Altria Group 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

OR

For the transition period from to

Commission File Number 1-08940

Altria Group, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (804) 274-2200

Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

At October 21, 2021, there were 1,836,988,822 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.

ALTRIA GROUP, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)

See notes to condensed consolidated financial statements.

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

(in millions of dollars, except share and per share data)

(Unaudited)

________________________________________________

See notes to condensed consolidated financial statements.

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Losses)

(in millions of dollars, except per share data)

(Unaudited)

_____________________________________

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Description of the Company

When used in this Quarterly Report on Form 10-Q (“Form 10-Q”), the terms “Altria,” “we” and “our” refer to Altria Group, Inc. and its subsidiaries, unless the context requires otherwise.

Altria’s Vision by 2030 is to responsibly lead the transition of adult smokers to a smoke-free future (“Vision”). Altria is focused on moving adult smokers away from cigarettes by taking action to transition adult smokers to potentially less harmful choices.

For a description of Altria, see Background in Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Part I, Item 1. Financial Statements of this Form 10-Q (“Item 1”).

For a detailed description of Altria’s reportable segments, see Note 9. Segment Reporting to the condensed consolidated financial statements in Item 1 (“Note 9”).

Executive Summary

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, Altria refers to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted OCI margins; adjusted net earnings attributable to Altria; adjusted diluted earnings per share attributable to Altria; and adjusted effective tax rates. These adjusted financial measures are not required by, or calculated in accordance with, United States generally accepted accounting principles (“GAAP”) and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a

substitute for the related financial information prepared in accordance with GAAP. Except as noted in the 2021 Forecasted Results section below, when Altria provides a non-GAAP measure in this Form 10-Q, it also provides a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure. OCI for the segments is defined as operating income before general corporate expenses and amortization of intangibles. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below.

Ste. Michelle Transaction

On July 8, 2021, UST LLC (“UST”) entered into a share purchase agreement pursuant to which it agreed to sell its subsidiary, International Wine & Spirits Ltd. (“IWS”), which includes Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), to an entity controlled by investment funds managed by Sycamore Partners Management, L.P. in an all-cash transaction with a purchase price of approximately $1.2 billion and the assumption of certain liabilities of IWS and its subsidiaries (the “Ste. Michelle Transaction”). UST completed the sale of IWS on October 1, 2021. For further discussion, see Note 3. Assets Held for Sale to the condensed consolidated financial statements in Item 1 (“Note 3”).

COVID-19 Pandemic

The COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and continues to create economic uncertainty even as COVID-19 vaccines have been and continue to be administered in 2021 and the U.S. and global economies have begun to operate with reduced restrictions on consumer movements and business operations. Although much uncertainty still surrounds the pandemic (including its duration, the impact of COVID-19 variants and ultimate overall impact on U.S and global economies, Altria and its subsidiaries’ operations and those of its investees), Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic (including labor shortages and inflation) and continues to carefully evaluate potential outcomes and work to mitigate risks. Specifically, Altria remains focused on any potential impact to its liquidity, operations, supply and distribution chains and on economic conditions. In terms of Altria’s liquidity, despite some volatility in commercial paper markets in 2020, Altria has not experienced a material adverse impact to its liquidity.

As with so many other companies throughout the U.S. and globally, Altria’s operations have been affected by the COVID-19 pandemic. To date, Altria believes its tobacco businesses have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but continues to monitor these factors. Altria has implemented remote working for many employees and aligned with the social distancing protocols recommended by public health authorities for employees working at Altria facilities. Altria continues to believe that remote working due to the COVID-19 pandemic has had minimal impact on productivity. Also, Altria’s critical information technology systems have remained operational. Although Altria’s tobacco businesses previously suspended operations temporarily at several of their manufacturing facilities in March 2020, the businesses resumed operations at those facilities under enhanced safety protocols in April 2020 and all manufacturing facilities are currently operational under enhanced safety protocols. Altria continues to monitor the risks associated with facility disruptions and workforce availability as a result of uncertainty related to the COVID-19 pandemic.

Altria’s suppliers and those within its distribution chain continue to be subject to potential facility closures, remote working protocols and labor shortages. To date, Altria has not experienced any material disruptions to its supply chains or distribution systems, but is continuing to monitor these factors. Altria continues to monitor the risk that the business of one or more suppliers, distributors or any other entities within its supply and distribution chains may be disrupted.

In September 2021, the President of the United States issued an Executive Order charging the Occupational Safety and Health Administration (“OSHA”) with developing an emergency temporary standard requiring almost all employers mandate certain COVID-19 vaccination and testing requirements in the workplace. This mandate could have an adverse impact on worker availability at Altria’s subsidiaries’ or investees’ manufacturing, salesforce and administrative operations, or in their distribution and supply chains.

Altria believes that the COVID-19 pandemic altered adult tobacco consumer behaviors and purchasing patterns, particularly in the earlier stages of the pandemic. While the number of adult tobacco consumer trips to the store remain below pre-pandemic levels and tobacco expenditures per trip remain elevated, the environment continues to evolve as the effects of government stimulus have lessened and consumer mobility returns to more normal levels. Although Altria’s tobacco businesses have not experienced a material adverse impact to date by the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic (including changes in COVID-19-related restrictions and guidelines) may impact adult tobacco consumers in the future. Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic (including risks associated with the timing and extent of vaccine administration and the impact of COVID-19 variants), and their effect on adult tobacco consumers, including stay-at-home practices and disposable income, which may be further impacted by unemployment rates and inflation. Altria also continues to monitor adult tobacco consumers’ purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of smoke-free products.

Anheuser-Busch InBev SA/NV (“ABI”) continued to be impacted by the COVID-19 pandemic, including the effects of COVID-19 variants, supply-chain constraints across certain markets, transactional foreign exchange and commodity cost headwinds. During the first nine months of 2021, ABI’s share price continued to fluctuate, ultimately resulting in a lower share price at September 30, 2021 compared

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Interest Rate Risk

The fair value of Altria’s long-term debt, all of which is fixed-rate debt, is subject to fluctuations resulting from changes in market interest rates. The following table provides the fair value of Altria’s long-term debt and the change in fair value based on a 1% increase or decrease in market interest rates at September 30, 2021 and December 31, 2020:

Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate, or a fallback benchmark rate determined based on prevailing market convention, plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s and S&P. The applicable percentage based on Altria’s long-term senior unsecured debt ratings at September 30, 2021 borrowings under the Credit Agreement was 1.0%. At September 30, 2021 and December 31, 2020, Altria had no borrowings under the Credit Agreement.

Equity Price Risk

The estimated fair values of the Fixed-price Preemptive Rights and the Cronos warrant are subject to equity price risk. The Fixed-price Preemptive Rights and warrant are recorded at fair value, which is estimated using Black-Scholes option-pricing models. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are subject to fluctuations resulting from changes in the quoted market price of Cronos shares, the underlying equity security.

The following table provides (i) fair values of the Fixed-price Preemptive Rights and Cronos warrants and (ii) the change in fair value based on a 10% increase or decrease in the quoted market price of Cronos shares at September 30, 2021 and December 31, 2020:

Altria carried out an evaluation, with the participation of Altria’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Form 10-Q. Based upon that evaluation, Altria’s Chief Executive Officer and Chief Financial Officer concluded that Altria’s disclosure controls and procedures are effective.

There have been no changes in Altria’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

See Note 12 for a discussion of legal proceedings pending against Altria and its subsidiaries. See also Exhibits 99.1 and 99.2 to this Form 10-Q.

Information regarding Risk Factors appears in Part I, Item 1A. Risk Factors of our 2020 Form 10-K and in Part II, Item 1A. Risk Factors of our Second Quarter 2021 Form 10-Q. Except as set forth below, there have been no material changes to the risk factors previously disclosed in our 2020 Form 10-K and in our Second Quarter 2021 Form 10-Q.

Risks Related to Litigation, Legislative or Regulatory Action

A challenge to our tax positions, an increase in the income tax rate or other changes to federal or state tax laws could adversely affect our earnings or cash flow.

Tax laws and regulations, such as the 2017 Tax Cuts and Jobs Act, are complex and subject to varying interpretations. A successful challenge to one or more of Altria’s tax positions (which could give rise to additional liabilities, including interest and potential penalties), an increase in the corporate income tax rate or other changes to federal or state tax laws, including changes in how foreign investments are taxed, could adversely affect our earnings or cash flow.

Risks Related to Our Investments

Altria recorded an impairment charge of $6.2 billion on its investment in ABI for the nine and three months ended September 30, 2021. If the carrying value of our investment in ABI exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired, which would result in additional impairment losses.

As discussed in Note 4, since October 2019, the carrying value of our investment in ABI has exceeded the fair value of our equity investment in ABI. In preparing our financial statements for the period ended September 30, 2021, we concluded that the decline in fair value of our investment in ABI below its carrying value was other than temporary at September 30, 2021. 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 to income (losses) from equity investments in Altria’s condensed consolidated statements of earnings (losses). This impairment charge reflects the difference between the fair value of our investment in ABI using ABI’s share price at September 30, 2021 and the carrying value of Altria’s equity investment in ABI at September 30, 2021. Additionally, if ABI is unable to successfully execute its business plans and strategies and the fair value of our investment in ABI continues to decrease, it could result in additional impairment losses, which could have a material adverse effect on our consolidated financial position or earnings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In January 2021, the Board of Directors authorized a new $2.0 billion share repurchase program, which it expanded to $3.5 billion in October 2021. Altria expects to complete the expanded program by December 31, 2022. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board.

Altria’s share repurchase activity for each of the three months in the period ended September 30, was as follows:

(1) The total number of shares purchased includes (a) shares purchased under the January 2021 share repurchase program (which totaled 2,088,922 shares in July, 2,373,425 shares in August and 2,205,774 shares in September) and (b) shares withheld by Altria in an amount equal to the statutory withholding taxes for vested stock-based awards previously granted to eligible employees (which totaled 8,073 shares in August and 893 shares in September).

(2) This chart provides information for each of the three months in the period ended September 30. 2021; therefore, it does not reflect the October 2021 expansion of Altria’s share repurchase program discussed above.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALTRIA GROUP, INC.

/s/ SALVATORE MANCUSO

Salvatore Mancuso

Executive Vice President and

Chief Financial Officer

October 28, 2021