. |
| Chadwell | September 2018 | PM USA | Miami-Dade | $2 million | $0 | Defendant’s petition for review to the Florida Supreme Court pending. |
Kaplan (McLaughlin) | July 2018 | PM USA and R.J. Reynolds | Broward | $2 million | $0 | Florida Supreme Court vacated the punitive damages award in accordance with the decision in Sheffield (3). The Fourth District Court of Appeals affirmed the compensatory damages award and granted a new trial on punitive damages. |
Cooper (Blackwood) | September 2015 | PM USA and R.J. Reynolds | Broward | $5 million (<$1 million PM USA) | $0 | Fourth District Court of Appeal affirmed the compensatory damages award and granted a new trial on punitive damages. |
| D. Brown | January 2015 | PM USA | Federal Court - Middle District of Florida | $8 million ($5 million PM USA) | $0 | U.S. Court of Appeals for the Eleventh Circuit vacated the punitive damages award and reduced the compensatory damages award based on plaintiff’s comparative fault to $5 million, which was accrued and paid in August 2022. Awaiting new trial date on punitive damages. |
(1) PM USA’s portion of the compensatory damages award is noted parenthetically where the court has ruled that comparative fault applies.
(2) Plaintiff’s verdict following a retrial of an initial verdict in favor of plaintiff.
(3) PM USA is not a defendant in Sheffield, which is discussed below in Engle Progeny Appellate Issues.
Engle Cases Concluded Within Past 12 Months
(rounded to nearest $ million)
| | | | | | | | | | | | | | | | | | | | |
| Plaintiff | Verdict Date | Defendant(s) | Court | Accrual Date | Payment Amount (if any) | Payment Date |
| Tuttle | August 2022 | PM USA | Duval | Third quarter of 2022 | <$1 million | October 2022 |
| Cuddihee | January 2020 | PM USA | Duval | Second quarter of 2022 | $2 million | June 2022 |
Engle Progeny Appellate Issues: Appellate decisions in the following Engle progeny cases may have wide application to other Engle progeny cases:
In Mary Sheffield v. R.J. Reynolds Tobacco Company, an Engle progeny case against R.J. Reynolds only, the Florida Supreme Court resolved a conflict among Florida’s District Courts of Appeal finding that the 1999 amendments to Florida’s punitive damages statute (including its caps and bar on multiple punitive damages awards for the same course of conduct) apply in wrongful death cases where the decedent was injured prior to the October 1, 1999 effective date of the amendments but died from his or her injuries after such effective date.
In Linda Prentice v. R.J. Reynolds Tobacco Company, an Engle progeny case against R.J. Reynolds only, the Florida Supreme Court resolved a conflict among Florida’s District Courts of Appeal finding that in order for an Engle plaintiff to prevail on fraudulent concealment and conspiracy claims, plaintiff must prove that the smoker relied to his or her detriment on a statement that concealed or omitted material information about the health risks or addictiveness of smoking. The Florida Supreme Court declined to revisit its prior decisions giving preclusive effect to the Engle Phase I findings, described above in Engle Class Action.
Florida Bond Statute: In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs have been unsuccessful in various challenges to the bond cap statute in Florida state court.
No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.
From time to time, legislation has been presented to the Florida legislature that would repeal the bond cap statute; however to date, no legislation repealing the statute has passed.
Other Smoking and Health Class Actions: Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases have purported to be brought on behalf of residents of a particular state or states (although a few cases have purported to be nationwide in scope) and have raised addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 61 smoking and health class actions involving PM USA in Arkansas (1), California (1), Delaware (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1). See Certain Other Tobacco-Related Litigation below for a discussion of “Lights” and “Ultra Lights” class action cases and medical monitoring class action cases pending against PM USA.
As of October 24, 2022, PM USA and Altria are named as defendants, along with other cigarette manufacturers, in seven class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (two separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants’ cigarettes. In March 2019, all of these class actions were stayed as a result of three Canadian tobacco manufacturers (none of which is related to us) seeking protection under Canada’s Companies’ Creditors Arrangement Act (which is similar to Chapter 11 bankruptcy in the United States). The companies entered into these proceedings following a Canadian appellate court upholding two smoking and health class action verdicts against those companies totaling approximately CAD $13 billion. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI, which provides for indemnities for certain liabilities concerning tobacco products.
Health Care Cost Recovery Litigation
Overview: In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The U.S. Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five federal circuit courts of appeal.
In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria, in Canada (10 cases), and other entities have stated that they are considering filing such actions.
Since the beginning of 2008, the Canadian Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in the British Columbia and Quebec cases, while both Altria and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia cases. The Nunavut Territory and Northwest Territory have passed legislation permitting similar claims, but lawsuits based on this legislation have not been filed. All of these cases have been stayed pending resolution of proceedings in Canada involving three tobacco manufacturers (none of which are affiliated with us) under the Companies’ Creditors Arrangement Act discussed above. See Smoking and Health Litigation - Other Smoking and Health Class Actions above for a discussion of these proceedings. See Guarantees and Other
Similar Matters below for a discussion of the Distribution Agreement between Altria and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other tobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia and certain United States territories to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers or “OPMs” (now PM USA, R.J. Reynolds and, with respect to certain brands, ITG Brands, LLC (“ITG”)) make annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the OPMs are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million; these quarterly payments are expected to end in 2024. For the three months ended September 30, 2022 and 2021, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $1.1 billion for each period. For the nine months ended September 30, 2022 and 2021, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements was approximately $3.0 billion and $3.2 billion, respectively. These amounts include PM USA’s estimate of amounts related to NPM Adjustments discussed below.
NPM Adjustment Disputes: The “NPM Adjustment” is a reduction in MSA payments made by the OPMs and those manufacturers that are subsequent signatories to the MSA (collectively, the “participating manufacturers” or “PMs”) that applies if the PMs collectively lose at least a specified level of market share to non-participating manufacturers since 1997, subject to certain conditions and defenses.
The independent auditor (“IA”) appointed under the MSA has calculated that PM USA’s share of the maximum potential NPM Adjustments for 2004-2021 is (exclusive of interest or earnings): $388 million for 2004; $181 million for 2005; $154 million for 2006; $185 million for 2007; $250 million for 2008; $211 million for 2009; $218 million for 2010; $166 million for 2011; $214 million for 2012; $224 million for 2013; $258 million for 2014; $313 million for 2015; $292 million for 2016; $285 million for 2017; $318 million for 2018; $415 million for 2019; $573 million for 2020; and $635 million for 2021. These maximum amounts will be substantially reduced to reflect the NPM Adjustment settlements discussed below, and potentially for current and future calculation disputes and other developments. PM USA’s recovery for 2004 is addressed below. In addition, PM USA’s recovery of such reduced amounts for all subsequent years will be dependent upon subsequent determinations regarding state-specific defenses and disputes with other PMs.
Settlements of NPM Adjustment Disputes.
▪Multi-State Settlement. By the end of 2018, PM USA entered into a multi-state settlement of NPM Adjustment disputes with a total of 36 MSA states and territories in which PM USA settled the NPM Adjustment disputes through 2022 with 35 of the 36 states, and through 2024 with one state. In March 2022, Illinois joined the multi-state settlement, settling the NPM Adjustment disputes through 2028 and bringing the total number of settling states and territories to 37. As a result, PM USA will receive approximately $80 million for 2004-2021 ($20 million of which relates to the 2019-2021 “transition years”). In connection with this development for Illinois, PM USA recorded $80 million as a reduction in cost of sales in the first quarter of 2022. Pursuant to the multi-state settlement, PM USA has received $1.15 billion and expects to receive approximately $410 million in credits to offset PM USA’s MSA payments through 2036.
▪New York Settlement. In 2015, PM USA entered into a separate NPM Adjustment settlement with New York in which PM USA settled the NPM Adjustment disputes with New York in perpetuity. PM USA has received $435 million pursuant to the New York settlement and expects to receive annual credits applied against the MSA payments due to New York going forward.
▪Montana Settlement. In 2020, PM USA entered into a separate NPM Adjustment settlement with Montana in which PM USA settled the NPM Adjustment disputes with Montana through 2030. This settlement resulted in a payment by PM USA of $4 million.
Continuing NPM Adjustment Disputes with States That Have Not Settled.
▪2004 NPM Adjustment. The PMs and the nine states that have not settled the NPM Adjustment disputes participated in a multi-state arbitration of NPM Adjustment disputes for 2004. A tenth state, Illinois, also participated in the arbitration, but joined the multi-state settlement after the arbitration panel issued its decisions described below. Hearings for nine of the 10 states concluded by the end of 2020. In September 2021, the arbitration panels issued decisions finding that two states, Missouri and Washington, were not diligent in their enforcement of their escrow statutes in 2004 and, therefore, are subject to the NPM adjustment for 2004. The arbitration panels further found that the remaining seven states were diligent in their enforcement and, therefore, are not subject to the NPM adjustment for 2004. The hearing for the last remaining state, New Mexico, concluded in March 2022; however, a decision has not yet been issued. The two states determined by the
arbitration panel to be non-diligent challenged those determinations in their respective state courts and with the arbitration panels and several issues remain to be resolved by the courts that may affect the final amount of the 2004 NPM adjustment PM USA and other PMs will receive. PM USA recorded $21 million as a reduction in cost of sales in the third quarter of 2021 for its estimate of the minimum amount of the 2004 NPM adjustment it will receive. PM USA estimates it is entitled to interest of approximately $23 million in connection with the 2004 NPM adjustment, which it recorded as interest income in the third quarter of 2021.
▪2005-2007 NPM Adjustments. The PMs and the nine states that have not settled the NPM Adjustment disputes are currently arbitrating NPM Adjustment disputes before a single arbitration panel. The arbitration encompasses three years, 2005-2007, for eight of the nine states, and one year, 2005, for one state. As of October 24, 2022, no decisions have resulted from the arbitration.
▪Subsequent Years. No assurance can be given as to when proceedings for 2008 and subsequent years will be scheduled or the precise form those proceedings will take.
▪In July 2022, the State of Iowa filed a motion in Iowa state court against the PMs, including PM USA, claiming that the PMs wrongfully disputed the applicability of NPM Adjustments to Iowa and that all adjustment amounts to date should have been paid to Iowa rather than deposited into the disputed payments account. PM USA has placed certain disputed NPM Adjustment amounts attributed to Iowa in the disputed payments account established pursuant to the terms of the MSA. Iowa seeks a total of approximately $133 million in disputed payments from all defendants combined, as well as treble and punitive damages, and other relief. The PMs filed a cross motion to compel arbitration, which is scheduled for hearing in December 2022.
Other Disputes Under the State Settlement Agreements: The payment obligations of the tobacco product manufacturers that are parties to the State Settlement Agreements, as well as the allocations of any NPM Adjustments and related settlements, have been and may continue to be affected by R.J. Reynolds’s acquisition of Lorillard in 2015 and its related sale of certain cigarette brands to ITG (the “ITG transferred brands”). PM USA filed motions to enforce the State Settlement Agreements in Florida, Minnesota, Texas and Mississippi in connection with various positions that R.J. Reynolds and ITG took with regard to the ITG transferred brands. After various court decisions in each of those states that were favorable to PM USA, those motions to enforce have now been resolved either through settlement or exhaustion of appeals. In May 2022, PM USA filed a motion to compel arbitration under the MSA regarding certain positions that R.J. Reynolds and ITG took with regard to the ITG transferred brands. In June 2022, the matter was resolved through mutual agreement of the parties. PM USA continues to dispute how the ITG transferred brands are treated in allocating the NPM Adjustments under the MSA and related settlements and may pursue such claims.
In December 2019, the State of Mississippi filed a motion in Mississippi state court seeking to enforce the Mississippi State Settlement Agreement against PM USA, R.J. Reynolds and ITG concerning the tax rates used in the annual calculation of the net operating profit adjustment payments starting in 2018. The Mississippi state court held a hearing in October 2021 and issued a decision in June 2022 granting the State’s motion. Further proceedings remain outstanding, and a final judgment has not yet been issued.
In January 2021, PM USA and other PMs reached an agreement with several MSA states to waive the PMs’ claim under the most favored nation provision of the MSA in connection with a settlement between those MSA states and a non-participating manufacturer, S&M Brands, Inc. (“S&M Brands”), under which the states released certain claims against S&M Brands in exchange for receiving a portion of the funds S&M Brands deposited into escrow accounts in those states pursuant to the states’ escrow statutes. In consideration for waiving its most favored nation claim, PM USA received approximately $32 million from the escrow funds paid to those MSA states under their settlement with S&M Brands. These funds were received in January 2021 and were recorded in our condensed consolidated statement of earnings (losses) for the first quarter of 2021 as a reduction in cost of sales.
Federal Government’s Lawsuit: In 1999, the U.S. government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria, asserting claims under three federal statutes. The case ultimately proceeded only under the civil provisions of RICO. In August 2006, the district court held that certain defendants, including Altria and PM USA, violated RICO and engaged in seven of the eight “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:
▪defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;
▪defendants hid from the public that cigarette smoking and nicotine are addictive;
▪defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;
▪defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;
▪defendants falsely denied that they intentionally marketed to youth;
▪defendants publicly and falsely denied that ETS is hazardous to non-smokers; and
▪defendants suppressed scientific research.
The court did not impose monetary penalties on defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes;” (iv) an injunction against conveying any express or implied health message or health descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to ETS; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until the third quarter of 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the FTC for a period of 10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the government’s costs in bringing the action.
Following several years of appeals relating to the content of the corrective statements remedy described above, in October 2017, the district court approved the parties’ proposed consent order implementing corrective statements in newspapers and on television. The corrective statements began appearing in newspapers and on television in the fourth quarter of 2017. In April 2018, the parties reached agreement on the implementation details of the corrective statements on websites and onserts. The corrective statements began appearing on websites in the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018.
In 2014 and 2019, we recorded provisions totaling approximately $36 million for the estimated costs of implementing the corrective communications remedy.
The requirements related to corrective statements at point-of-sale remain outstanding. In May 2014, the district court ordered further briefing on the issue, which was completed in June 2014. In May 2018, the parties submitted a joint status report and additional briefing on point-of-sale signage to the district court. In May 2019, the district court ordered a hearing on the point-of-sale signage issue. The hearing was subsequently vacated due to the parties reaching an agreement in principle regarding the placement of corrective statements at point-of-sale. A hearing for the district court to consider and approve the settlement and consent decree proposed by the parties occurred in July 2022.
In June 2020, the U.S. government filed a motion with the district court asking for clarification as to whether the court-ordered injunction that applies to cigarettes also applies to HeatSticks, a heated tobacco product used with the IQOS electronic device. In August 2020, we filed an opposition to the government’s motion and, in the alternative, a motion to modify the injunction to make clear it does not apply to HeatSticks. The district court heard arguments on the motions in July 2022 and has not yet issued any decisions. Regardless of the district court’s decisions on the pending motions, the government has indicated it will not oppose a modification to the injunction that permits PM USA to use the Modified Risk Tobacco Product claim authorized by the FDA for HeatSticks.
E-vapor Product Litigation
As of October 24, 2022, we are defendants in 58 class action lawsuits relating to JUUL e-vapor products. JUUL is an additional named defendant in each of these lawsuits. The theories of recovery include violation of RICO, fraud, failure to warn, design defect, negligence and unfair trade practices. Plaintiffs seek various remedies, including compensatory and punitive damages and an injunction prohibiting product sales. The 58 class action lawsuits include 32 cases involving plaintiffs whose claims were previously included in other class action complaints but were refiled as separate stand-alone class actions for procedural and other reasons. Three of the class action lawsuits are pending in Canada.
We also have been named as defendants in other lawsuits involving JUUL e-vapor products, including 3,119 individual lawsuits and 1,174 “third party” lawsuits, which include school districts, state and local governments and tribal and healthcare organization lawsuits. JUUL is an additional named defendant in each of these lawsuits.
In October 2019, the U.S. Judicial Panel on Multidistrict Litigation ordered the coordination or consolidation of the federal individual and class action lawsuits mentioned above in the U.S. District Court for the Northern District of California for pretrial purposes.
We filed motions to dismiss certain claims in the class action and school district cases, including the federal RICO claim. In October 2020, the U.S. District Court for the Northern District of California granted the motion to dismiss the RICO class action claim without prejudice. Although it otherwise denied the motion, the court found that plaintiffs had not sufficiently alleged standing or causation with respect to their claim under California law. The court also granted the motion to dismiss the RICO claim in the cases filed by various school districts, but denied the motion in all other respects. The court gave plaintiffs the opportunity to amend their complaints to attempt to cure the deficiencies the court identified and plaintiffs filed their amended complaints in November 2020. In January 2021, we filed a renewed motion to dismiss the RICO claim, which the court denied in April 2021. In June 2022, the court granted plaintiffs’ motion to certify a California state class based on state law claims against JUUL and a nationwide class based on RICO claims against Altria and other defendants. Altria and the other defendants have filed petitions with the U.S. Court of Appeals for the Ninth Circuit seeking discretionary review of the class certification order, which the court granted in October 2022.
The court has set trial dates for five cases pending in the Multidistrict Litigation. The first trial is currently scheduled for November 2022.
An additional group of cases is pending in California state courts. In January 2020, the Judicial Council of California determined that this group of cases was appropriate for coordination and assigned the group to the Superior Court of California, Los Angeles County, for pretrial purposes.
JUUL also is named in a significant number of additional individual and class action lawsuits to which we are not currently named.
Four of the “third party” lawsuits noted above against us and JUUL were initiated, individually, by the attorneys general of Alaska, Hawaii, Minnesota and New Mexico alleging violations of state consumer protection and other similar laws. We filed motions to dismiss the Alaska, Hawaii and Minnesota lawsuits, and the motions were denied in February 2022, May 2021 and June 2021, respectively. We intend to file a motion to dismiss the New Mexico lawsuit. In the Alaska lawsuit, although the trial court declined to dismiss most of the plaintiff’s claims, the trial court did dismiss plaintiff’s public nuisance claim. The trial courts in the Alaska, Hawaii and Minnesota lawsuits have set the trials for April 2024, February 2024 and March 2023, respectively. As of October 24, 2022, the trial court in New Mexico has not set a trial date. JUUL is also named in other attorneys general lawsuits in which we are not currently named. As of October 24, 2022, JUUL settled four such lawsuits by, in each case, agreeing to a monetary payment (on average approximately $20 million) and to certain restrictions on its sales and marketing activities.
IQOS Litigation
In April 2020, RAI Strategic Holdings, Inc. and R.J. Reynolds Vapor Co., which are affiliates of R.J. Reynolds, filed a lawsuit against Altria, PM USA, ALCS, PMI and its affiliate, Philip Morris Products S.A., in the U.S. District Court for the Eastern District of Virginia asserting claims of patent infringement based on the sale of the IQOS electronic device and HeatSticks in the United States. Plaintiffs seek various remedies, including preliminary and permanent injunctive relief, treble damages and attorneys’ fees. Altria and PMI were previously dismissed from the lawsuit, and plaintiffs’ claims against the other defendants have been stayed.
PM USA, ALCS and Philip Morris Products S.A. filed counterclaims against plaintiffs in the Eastern District of Virginia lawsuit alleging patent infringement by R.J. Reynolds’ e-vapor products. In June 2022, PM USA and ALCS reached an agreement with R.J. Reynolds resulting in dismissal of their counterclaims. In addition, ALCS filed a separate lawsuit against R.J. Reynolds in the U.S. District Court for the Middle District of North Carolina also alleging patent infringement by R.J. Reynolds’ e-vapor products. In September 2022, a jury awarded ALCS $95 million in damages for past infringement, plus supplemental damages and interest. The court will conduct additional proceedings to determine a reasonable royalty for future infringing sales through the expiration of ALCS’s patents in 2035. As this gain has not yet been determined to be realized or realizable in accordance with GAAP, it has not been recognized in our financial statements for the nine months ended September 30, 2022.
Also in April 2020, a related patent infringement action was filed against the same defendants by the same plaintiffs, as well as R.J. Reynolds, with the U.S. International Trade Commission (“ITC”), but the remedies sought included a prohibition on the importation of the IQOS electronic device, HeatSticks and component parts into the United States and on the sale of any such products previously imported into the United States. No damages are recoverable in the proceedings before the ITC. In September 2021, the ITC issued a limited exclusion order barring the importation of the IQOS electronic device, HeatSticks and the infringing components into the United States and a cease and desist order barring domestic sales, marketing and distribution of these imported products. The orders became effective on November 29, 2021. Consequently, PM USA removed the IQOS
electronic device and HeatSticks from the marketplace. In December 2021, defendants appealed the orders to the U.S. Court of Appeals for the Federal Circuit and, in January 2022, the court denied defendants’ motion to stay the orders pending the conclusion of the appeal.
An additional unrelated patent infringement case regarding the IQOS electronic device was filed in November 2020 in the U.S. District Court for the Northern District of Georgia against PM USA and Philip Morris Products S.A. seeking damages and equitable relief. In February 2021, defendants filed a motion to dismiss the lawsuit, which the court granted in July 2021. In December 2021, the U.S. District Court denied plaintiff’s motion to amend the complaint and plaintiff appealed this ruling to the U.S. Court of Appeals for the Federal Circuit, which appeal remains pending.
Antitrust Litigation
In April 2020, the FTC issued an administrative complaint against Altria and JUUL alleging that our 35% investment in JUUL and the associated agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act of 1890 (“Sherman Act”) and Section 5 of the Federal Trade Commission Act of 1914, and substantially lessened competition in violation of Section 7 of the Clayton Antitrust Act (“Clayton Act”). If the FTC’s challenge is successful, the FTC may order a broad range of remedies, including divestiture of our minority investment in JUUL, rescission of the transaction and all associated agreements, a requirement of FTC approval of future agreements related to the development, manufacture, distribution or sale of e-vapor products and prohibition against any officer or director of either Altria or JUUL serving on the other party’s board of directors or attending meetings of the other party’s board of directors and notice to the FTC in advance of certain corporate actions, including acquisitions, mergers or certain corporate restructurings. In February 2022, the administrative law judge dismissed the FTC’s complaint and, also in February 2022, FTC complaint counsel appealed the administrative law judge’s decision to the FTC. Oral argument with respect to the appeal occurred in September 2022. Altria can appeal any adverse ruling the FTC issues following its review to any U.S. Court of Appeals.
Also as of October 24, 2022, 17 putative class action lawsuits have been filed against Altria and JUUL in the U.S. District Court for the Northern District of California. The lawsuits initially named, in addition to the two companies, certain senior executives and certain members of the board of directors of both companies as defendants; however, those individuals currently or formerly affiliated with Altria were later dismissed. In November 2020 these lawsuits were consolidated into three complaints (one on behalf of direct purchasers, one on behalf of indirect purchasers and one on behalf of indirect resellers). The consolidated lawsuits, as amended, cite the FTC administrative complaint and allege that Altria and JUUL violated Sections 1, 2 and/or 3 of the Sherman Act and Section 7 of the Clayton Act and various state antitrust, consumer protection and unjust enrichment laws by restraining trade and/or substantially lessening competition in the U.S. closed-system electronic cigarette market. Plaintiffs seek various remedies, including treble damages, attorneys’ fees, a declaration that the agreements between Altria and JUUL are invalid, divestiture of our minority investment in JUUL and rescission of the transaction. We filed a motion to dismiss these lawsuits in January 2021. In August 2021, the U.S. District Court for the Northern District of California denied our motion to dismiss except with respect to plaintiffs’ claims for injunctive and equitable relief. However, plaintiffs were granted the opportunity to replead such claims by the trial court, which plaintiffs did in September 2021. In January 2022, the trial court ordered that the direct-purchaser plaintiffs’ claims against JUUL be sent to arbitration pursuant to an arbitration provision in JUUL’s online purchase agreement. The court granted plaintiffs’ leave to replead the complaint with new direct-purchaser plaintiffs, which plaintiffs did in February 2022, substituting in four new plaintiffs. In August 2022, the court stayed all of the cases pending any appeal from the FTC’s lawsuit against Altria and JUUL.
In November 2020, we exercised our rights to convert our non-voting JUUL shares to voting shares. In September, 2022, we exercised our option to be released from our JUUL non-competition obligations, resulting in (i) the permanent termination of our non-competition obligations to JUUL, (ii) the loss of our JUUL board designation rights (other than the right to appoint one independent director so long as our ownership continues to be at least 10%), our preemptive rights, our consent rights and certain other rights with respect to our investment in JUUL and (iii) the conversion of our JUUL shares to single vote common stock, significantly reducing our voting power. We do not currently intend to exercise our remaining governance rights or to vote our JUUL shares other than as a passive investor.
Shareholder Class Action and Shareholder Derivative Lawsuits
Shareholder Class Action: In October and December 2019, two purported Altria shareholders filed putative class action lawsuits against Altria, Howard A. Willard III, our former Chairman and Chief Executive Officer, and William F. Gifford, Jr., our former Vice Chairman and Chief Financial Officer and current Chief Executive Officer, in the U.S. District Court for the Eastern District of New York. In December 2019, the court consolidated the two lawsuits into a single proceeding. The consolidated lawsuit was subsequently transferred to the U.S. District Court for the Eastern District of Virginia. The lawsuit asserts claims under Sections 10(b) and 20(a) and under Rule 10b-5 of the Exchange Act. In April 2020, JUUL, its founders and some of its current and former executives were added to the lawsuit. The claims allege false and misleading statements and omissions relating to our investment in JUUL. Plaintiffs seek various remedies, including damages and attorneys’ fees. In July 2020, the defendants filed motions to dismiss plaintiffs’ claims, which the district court denied in March 2021. In the fourth
quarter of 2021, plaintiffs and defendants agreed upon a class action settlement under which, among other things, (i) all claims asserted against Altria and the other named defendants are resolved without any liability or wrongdoing attributed to them personally or to Altria and (ii) Altria will pay the class an aggregate amount of $90 million, which amount includes attorneys’ fees. The class is defined to include persons and entities who purchased or otherwise acquired shares of Altria between October 25, 2018 through April 2, 2020, subject to certain exclusions. The trial court preliminarily approved the settlement in December 2021 and granted final approval in March 2022. We recorded pre-tax provisions totaling $90 million in 2021 and, in January 2022, paid $90 million to plaintiffs’ escrow account.
Federal and State Shareholder Derivative Lawsuits: In August 2020, two purported Altria shareholders filed separate derivative lawsuits in the U.S. District Court for the Northern District of California on behalf of themselves and Altria, against Mr. Willard, Mr. Gifford, JUUL and certain of our executives and officers. These derivative lawsuits relate to our investment in JUUL, and assert claims of breach of fiduciary duty by the Altria defendants and aiding and abetting in that alleged breach of fiduciary duty by the remaining defendants. In March 2021, the U.S. District Court for the Northern District of California granted defendants’ motion to transfer both lawsuits to the U.S. District Court for the Eastern District of Virginia. Three additional federal derivative lawsuits were filed in October 2020, January 2021 and March 2021, respectively, in the U.S. District Court for the Eastern District of Virginia against Mr. Willard, Mr. Gifford, Mr. Crosthwaite, certain members of our Board of Directors, JUUL, its founders and some of its current and former executives. These suits assert various claims, including breach of fiduciary duty, unjust enrichment, waste of corporate assets and violations of certain federal securities laws. The remedies sought in these lawsuits include damages, disgorgement of profits, reformation of our corporate governance and internal procedures, and attorneys’ fees. In April 2021, the court consolidated the five cases pending in the Eastern District of Virginia into a single case.
Six derivative lawsuits have been filed in Virginia state courts against Mr. Willard, Mr. Gifford, Mr. Crosthwaite (our former Chief Growth Officer and JUUL’s current Chief Executive Officer), certain members of our Board of Directors, JUUL, its founders and some of its current and former executives. The lawsuits were filed in September 2020, May 2021, June 2021, July 2021, August 2021 and August 2021, respectively. The lawsuits assert various claims, including breach of fiduciary duty, and seek remedies similar to those sought by plaintiffs in the cases pending in federal court in the Eastern District of Virginia. In successive orders from July 2021, September 2021 and January 2022, the court consolidated five of these six state derivative cases into a single consolidated case.
Altria and the other parties to the state and federal shareholder derivative lawsuits have reached a settlement that was preliminarily approved by the federal court in the Eastern District of Virginia in October 2022. Under the terms of the proposed settlement, among other things, we agreed to fund underage tobacco prevention and cessation programs, which may include positive youth development programs, led by independent third-party organizations. The court has scheduled a hearing regarding final approval of the settlement for January 2023. We recorded pre-tax provisions totaling $27 million for attorneys fees and costs associated with the implementation and monitoring of our funding commitment.
Certain Other Tobacco-Related Litigation
“Lights/Ultra Lights” Cases and Other Smoking and Health Class Actions: Plaintiffs have sought certification of their cases as class actions, alleging among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and have sought injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria or our other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. Twenty-one state courts in 23 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA. As of October 24, 2022, two “Lights/Ultra Lights” class actions are pending in U.S. state courts. Neither case is active.
As of October 24, 2022, one smoking and health case alleging personal injury or seeking court-supervised programs or ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, is pending in a U.S. state court. The case is currently inactive.
UST Litigation: UST and/or its tobacco subsidiaries have been named in a number of individual tobacco and health lawsuits over time. Plaintiffs’ allegations of liability in these cases have been based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs have typically sought various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases have included lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. As of October 24, 2022, there is no such case pending against UST and/or its tobacco subsidiaries.
Environmental Regulation
Altria and our former subsidiaries are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Altria and our former subsidiaries are involved in several cost recovery/contribution cases subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. We expect to continue to make capital and other expenditures in connection with environmental laws and regulations.
We provide for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that we may undertake in the future. In the opinion of our management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on our condensed consolidated results of operations, capital expenditures, financial position or cash flows.
Guarantees and Other Similar Matters
In the ordinary course of business, we have agreed to indemnify a limited number of third parties in the event of future litigation. At September 30, 2022, we (i) had $46 million of unused letters of credit obtained in the ordinary course of business and (ii) were contingently liable for guarantees related to our own performance, including $19 million for surety bonds recorded on our condensed consolidated balance sheet. In addition, from time to time, we issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on our liquidity.
Under the terms of a distribution agreement between Altria and PMI (the “Distribution Agreement”), entered into as a result of our 2008 spin-off of our former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. We do not have a related liability recorded on our condensed consolidated balance sheet at September 30, 2022 as the fair value of this indemnification is insignificant. PMI has agreed not to seek indemnification with respect to the IQOS patent litigation discussed above under IQOS Litigation, excluding the patent infringement case filed with the U.S. District Court for the Northern District of Georgia.
PM USA has issued guarantees relating to our obligations under our outstanding debt securities, borrowings under our $3.0 billion Credit Agreement and amounts outstanding under our commercial paper program. For further discussion, see Note 9. Debt.
Note 12. New Accounting Guidance Not Yet Adopted
The following table provides a description of issued accounting guidance applicable to, but not yet adopted by, us:
| | | | | | | | | | | |
| Standards | Description | Effective Date for Public Entity | Effect on Financial Statements |
ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | The guidance updates how an entity recognizes and measures contract assets and contract liabilities acquired in a business combination. Acquirers will now account for related revenue contracts in accordance with Topic 606 as if it had originated the contract. | The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. | We do not expect our adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures. |
ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions | The guidance clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also specify required disclosures for equity securities subject to contractual sale restrictions. | The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. | We do not expect our adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures. |
Note 13. Subsequent Events
Altria and PMI Purchase Agreement
On October 19, 2022 (the “Effective Date”), ALCS and Altria (solely with respect to certain provisions thereunder) entered into an agreement (the “Purchase Agreement”) with Triaga, Inc. (“Triaga”), a subsidiary of PMI, and PMI (solely with respect to certain provisions thereunder), to, among other things, transition and ultimately conclude our relationship with respect to the IQOS Tobacco Heating System® (“IQOS System”) in the U.S. Under the terms of the Purchase Agreement, Triaga paid ALCS $1.0 billion upon entry into the Purchase Agreement and is obligated to make an additional payment of $1.7 billion (plus interest thereon from the Effective Date at a per annum rate equal to 6%) to ALCS by July 15, 2023, for a total cash payment of approximately $2.7 billion (plus interest). For the consideration received, ALCS has agreed to assign to Triaga exclusive U.S. commercialization rights to the IQOS System effective April 30, 2024. PMI will not have access to the Marlboro brand name or other brand assets, as PM USA owns the Marlboro trademark in the U.S.
We expect to record the $2.7 billion pre-tax transaction amount as a deferred gain on our consolidated balance sheet in the fourth quarter of 2022. We expect to recognize this gain in earnings when we relinquish our rights to the IQOS System.
Altria and Japan Tobacco Joint Venture
On October 26, 2022, Altria, through PM USA, entered into a joint venture with JTI (US) Holding, Inc. (“JTIUH”), a subsidiary of Japan Tobacco Inc., for the U.S. marketing and commercialization of heated tobacco stick (“HTS”) products. HTS products are defined in the joint venture agreement as products that include both (i) a tobacco heating device intended to heat the consumable without combusting and (ii) a consumable that meets the definition of a cigarette under the U.S. Federal Cigarette Labeling and Advertising Act. The joint venture is structured to exist in perpetuity and forms the Horizon Innovations LLC (“Horizon”) entity, which is responsible for the U.S. commercialization of current and future HTS products owned by either party. Upon pre-market tobacco application (“PMTA”) authorization, Horizon will become the exclusive entity through which the parties market and commercialize HTS products in the U.S. The parties expect to jointly prepare FDA filings for the latest version of Ploom HTS products. Upon PMTA authorization of Ploom HTS products, JTIUH will supply Ploom heated tobacco stick devices and PM USA will manufacture Marlboro HTS consumables for U.S. commercialization.
PM USA holds a 75% economic interest in Horizon, with JTIUH having a 25% economic interest. The parties plan to collaborate on a global smoke-free partnership. However, if an international heated tobacco joint venture between the parties is not reached over the next five years, PM USA may elect to increase its economic interest in Horizon to 80%. PM USA is responsible for making initial capital contributions to Horizon of up to $150 million, as charges are incurred. Any additional capital contributions made to Horizon after the initial $150 million will be split according to economic ownership. The parties will both maintain independent ownership of their respective intellectual property, including any intellectual property acquired that supports the development of future HTS products. The parties have agreed to commercialization milestones for Horizon, which include distribution requirements and minimum levels of cumulative marketing investment. Distribution requirements include minimum cumulative numbers of stores where devices and consumables are sold, minimum cumulative weighted distribution and minimum cumulative number of new metro areas where at least one direct retail store is established and fully operational.
Horizon is governed by a board of managers. The board is comprised of four individuals designated by PM USA and three individuals designated by JTIUH. Both PM USA and JTIUH are also entitled to designate up to three board observers.
We expect to include the financial results of Horizon as part of our “all other” category in our consolidated financial statements, with the 25% ownership interest held by JTIUH to be reported as a non-controlling interest.