filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections in this Quarterly Report on Form 10-Q (“Form 10-Q”), including our condensed consolidated financial statements and related notes contained in Item 1. Financial Statements of this Form 10-Q (“Item 1”). When used in this Form 10-Q, 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.
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section, we refer to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted OCI margins; adjusted net earnings; adjusted diluted earnings per share (“EPS”); and adjusted effective tax rates. We also refer to the ratio of debt-to-Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in our credit agreement, which includes certain adjustments). These 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 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. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below.
Executive Summary
Our Business
We have a leading portfolio of tobacco products for U.S. tobacco consumers age 21+. Our Vision is to responsibly lead the transition of adult smokers to a smoke-free future (“Vision”). We are Moving Beyond Smoking™, leading the way in moving adult smokers away from cigarettes by taking action to transition millions to potentially less harmful choices - believing it is a substantial opportunity for adult tobacco consumers, our businesses and society.
As we execute on our Vision, we established our 2028 Enterprise Goals (“2028 Goals”) to provide our investors with specific metrics to measure our progress. Our 2028 Goals are:
Corporate
**▪**Deliver a mid-single digits adjusted diluted EPS compounded annual growth rate in 2028 from our base in 2022;
**▪**A progressive dividend goal targeting mid-single digits dividend per share growth annually through 2028;
**▪**Target a debt-to-Consolidated EBITDA ratio of approximately 2.0x;
**▪**Maintain our leadership position in the U.S. tobacco space; and
**▪**Maintain a total adjusted OCI margin of at least 60% in each year through 2028 while investing behind innovative smoke-free products.
U.S. Smoke-Free Portfolio
**▪**Grow U.S. smoke-free volumes by at least 35% from our 2022 base of 800 million units by 2028; and
**▪**Approximately double our U.S. smoke-free net revenues to $5 billion by 2028 from our 2022 base, with $2 billion sourced from innovative smoke-free products.
Long-Term Growth
**▪**Compete internationally in the top innovative oral tobacco markets and develop a pathway to participate in heated tobacco and e-vapor markets; and
**▪**Enter non-nicotine categories with broad commercial distribution of at least five products by 2028.
See Operating Results by Business Segment and Liquidity and Capital Resources for additional information on total adjusted OCI margin and debt-to-Consolidated EBITDA, respectively.
Our wholly owned subsidiaries include leading manufacturers of both combustible and smoke-free products. In combustibles, we own Philip Morris USA Inc. (“PM USA”), the most profitable U.S. cigarette manufacturer, and John Middleton Co. (“Middleton”), a leading U.S. cigar manufacturer.
In smoke-free products, we own U.S. Smokeless Tobacco Company LLC (“USSTC”), the leading global moist smokeless tobacco (“MST”) manufacturer, Helix Innovations LLC (“Helix”), a leading manufacturer of oral nicotine pouches, and NJOY, LLC (“NJOY”), an e-vapor manufacturer with a commercialized product portfolio fully covered by marketing granted orders (“MGO”) from the U.S. Food and Drug Administration (“FDA”). Additionally, we have a majority-owned joint venture, Horizon Innovations LLC, for the U.S. marketing and commercialization of heated tobacco stick products. As of this filing, there are no products in the U.S. marketplace from the joint venture.
The brand portfolios of our operating companies include Marlboro, Black & Mild, Copenhagen, Skoal, on! and NJOY. Trademarks related to Altria referenced in this Form 10-Q are the property of Altria or our subsidiaries or are used with permission.
Our investments in equity securities include Anheuser-Busch InBev SA/NV (“ABI”), the world’s largest brewer, and Cronos Group Inc. (“Cronos”), a leading Canadian cannabinoid company. In March 2024, we sold a portion of our ABI shares (“ABI Transaction”). We used the proceeds from the sale to fund accelerated share repurchase (“ASR”) transactions for our common stock. For further information on the ABI Transaction and the ASR transactions, see Note 6. Investments in Equity Securities to our condensed consolidated financial statements in Item 1 (“Note 6”) and Note 1. Background and Basis of Presentation to our condensed consolidated financial statements in Item 1 (“Note 1”), respectively.
Trends and Developments
In this MD&A section, we discuss factors that have impacted our business as of the date of this Form 10-Q. In addition, we are aware of and address certain trends and developments that could, individually or in the aggregate, have a material impact on our business, including the value of our investments in equity securities, in the future. We focus in this Trends and Developments section on the cumulative effects of inflation, geopolitical events, recent regulatory actions, supply chain disruptions and illegal disposable e-vapor products and their effects or potential effects on our business, including impacts on adult tobacco consumers and their purchasing behaviors.
We continue to monitor the evolving macroeconomic landscape. The annual rate of inflation remains above the Federal Reserve’s target of 2%, which is a key benchmark for the Federal Reserve in determining the timing and magnitude of changes to the Federal Funds Rate. We continue to observe discretionary income pressures on adult tobacco consumers as a result of the cumulative effects of inflation and other factors. During the first half of 2024, cigarette retail share for the industry discount segment increased year-over-year. We will continue to monitor the effect of these dynamics on adult tobacco consumer purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of smoke-free products. We expect discretionary income pressures will continue to influence adult tobacco consumers’ purchase behaviors in 2024. Inflation also has a direct and adverse impact on our direct and indirect costs.
Product assortment, regulation and enforcement continue to evolve in the e-vapor category. In June 2024, the FDA issued MGOs to NJOY for four of its menthol e-vapor products. Through the first half of 2024, we estimate the e-vapor category grew by approximately 40%, driven by illicit flavored disposable products, which we believe now represent more than 60% of the e-vapor category as of June 30, 2024. The primary impacts of this trend have been an increase in the rate of cross-category movement among adult cigarette smokers, contributing to higher than expected domestic cigarette industry volume declines as well as declines in pod-based product volume within the e-vapor category. In response to the proliferation of illegal disposable e-vapor products, states and the federal government took various regulatory and enforcement actions in the first half of 2024. Select states have established e-vapor product registries based on pre-market tobacco product application (“PMTA”) submissions or approvals. In June 2024, the federal government created a multi-agency task force in an effort to combat the marketing and sale of illegal e-vapor products in the United States. We have also noted the emergence of products using nicotine analogues designed to imitate the effects of nicotine and evade the FDA regulatory framework for nicotine products. Additionally, we are beginning to see increased illicit activity across multiple tobacco categories, including nicotine pouch products and cigarettes that are available to U.S. consumers.
Tobacco companies are subject to broad and evolving regulatory and legislative frameworks that could have a material impact on our business. For example, the FDA has submitted for final review proposed product standards regarding menthol in
cigarettes and characterizing flavors in cigars, which were indefinitely delayed in April 2024. In addition, the Biden Administration published plans for future potential regulatory actions that include the FDA’s plans to develop a proposed product standard that would establish a maximum nicotine level for cigarettes and certain other combustible tobacco products. In California, where a ban on flavored nicotine products went into effect in late 2022, we continue to observe indications of negative unintended consequences of the ban, such as adult tobacco consumer adoption of unregulated products and the development of illicit markets.
Volatility in domestic and global economies and disruptions in the supply and distribution chains have continued in 2024, although these factors have shown some improvement during the year. This volatility and disruption is the result of several factors, including supply and demand imbalances across many commodity sectors, raw materials availability and geopolitical events. We continue to work to mitigate the potential negative impacts of these macroeconomic and geopolitical dynamics on our businesses through, among other actions, proactive engagement with current and potential suppliers and distributors, the development of alternative sourcing strategies, entry into long-term supply contracts and prudent oversight of our liquidity.
See Operating Results by Business Segment - Business Environment for additional information on the trends and developments discussed above.
ABI’s business is exposed to foreign exchange rate fluctuations, inflation and commodity price movements which may impact financial performance from time to time. We will continue to monitor these conditions and other factors as they could affect our equity earnings, our other comprehensive earnings/losses and the dividends that we receive from ABI, and the fair value of our investment in ABI.
See Note 6 for additional information on our investments in equity securities.
The trends and developments discussed above have not had a material adverse impact on our condensed consolidated financial statements, but we continue to monitor these trends and developments and potential financial impacts. Additionally, we do not believe that these trends and developments have materially impacted our ability to achieve our Vision. As the trends and developments discussed above evolve and new ones emerge, we will continue to evaluate the potential impacts on our business, investments and Vision.
Consolidated Results of Operations for the Six Months Ended June 30, 2024
The changes in net earnings and diluted EPS for the six months ended June 30, 2024, from the six months ended June 30, 2023, were due primarily to the following:
| (in millions, except per share data) | Net Earnings | Diluted EPS | |||||||||
| For the six months ended June 30, 2023 | $ | 3,904 | $ | 2.18 | |||||||
| 2023 Acquisition and disposition-related items | 1 | — | |||||||||
| 2023 Tobacco and health and certain other litigation items | 301 | 0.17 | |||||||||
| 2023 Loss on disposition of JUUL equity securities | 250 | 0.14 | |||||||||
| 2023 ABI-related special items | (22) | (0.01) | |||||||||
| 2023 Cronos-related special items | 30 | 0.02 | |||||||||
| Subtotal 2023 special items | 560 | 0.32 | |||||||||
| 2024 NPM Adjustment Items | 5 | — | |||||||||
| 2024 Acquisition and disposition-related items | 1,882 | 1.09 | |||||||||
| 2024 Asset impairment | (264) | (0.15) | |||||||||
| 2024 Tobacco and health and certain other litigation items | (52) | (0.03) | |||||||||
| 2024 ABI-related special items | 48 | 0.02 | |||||||||
| 2024 Cronos-related special items | (19) | (0.01) | |||||||||
| 2024 Income tax items | 52 | 0.03 | |||||||||
| Subtotal 2024 special items | 1,652 | 0.95 | |||||||||
| Fewer shares outstanding | — | 0.06 | |||||||||
| Change in tax rate | 17 | 0.01 | |||||||||
| Operations | (201) | (0.11) | |||||||||
| For the six months ended June 30, 2024 | $ | 5,932 | $ | 3.41 | |||||||
| 2024 Reported Net Earnings | $ | 5,932 | $ | 3.41 | |||||||
| 2023 Reported Net Earnings | $ | 3,904 | $ | 2.18 | |||||||
| % Change | 51.9 | % | 56.4 | % | |||||||
| 2024 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 4,280 | $ | 2.46 | |||||||
| 2023 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 4,464 | $ | 2.50 | |||||||
| % Change | (4.1) | % | (1.6) | % | |||||||
For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings and adjusted diluted EPS, see the Consolidated Operating Results section below.
**▪**Fewer Shares Outstanding: Fewer shares outstanding were due to shares we repurchased under our share repurchase programs.
**▪**Operations: The decrease of $201 million in operations (which excludes the impact of special items shown in the table above) was due primarily to lower OCI.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.
Consolidated Results of Operations for the three months ended June 30, 2024
The changes in net earnings and diluted EPS for the three months ended June 30, 2024, from the three months ended June 30, 2023, were due primarily to the following:
| (in millions, except per share data) | Net Earnings | Diluted EPS | |||||||||
| For the three months ended June 30, 2023 | $ | 2,117 | $ | 1.19 | |||||||
| 2023 Acquisition and disposition-related items | 13 | — | |||||||||
| 2023 Tobacco and health and certain other litigation items | 217 | 0.12 | |||||||||
| 2023 ABI-related special items | (2) | — | |||||||||
| 2023 Cronos-related special items | 4 | — | |||||||||
| 2023 Income tax items | (3) | — | |||||||||
| Subtotal 2023 special items | 229 | 0.12 | |||||||||
| 2024 Acquisition and disposition-related items | 1,882 | 1.09 | |||||||||
| 2024 Asset impairment | (264) | (0.15) | |||||||||
| 2024 Tobacco and health and certain other litigation items | (33) | (0.02) | |||||||||
| 2024 ABI-related special items | (19) | (0.01) | |||||||||
| 2024 Cronos-related special items | (2) | — | |||||||||
| 2024 Income tax items | (19) | (0.01) | |||||||||
| Subtotal 2024 special items | 1,545 | 0.90 | |||||||||
| Fewer shares outstanding | — | 0.05 | |||||||||
| Change in tax rate | 11 | — | |||||||||
| Operations | (99) | (0.05) | |||||||||
| For the three months ended June 30, 2024 | $ | 3,803 | $ | 2.21 | |||||||
| 2024 Reported Net Earnings | $ | 3,803 | $ | 2.21 | |||||||
| 2023 Reported Net Earnings | $ | 2,117 | $ | 1.19 | |||||||
| % Change | 79.6 | % | 85.7 | % | |||||||
| 2024 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 2,258 | $ | 1.31 | |||||||
| 2023 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 2,346 | $ | 1.31 | |||||||
| % Change | (3.8) | % | — | % | |||||||
For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings and adjusted diluted EPS, see the Consolidated Operating Results section below.
**▪**Fewer Shares Outstanding: Fewer shares outstanding were due to shares we repurchased under our share repurchase programs.
**▪**Operations: The decrease of $99 million in operations (which excludes the impact of special items shown in the table above) was due primarily to lower OCI.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP. However, our management also reviews certain financial results, including OCI, OCI margins, net earnings and diluted EPS, on an adjusted basis, which excludes certain income and expense items that our management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset impairment charges, acquisition, disposition and integration-related items, equity investment-related special items, certain income tax items, charges associated with tobacco and health and certain other litigation items, and resolutions of certain non-participating manufacturer (“NPM”) adjustment disputes under the Master Settlement Agreement (“NPM Adjustment Items”). In addition, our management reviews the ratio of debt-to-Consolidated EBITDA, which we use as a factor to determine our ability to access the capital markets and make investments in pursuit of our Vision. Consolidated EBITDA is calculated in accordance with our Credit Agreement (defined below in Liquidity and Capital Resources) and includes certain adjustments. Our management does not view any of these special items to be part of our underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort
underlying business trends and results. Our management also reviews income tax rates on an adjusted basis, which may exclude certain income tax items from our reported effective tax rate.
Our management believes that the foregoing financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Our management uses these financial measures and regularly provides these to our chief operating decision maker (“CODM”) for planning, forecasting and evaluating business and financial performance, including allocating capital and other resources and evaluating results relative to employee compensation targets. The foregoing financial measures are not required by, or calculated in accordance with GAAP and may not be calculated the same as similarly titled measures used by other companies. The foregoing 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. When we provide a non-GAAP measure in this Form 10-Q, we also provide a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure.
Discussion and Analysis
Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”); there have been no updates to these critical accounting estimates, except as noted below.
Critical Accounting Estimates
Depreciation, Amortization, Impairment Testing and Asset Valuation
We conduct a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require an interim quantitative impairment assessment.
Apart from the factors leading us to perform a quantitative assessment for the Skoal intangible asset as discussed below, there have been no events or changes in circumstances that indicate an interim quantitative impairment assessment was required as of June 30, 2024. We will perform our annual impairment testing during the fourth quarter of 2024.
At December 31, 2023, the estimated fair value of the Skoal trademark exceeded its carrying value of $3.9 billion by approximately 6% ($0.2 billion). Sales volumes of MST products, including Skoal, have continued to be negatively impacted due in part to evolving adult tobacco consumer preferences, which has resulted in consumers increasingly moving across tobacco categories. In connection with the preparation of our financial statements for the period ended June 30, 2024, we evaluated the accelerated growth of innovative tobacco products, including oral nicotine pouches, and the related increase in competitive activity among tobacco categories, which have continued to contribute to reductions in sales volumes for MST products, including Skoal. We concluded that the expected impact from the sales volume declines on the Skoal trademark represented a triggering event, and as a result of this conclusion, we performed an interim impairment assessment. As a result of (i) lower projected revenue and income due to lower volume assumptions, (ii) a decrease in the perpetual growth rate to 0% (1% at October 1, 2023 valuation) and (iii) an increase in the discount rate to 11.5% (11.0% at October 1, 2023 valuation), we determined the estimated fair value of the Skoal trademark was below its carrying value and recorded a non-cash, pre-tax impairment of $354 million for the six and three months ended June 30, 2024 in our condensed consolidated statements of earnings. Our estimate of the fair value and carrying value of the Skoal trademark at June 30, 2024 was $3.6 billion, after recording the impairment.
At June 30, 2024, we used an income approach to estimate the fair value of the Skoal trademark. In performing the discounted cash flow analysis, we made various judgments, estimates and assumptions, the most significant of which were volume, revenue, income, operating margins, perpetual growth rate and discount rate.
We believe if there is further acceleration in the decline in sales volume for Skoal that results in material revenue declines, there may be a material adverse effect on the significant assumptions used in performing our valuation. For example, a hypothetical 1% increase to the discount rate or a 1% decrease in the perpetual growth rate used in our quantitative assessment as of June 30, 2024, would have resulted in an additional pre-tax impairment to the Skoal trademark of approximately $300 million and $120 million, respectively, in the second quarter of 2024.
While our management believes that the estimated fair value of the Skoal trademark at June 30, 2024 is reasonable, if Skoal’s actual revenue and income or long-term outlook are significantly different from forecasted performance used to estimate the fair value or if the discount rate used to estimate the fair value increases, we could have an additional non-cash impairment, which could be material, to the Skoal trademark in future periods.
For further discussion of goodwill and other intangible assets, see Note 5. Goodwill and Other Intangible Assets, net to our condensed consolidated financial statements in Item 1 (“Note 5”).
Consolidated Operating Results
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net Revenues: | |||||||||||||||||||||||
| Smokeable products | $ | 10,401 | $ | 10,910 | $ | 5,495 | $ | 5,820 | |||||||||||||||
| Oral tobacco products | 1,362 | 1,308 | 711 | 680 | |||||||||||||||||||
| All other | 22 | 9 | 3 | 8 | |||||||||||||||||||
| Net revenues | $ | 11,785 | $ | 12,227 | $ | 6,209 | $ | 6,508 | |||||||||||||||
| Excise Taxes on Products: | |||||||||||||||||||||||
| Smokeable products | $ | 1,742 | $ | 1,969 | $ | 908 | $ | 1,041 | |||||||||||||||
| Oral tobacco products | 49 | 57 | 24 | 29 | |||||||||||||||||||
| Excise taxes on products | $ | 1,791 | $ | 2,026 | $ | 932 | $ | 1,070 | |||||||||||||||
| Operating Income: | |||||||||||||||||||||||
| OCI: | |||||||||||||||||||||||
| Smokeable products | $ | 5,246 | $ | 5,349 | $ | 2,807 | $ | 2,846 | |||||||||||||||
| Oral tobacco products | 532 | 859 | 97 | 443 | |||||||||||||||||||
| All other | (172) | (13) | (111) | (4) | |||||||||||||||||||
| Amortization of intangibles | (64) | (45) | (37) | (27) | |||||||||||||||||||
| General corporate expenses | (335) | (488) | (223) | (353) | |||||||||||||||||||
| Operating income | $ | 5,207 | $ | 5,662 | $ | 2,533 | $ | 2,905 |
As discussed further in Note 11. Segment Reporting to our condensed consolidated financial statements in Item 1 (“Note 11”), our CODM reviews OCI, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate the performance of, and allocate resources to, our segments. Our management believes it is appropriate to disclose this measure to help investors analyze our business performance and trends.
The following table provides a reconciliation of adjusted net earnings and adjusted diluted EPS for the six months ended June 30:
| (in millions of dollars, except per share data) | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Diluted EPS | ||||||||||||||||
| 2024 Reported | $ | 7,855 | $ | 1,923 | $ | 5,932 | $ | 3.41 | ||||||||||||
| NPM Adjustment Items | (6) | (1) | (5) | — | ||||||||||||||||
| Acquisition and disposition-related items | (2,557) | (675) | (1,882) | (1.09) | ||||||||||||||||
| Asset impairment | 354 | 90 | 264 | 0.15 | ||||||||||||||||
| Tobacco and health and certain other litigation items | 68 | 16 | 52 | 0.03 | ||||||||||||||||
| ABI-related special items | (62) | (14) | (48) | (0.02) | ||||||||||||||||
| Cronos-related special items | 20 | 1 | 19 | 0.01 | ||||||||||||||||
| Income tax items | — | 52 | (52) | (0.03) | ||||||||||||||||
| 2024 Adjusted for Special Items | $ | 5,672 | $ | 1,392 | $ | 4,280 | $ | 2.46 | ||||||||||||
| 2023 Reported | $ | 5,285 | $ | 1,381 | $ | 3,904 | $ | 2.18 | ||||||||||||
| Acquisition and disposition-related items | 1 | — | 1 | — | ||||||||||||||||
| Tobacco and health and certain other litigation items | 401 | 100 | 301 | 0.17 | ||||||||||||||||
| Loss on disposition of JUUL equity securities | 250 | — | 250 | 0.14 | ||||||||||||||||
| ABI-related special items | (28) | (6) | (22) | (0.01) | ||||||||||||||||
| Cronos-related special items | 30 | — | 30 | 0.02 | ||||||||||||||||
| 2023 Adjusted for Special Items | $ | 5,939 | $ | 1,475 | $ | 4,464 | $ | 2.50 |
The following table provides a reconciliation of adjusted net earnings and adjusted diluted EPS for the three months ended June 30:
| (in millions of dollars, except per share data) | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Diluted EPS | ||||||||||||||||
| 2024 Reported | $ | 5,116 | $ | 1,313 | $ | 3,803 | $ | 2.21 | ||||||||||||
| Acquisition and disposition-related items | (2,557) | (675) | (1,882) | (1.09) | ||||||||||||||||
| Asset impairment | 354 | 90 | 264 | 0.15 | ||||||||||||||||
| Tobacco and health and certain other litigation items | 44 | 11 | 33 | 0.02 | ||||||||||||||||
| ABI-related special items | 24 | 5 | 19 | 0.01 | ||||||||||||||||
| Cronos-related special items | 3 | 1 | 2 | — | ||||||||||||||||
| Income tax items | — | (19) | 19 | 0.01 | ||||||||||||||||
| 2024 Adjusted for Special Items | $ | 2,984 | $ | 726 | $ | 2,258 | $ | 1.31 | ||||||||||||
| 2023 Reported | $ | 2,806 | $ | 689 | $ | 2,117 | $ | 1.19 | ||||||||||||
| Acquisition and disposition-related items | 18 | 5 | 13 | — | ||||||||||||||||
| Tobacco and health and certain other litigation items | 290 | 73 | 217 | 0.12 | ||||||||||||||||
| ABI-related special items | (3) | (1) | (2) | — | ||||||||||||||||
| Cronos-related special items | 4 | — | 4 | — | ||||||||||||||||
| Income tax items | — | 3 | (3) | — | ||||||||||||||||
| 2023 Adjusted for Special Items | $ | 3,115 | $ | 769 | $ | 2,346 | $ | 1.31 |
The following special items affected the comparability of statements of earnings amounts for the six and three months ended June 30, 2024 and 2023:
**▪**Acquisition and disposition-related items: We recorded a pre-tax gain of $2.7 billion upon the assignment of the IQOS Tobacco Heating System (“IQOS System”) commercialization rights to Philip Morris International Inc. (“PMI”) in April 2024, for the six and three months ended June 30, 2024. For a discussion of the sale of the IQOS System commercialization rights, see Note 5.
Also, in connection with the June 2024 issuance by the FDA of MGOs for four NJOY menthol e-vapor products, we recorded a pre-tax charge of approximately $140 million for the six and three months ended June 30, 2024 for the change in the fair value of the contingent payments associated with the acquisition of NJOY Holdings (“NJOY Transaction”). This charge was recorded as general corporate expenses and included in marketing, administration and research costs in our condensed consolidated statement of earnings. For a discussion of the MGOs, see Note 2. Acquisition of NJOY to our condensed consolidated financial statements in Item 1 (“Note 2”).
**▪**Asset Impairment: We recorded a non-cash, pre-tax impairment of the Skoal trademark of $354 million for the six and three months ended June 30, 2024 in our oral tobacco products segment. For further discussion, see Note 5.
**▪**Tobacco and Health and Certain Other Litigation Items: For a discussion of tobacco and health and certain other litigation items and a breakdown of these costs by segment, see Note 14. Contingencies to our condensed consolidated financial statements in Item 1 (“Note 14”) and Tobacco and Health and Certain Other Litigation Items in Note 11, respectively.
**▪**Loss on Disposition of JUUL Equity Securities: We recorded a non-cash, pre-tax loss of $250 million related to the disposition of our JUUL equity securities for the six months ended June 30, 2023 as (income) losses from investments in equity securities in our condensed consolidated statement of earnings. We recorded a corresponding adjustment to the JUUL tax valuation allowance in 2023.
**▪**ABI-Related Special Items: We recorded net pre-tax income of $62 million from our investment in ABI for the six months ended June 30, 2024, which consists primarily of a gain related to the ABI Transaction. For further information on the gain related to the ABI Transaction, see Note 6.
The ABI-related special items include our respective share of the amounts recorded by ABI and additional adjustments related to (i) the conversion of ABI-related special items from international financial reporting standards to GAAP and (ii) adjustments to our investment required under the equity method of accounting.
**▪**Cronos-Related Special Items: We recorded pre-tax losses of $30 million, substantially all of which related to our share of special items recorded by Cronos for the six months ended June 30, 2023. We recorded a corresponding adjustment to the Cronos tax valuation allowance.
**▪**Income Tax Items: We recorded income tax items of $52 million for the six months ended June 30, 2024, due primarily to an income tax benefit from the partial release of a valuation allowance on JUUL-related losses, partially offset by interest expense on tax reserves recorded in prior years. The valuation allowance release was due to our capital gain on the ABI Transaction. For further discussion, see Note 13. Income Taxes to our condensed consolidated financial statements in Item 1 (“Note 13”).
Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023
Net revenues, which include excise taxes billed to customers, decreased $442 million (3.6%), due to lower net revenues in our smokeable products segment, partially offset by higher net revenues in our oral tobacco products segment and our all other category.
Cost of sales decreased $76 million (2.4%), due primarily to lower shipment volume in our smokeable products segment, partially offset by higher per unit settlement charges and higher manufacturing costs in our smokeable products segment and higher NJOY shipment volume.
Excise taxes on products decreased $235 million (11.6%), due to lower shipment volume in our smokeable products segment.
Marketing, administration and research costs decreased $30 million (2.1%), due primarily to lower general corporate expenses, partially offset by inflation impacts and higher investment spending in support of our Vision (including 2024 NJOY costs). The lower general corporate expenses were due primarily to lower charges to resolve certain JUUL-related litigation and the 2023 settlement of the shareholder derivative lawsuits, partially offset by higher acquisition-related costs primarily associated with the NJOY Transaction and transaction costs from the ABI Transaction. See Note 14 for a discussion of litigation items.
Operating income decreased $455 million (8.0%), due primarily to lower OCI (which includes a non-cash impairment of the Skoal trademark in our oral tobacco product segment), partially offset by lower general corporate expenses.
Interest and other debt expense, net increased $29 million (6.0%), due primarily to 2023 interest income associated with the sale of the IQOS System commercialization rights, partially offset by 2023 interest expense and fees for the term loan facility associated with the NJOY Transaction. For further discussion regarding the sale of the IQOS System commercialization rights, see Note 5.
(Income) losses from investments in equity securities, which were favorable $367 million (100.0+%), were positively impacted by the 2023 loss on the disposition of our JUUL equity securities and favorable results from our investment in ABI (due primarily to our gain on the ABI Transaction.)
Provision for income taxes increased $542 million (39.2%), due primarily to higher earnings before income taxes, partially offset by favorable tax items as discussed above.
Reported net earnings of $5,932 million increased $2,028 million (51.9%), due primarily to the gain on the sale of the IQOS System commercialization rights, favorable results from our investments in equity securities and favorable income tax items, partially offset by lower operating income. Reported basic and diluted EPS of $3.41, each increased by 56.4% due to higher reported net earnings and fewer shares outstanding.
Adjusted net earnings of $4,280 million decreased $184 million (4.1%), due primarily to lower OCI. Adjusted diluted EPS of $2.46 decreased by 1.6%, due to lower adjusted net earnings, partially offset by fewer shares outstanding.
Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023
Net revenues, which include excise taxes billed to customers, decreased $299 million (4.6%), due primarily to lower net revenues in our smokeable products segment, partially offset by higher net revenues in our oral tobacco products segment.
Cost of sales decreased $79 million (4.7%), due primarily to lower shipment volume in our smokeable products segment, partially offset by higher per unit settlement charges and higher manufacturing costs in our smokeable products segment and higher NJOY shipment volume.
Excise taxes on products decreased $138 million (12.9%), due to lower shipment volume in our smokeable products segment.
Marketing, administration and research costs decreased $64 million (7.5%), due primarily to lower general corporate expenses, partially offset by inflation impacts and higher investment spending in support of our Vision (including 2024 NJOY costs). The lower general corporate expenses include lower charges to resolve certain JUUL-related litigation, partially offset by higher acquisition-related costs primarily associated with the NJOY Transaction.
Operating income decreased $372 million (12.8%), due primarily to lower OCI (which includes a non-cash impairment of the Skoal trademark in our oral tobacco product segment), partially offset by lower general corporate expenses.
Provision for income taxes increased $624 million (90.6%), due primarily to higher earnings before income taxes.
Reported net earnings of $3,803 million increased $1,686 million (79.6%), due primarily to the gain on the sale of the IQOS System commercialization rights, partially offset by lower operating income. Reported basic and diluted EPS of $2.21, each increased by 85.7% due to higher reported net earnings and fewer shares outstanding.
Adjusted net earnings of $2,258 million decreased $88 million (3.8%), due primarily to lower OCI. Adjusted diluted EPS of $1.31 remained unchanged as lower adjusted net earnings were offset by fewer shares outstanding.
Operating Results by Business Segment
Business Environment
Summary
The U.S. tobacco industry faces a number of business and legal challenges that have materially adversely affected and may continue to materially adversely affect our business, results of operations, cash flows or financial position or our ability to achieve our Vision. These challenges, some of which are discussed in more detail in Note 14, and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), include:
▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;
▪the FDA’s failure to effectively address illegal e-vapor products on the market;
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of tobacco products with characterizing flavors and the sale of tobacco products in certain package sizes;
▪additional restrictions on the advertising and promotion of tobacco products;
▪other actual and proposed tobacco-related legislation and regulation; and
▪governmental investigations;
▪reductions in consumption levels of cigarettes and MST products;
▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products or the ability to communicate with consumers through third-party digital platforms;
▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as macroeconomic conditions (including inflation), excise taxes and price gap relationships, each of which may result in adult tobacco consumers switching to lower-priced tobacco products and lower shipment volumes;
▪the highly competitive nature of all tobacco categories, including competitive disadvantages related to the impact on cigarette prices due to the settlement of certain healthcare cost recovery litigation and the proliferation of innovative tobacco products, such as e-vapor and oral nicotine pouch products;
▪the proliferation of products using nicotine analogues that are designed to imitate the effects of nicotine but are not subject to the FDA regulatory framework for tobacco products;
▪illicit trade in tobacco products, including illicit e-vapor and oral nicotine pouch products; and
▪potential adverse changes in prices, availability and quality of tobacco, other raw materials and component parts, including as a result of changes in macroeconomic, geopolitical and climate and environmental conditions.
In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences continue to impact the tobacco industry, including negatively impacting cigarette and MST shipment volumes. We believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. Adult tobacco consumers continue to transition from cigarettes and MST to exclusive use of smoke-free tobacco product alternatives, which aligns with our Vision.
We work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the United States through innovation and other growth strategies (including, where appropriate, arrangements with, or investments in, third parties and acquisitions).
For the second quarter of 2024, we estimate that, when adjusted for trade inventory movements, calendar differences and other factors, domestic cigarette industry volume declined by 9.5% versus the second quarter of 2023. We expect cigarette industry volume trends for the remainder of 2024 to be most influenced by (i) continued macroeconomic and discretionary income pressures on adult tobacco consumers (including inflation, interest rates, gasoline prices and unemployment levels), (ii) cross-category movement, including to illegal e-vapor products, and (iii) regulatory and legislative (including excise tax) developments.
Through the first half of 2024, we estimate the e-vapor category grew by approximately 40%, driven by illicit flavored disposable products, which we believe now represent more than 60% of the e-vapor category as of June 30, 2024. We estimate that cross-category movement to illicit disposable e-vapor products, which we discuss in more detail below, contributed to cigarette industry volume declines in a range of 2% to 3% over the last 12 months. These illicit disposable e-vapor products are largely distributed through non-traditional retail channels (including e-commerce and vape retail channels), making them more difficult to track. In addition, we believe illicit cigarettes are becoming more prevalent in the United States, based on the results of discarded pack studies we have conducted in select geographies. We believe the FDA’s inaction, lack of enforcement and slow pace of smoke-free product authorizations enables bad actors to disregard regulation.
For example, we believe the lack of effective enforcement against illicit disposable e-vapor products has allowed for the introduction of illicit products in other categories, such as oral nicotine, where we have seen a rise in illegal nicotine pouch products. These products are distributed primarily through e-commerce channels that are more difficult to track than traditional retail. As of June 2024, we have identified more than 350 illicit nicotine pouch products across retail and e-commerce channels. We have also noted the emergence of products using nicotine analogues, which are designed to imitate the effects of nicotine and are not subject to the regulatory framework for tobacco products. While illicit oral nicotine products and nicotine analogues have not had a material impact on our business to date, a lack of effective enforcement could lead to an increase in the introduction and volume activity of these products, which could have a material impact on our innovative tobacco products businesses.
Despite some improvements in macroeconomic conditions, discretionary income pressures persisted for adult tobacco consumers through the second quarter of 2024 due to the cumulative effects of inflation. The June 2024 Consumer Price Index was 3.0%, exceeding the Federal Reserve’s target of 2%. Although inflation rates remained lower than prior years, increased prices on certain expenditures, such as groceries and gas, continued to pressure adult tobacco consumer discretionary income. Furthermore, adult tobacco consumer wage increases have failed to keep up with the rising prices of everyday expenses over the past several years, and we have observed increases in consumer debt and credit card delinquencies. Gas prices throughout the second quarter of 2024 experienced seasonal increases, reaching an average price of $3.46 per gallon for the month of June 2024. While gas prices were lower than in the second quarter of 2023, they remained consistently above $3.00 month-over-month in the second quarter of 2024. In addition, the Federal Funds Rate, although stable, remained above historical levels at 5.33% through the second quarter of 2024.
The macroeconomic and discretionary income pressures on adult tobacco consumers influenced discount share performance. For the second quarter of 2024, the discount share of the cigarette category was 29.3%, an increase of 0.2 share points sequentially and an increase of 1.0 share point versus the second quarter of 2023.
Marlboro share was 42.0% in the second quarter of 2024, which is unchanged sequentially and a decrease of 0.1 share points versus the second quarter of 2023. Marlboro share in the premium segment of the industry grew to 59.4%, an increase of 0.1 share points sequentially and an increase of 0.7 share points versus the second quarter of 2023.
Through the second quarter of 2024, NJOY distribution grew to over 100,000 stores. During the same period, reported shipment volume of NJOY consumables (including NJOY ACE and NJOY DAILY) was approximately 12.5 million units, and NJOY device shipment volume was approximately 1.8 million units. The NJOY share of the e-vapor category reached 5.5% in the second quarter of 2024, an increase of 1.3 share points sequentially.
The U.S. nicotine pouch category continued to grow significantly throughout the second quarter of 2024 to 41.6% of the U.S. oral tobacco category, an increase of 12.3 share points versus the second quarter of 2023. on! maintained year-over-year share momentum through the second quarter of 2024 to achieve 8.1% of the total oral tobacco category, an increase of 1.2 share points versus the second quarter of 2023 and an increase of 1.0 share point sequentially. For the second quarter 2024, the traditional smokeless category (including MST and Snus) share of the total oral tobacco category declined to 58.4%, down 12.3 share points versus the second quarter of 2023. Copenhagen had an oral tobacco category share of 19.5% for the second quarter of 2024, a decrease of 4.7 share points when compared to the second quarter of 2023.
We continue to track the growth of nicotine pouch volumes and the related impact on the size of the MST category. Decreases in the size of the MST category could impact the carrying value of our assets, such as our smokeless tobacco product trademarks. For example, in the second quarter of 2024, we recorded a non-cash, pre-tax impairment on the value of the Skoal trademark. For more information on this impairment, see Note 5. We continue to monitor changing conditions within our
business environment and impacts on our businesses. Changes in these and other conditions could have a material adverse effect on our business, results of operations, cash flows or financial position.
FSPTCA and FDA Regulation
**▪**The Regulatory Framework: The FSPTCA and its related regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions:
▪impose restrictions on the advertising, promotion, sale and distribution of tobacco products (see Final Tobacco Marketing Rule below);
▪establish pre-market review pathways for new and modified tobacco products (see Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below);
▪prohibit any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
▪authorize the FDA to impose tobacco product standards that are appropriate for the protection of the public health (see Potential Product Standards below); and
▪equip the FDA with a variety of investigatory and enforcement tools, including the authority to inspect product manufacturing and other facilities (see Investigation and Enforcement below).
The FSPTCA also bans descriptors such as “light,” “low” or “mild” when used as descriptors of modified risk, unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by Middleton, the U.S. Department of Justice, on behalf of the FDA, informed Middleton that the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to bring another lawsuit.
Effective April 2022, the U.S. Congress expanded the statutory definition of tobacco products to include products containing nicotine derived from any source, including synthetic nicotine. See Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below for additional information on the effects of the statutory change. Currently, however, the statutory definition of tobacco products does not cover products containing nicotine analogues, which are designed to imitate the effects of nicotine. As a result, products containing nicotine analogues are not subject to the FDA regulatory framework for tobacco products, including the requirements that manufacturers submit a PMTA to, and receive a MGO from, the FDA before marketing such products in the United States.
**▪**Final Tobacco Marketing Rule: As required by the FSPTCA, in March 2010, the FDA promulgated a wide range of advertising and promotion restrictions for cigarettes and smokeless tobacco(1) products (the “Final Tobacco Marketing Rule”). The May 2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives.
The Final Tobacco Marketing Rule, as amended, among other things:
▪restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;
▪prohibits sampling of all tobacco products except that sampling of smokeless tobacco products is permitted in qualified adult-only facilities;
▪prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos;
▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and
▪requires the development by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and gives the FDA the authority to require new warnings for any type of tobacco product (see FDA Regulatory Actions - Graphic Warnings below).
Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products, in August 2016 for all other tobacco products, including e-vapor and oral nicotine pouch products containing tobacco-derived nicotine, and in April 2022 for tobacco products, including e-vapor and oral nicotine pouch products, that contain nicotine from any source other than tobacco, such as synthetic nicotine. The Final Tobacco Marketing Rule currently does not apply to products containing nicotine analogues.
(1) “Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
**▪**Rulemaking and Guidance: From time to time, the FDA issues proposed regulations and guidance, which may be issued in draft or final form, that generally involve public comment and may include scientific review. The FDA also may request comments on broad topics through an Advanced Notice of Proposed Rulemaking (“ANPRM”). We actively engage with the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA policies and proposals and participation in public hearings and engagement sessions.
The FDA’s implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by states, territories and localities of their laws and regulations as well as of the State Settlement Agreements (see State Settlement Agreements below). Such enforcement efforts may adversely affect our operating companies’ ability to market and sell tobacco products in those states, territories and localities.
▪FDA’s Five-Year Strategic Plan for Tobacco and Nicotine Regulation: In December 2023, in response to the Reagan-Udall Foundation’s report of its operational evaluation of the FDA’s Center for Tobacco Products, the FDA released its five-year strategic plan to address concerns raised by the report. The Reagan-Udall Report urged the FDA to clearly define product pathways, accelerate PMTA decision making, address the need for health risk communications to tobacco consumers and take enforcement actions against manufacturers and products that violate the law.
The FDA’s five-year strategic plan lists five goals:
▪develop, advance and communicate comprehensive and impactful tobacco regulations and guidance;
▪ensure timely, clear and consistent product application review;
▪strengthen compliance of regulated industry using all available tools, including robust enforcement actions;
▪enhance knowledge and understanding of the risks associated with tobacco product use; and
▪advance operational excellence.
Although the FDA, in conjunction with other federal entities, has increased enforcement activity, insufficient actions against certain product categories that violate the law, including disposable and flavored e-vapor products and products targeted to minors, have allowed such products to proliferate on the market. In addition, the FDA’s failure to clearly define product pathways and accelerate PMTA decision making has resulted in a market with few authorized smoke-free products available to adult tobacco consumers.
**▪**Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement: The FSPTCA permits the sale of tobacco products on the market as of February 15, 2007 and not subsequently modified (“Pre-existing Tobacco Products”) and new or modified products authorized through the PMTA, Substantial Equivalence (“SE”) or SE Exemption pathways. Subsequent FDA rules also provide a Supplemental PMTA pathway designed to increase the efficiency of submission and review for modified versions of previously authorized products.
The FDA pre-market authorization enforcement policy varies based on product type and date of availability on the market, specifically:
▪Pre-existing Tobacco Products are exempt from the pre-market authorization requirement;
▪cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health;
▪tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Pre-existing Tobacco Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020; and
▪tobacco products containing nicotine from any source other than tobacco (e.g., synthetic nicotine) that were on the market between March 15, 2022 and April 14, 2022 and are not Pre-existing Tobacco Products are generally products for which a manufacturer must have filed a PMTA by May 14, 2022. A manufacturer was permitted to keep such a product on the market until July 13, 2022 provided that a PMTA was filed by May 14, 2022. Thereafter, unless the FDA granted the product a marketing order, the product is unlawful and subject to possible FDA enforcement.
Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier or contract manufacturer being unable to maintain the consistency required in ingredients or manufacturing processes, could trigger the FDA’s pre-market review processes. Additionally, a manufacturer may be unable to maintain consistency in manufacturing processes as it increases the scale of its manufacturing operations in response to market expansion or product introduction. These circumstances could cause a manufacturer to receive (i) a “not substantially equivalent” determination or (ii) a denial or
withdrawal of a PMTA, either of which could result in a product being removed from the market. In addition, new scientific data continues to be developed relating to innovative tobacco products, which could impact the FDA’s determination as to whether a product is, or continues to be, appropriate for the protection of public health and could, therefore, result in the removal of one or more products from the market. Any such actions affecting our operating companies’ products could have a material adverse impact on our business, results of operations, cash flows or financial position.
Products Regulated in 2009: Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are “Provisional Products.” PM USA and USSTC timely submitted SE reports for these Provisional Products and have received SE determinations on certain Provisional Products. Those products that were found by the FDA to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent.
In addition, the FDA has communicated that it will not review a certain subset of Provisional Product SE reports and that the products that are the subject of those reports can continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products.
While we believe PM USA’s and USSTC’s current Provisional Products meet the statutory requirements of the FSPTCA, we cannot predict how the FDA will ultimately apply law, regulation and guidance to their various SE reports. Should PM USA or USSTC receive unfavorable determinations on any SE reports currently pending with the FDA, we believe PM USA and USSTC can replace the vast majority of these product volumes with other FDA authorized products or with Pre-existing Tobacco Products.
Cigarette and smokeless tobacco products introduced into the market or modified after March 22, 2011 are “Non-Provisional Products” and must receive a marketing order from the FDA prior to being offered for sale. Marketing orders for Non-Provisional Products may be obtained by filing an SE report, PMTA or using another pre-market pathway established by the FDA. PM USA and USSTC may not be able to obtain a marketing order for non-provisional products because the FDA may determine that any such product does not meet the statutory requirements for approval.
Products Regulated in 2016: Manufacturers of products first regulated by the FDA in 2016, including cigars, oral nicotine pouches and e-vapor products, that were on the market as of August 8, 2016 and not subsequently modified must have filed an SE report or PMTA by the filing deadline of September 9, 2020 in order for their products to remain on the market. These products can remain on the market during FDA review through court-allowed, case-by-case discretion, so long as the report or application was timely filed with the FDA. In September 2022, the FDA represented that it had resolved more than 99% of the timely applications it had received, the vast majority of which were for e-vapor products and resulted in denials. A number of the denials are subject to challenges initiated by the affected manufacturers. For those products still under FDA review, it is uncertain when and for how long the FDA may permit continued marketing and sale of those products pursuant to its case-by-case discretion. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing and selling the product.
Helix submitted PMTAs for on! oral nicotine pouches in May 2020 and PMTAs for on! PLUS oral nicotine pouches in tobacco, mint and wintergreen flavors in June 2024. As of July 29, 2024, the FDA has not issued marketing order decisions for any on! or on! PLUS products.
As of July 29, 2024, Middleton has received market orders or exemptions that cover over 99% of its cigar product volume.
In October 2022, we agreed to assign the exclusive U.S. commercialization rights to the IQOS System to PMI in exchange for a total cash payment of approximately $2.7 billion (plus interest). The assignment became effective in April 2024. The U.S. government asserted that the agreement to assign those rights required district court approval and was subject to PMI becoming bound by a court-ordered injunction against engaging in certain conduct and requiring the communication of corrective statements. In May 2024, we signed an agreement with the U.S. government resolving its concerns regarding our assignment of the exclusive U.S. commercialization rights to the IQOS System to PMI. For further discussion of the agreement with the U.S government, see Note 14.
In October 2021, the FDA authorized the marketing and sale of four of USSTC’s Verve oral nicotine products, including Green Mint and Blue Mint varieties, representing the first flavored product authorizations issued by the FDA for newly deemed innovative products. These products are not currently marketed or sold.
In March 2023, the FDA authorized USSTC to communicate a modified risk claim about its Copenhagen Classic Snuff MST product. This product is not currently marketed or sold. The authorized claim for Copenhagen Classic Snuff is “IF YOU SMOKE, CONSIDER THIS: Switching completely to this product from cigarettes reduces risk of lung cancer.” USSTC’s authorization to use this claim is subject to the FDA’s post-market surveillance requirements described below.
In June 2023, we completed our acquisition of NJOY Holdings, the parent of NJOY. As a result of the acquisition, NJOY became a wholly owned subsidiary of Altria, and we gained full global ownership of NJOY’s e-vapor product portfolio, including NJOY ACE, a pod-based e-vapor product with an MGO from the FDA, and NJOY DAILY, which also has an MGO. In June 2024, NJOY received MGOs with respect to two NJOY ACE menthol products and two NJOY DAILY menthol products. In May 2024, NJOY submitted a supplemental PMTA to the FDA to commercialize and market the NJOY ACE 2.0 device, which leverages Bluetooth® connectivity to incorporate access restriction technology designed to prevent underage use by authenticating the user before unlocking the device. Also in May 2024, NJOY re-submitted PMTAs for blueberry and watermelon flavored pod-based e-vapor products that work exclusively with the Bluetooth®-enabled NJOY ACE 2.0 device. These products previously received marketing denial orders (“MDOs”) on the basis of FDA concerns regarding underage use.
Post-Market Surveillance: Manufacturers that receive product authorizations through the PMTA process must adhere to the FDA post-market record keeping and reporting requirements, as detailed in market orders and in the final PMTA rule. The requirements include prior notification of marketing activities. The FDA may amend requirements of a market order or withdraw the market order based on this information if, among other reasons, it determines that the continued marketing of the products is no longer appropriate for the protection of the public health.
Effect of Adverse FDA Determinations: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. An unfavorable determination on an application, the withdrawal by the FDA of a prior marketing order or other changes in FDA regulatory requirements could result in the removal of products from the market. A “not substantially equivalent” determination, a denial of a PMTA or a marketing order withdrawal by the FDA on one or more products (which would require the removal of the product or products from the market) could have a material adverse impact on our business, results of operations, cash flows or financial position. Also, adverse FDA determinations on innovative tobacco products could have a material adverse effect on our innovative tobacco businesses and our ability to achieve our Vision.
**▪**FDA Regulatory Actions
▪Graphic Warnings: In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting certain negative health consequences of smoking on cigarette packaging and advertising. PM USA and other cigarette manufacturers filed lawsuits challenging the final rule on substantive and procedural grounds. In December 2022, the U.S. District Court for the Eastern District of Texas found in favor of cigarette manufacturers in one such suit and blocked the rule, finding it unconstitutional on the basis that it compelled speech in violation of the First Amendment. The FDA appealed the decision, and, in March 2024, the U.S. Court of Appeals for the Fifth Circuit reversed the trial court and remanded the case for further proceedings.
▪Underage Access and Use of Certain Tobacco Products: The FDA announced regulatory actions in September 2018 to address underage access and use of e-vapor products. We have engaged with the FDA on this topic and have reaffirmed to the FDA our ongoing and long-standing commitment to preventing underage use. For example, we advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage use, which is now federal law. We continue to advocate in states that have not yet raised the minimum legal age to purchase all tobacco products to 21. See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for further discussion.
Additionally, the FDA issued final guidance in April 2020, stating that it intended to prioritize enforcement action against certain product categories, including pod-based, flavored e-vapor products and products targeted to minors. More recently, the FDA has taken limited enforcement action aimed at manufacturers and retailers of certain disposable flavored electronic nicotine delivery system products. However, despite some enforcement activity, insufficient actions against certain product categories that violate the law, including disposable and flavored e-vapor products and products targeted to minors, have allowed such products to proliferate on the market.
▪Electronic Nicotine Delivery System Products: As of July 29, 2024, many manufacturers of menthol and other flavored e-vapor products have received MDOs for failure to provide sufficiently strong product-specific scientific evidence to demonstrate that the benefit of their products to adult smokers overcomes the risk that their products pose to youth. The FDA has communicated in these MDOs that vapor products with non-tobacco flavors present unique questions relevant to the FDA’s “Appropriate for the Protection of Public Health” standard and that successful applications require strong, product-specific evidence. A number of these manufacturers are challenging the MDOs for their products. In January 2024, the U.S. Court of Appeals for the Fifth Circuit ruled that the FDA process and procedure for addressing an e-vapor PMTA violated federal law and that, among other things, the FDA failed to give the manufacturer plaintiff fair notice of, and repeatedly changed positions with respect to, the information required to obtain a PMTA. The court decided the case en banc, with all judges on the court hearing the case. In July 2024, the U.S. Supreme Court agreed to review the U.S. Court of Appeals for the Fifth Circuit’s decision. Other U.S. Courts of Appeals have upheld adverse FDA determinations, and there are pending requests that the U.S. Supreme Court review these decisions.
**▪**Potential Product Standards
▪Nicotine in Cigarettes and Other Combustible Tobacco Products: In March 2018, the FDA issued an ANPRM seeking comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels. Among other issues, the FDA sought comments on (i) whether smokers would compensate by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) whether the proposed rule would create an illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars. In July 2024, the Biden Administration published its Spring 2024 Unified Regulatory Agenda, which indicates that the date for any final action on this proposed product standard is to be determined. Any proposed product standard would proceed through the rulemaking process, which we believe will take multiple years to complete.
▪Flavors in Tobacco Products: In April 2022, the FDA issued two proposed product standards: (i) banning menthol in cigarettes and (ii) banning all characterizing flavors (including menthol) in cigars. We submitted comments during the notice-and-comment period and plan to continue engaging with the FDA through the rulemaking process. In October 2023, the FDA submitted the two proposed product standards to the White House Office of Management and Budget for review. As of July 29, 2024, the FDA has not completed rulemaking with respect to either proposed product standard. In April 2024, the FDA announced that it would delay a decision on the menthol ban indefinitely, citing the high volume of feedback received during the notice-and-comment period, and the Biden Administration’s Spring 2024 Unified Regulatory Agenda indicates that the date for any final action on these proposed product standards is to be determined. The FDA could propose an additional product standard for flavors in innovative tobacco products, including e-vapor products and oral nicotine products.
▪N-nitrosonornicotine (“NNN”) in Smokeless Tobacco: In January 2017, the FDA proposed a product standard for NNN levels in finished smokeless tobacco products.
If any one or more of the foregoing potential product standards were to become final and was appealed and upheld in the courts, it could have a material adverse effect on our business, results of operations, cash flows or financial position, including a material adverse effect on the carrying value of certain of our assets such as our cigar trademarks.
**▪**Good Manufacturing Practices: In March 2023, the FDA, pursuant to the requirements of the FSPTCA, issued a proposed rule setting forth requirements for tobacco product manufacturers regarding the manufacture, design, packing and storage of their products. This proposed rule establishes a framework of good manufacturing practices, including by:
▪establishing tobacco product design and development controls;
▪ensuring that finished and bulk tobacco products are manufactured according to established specifications;
▪minimizing the manufacture and distribution of tobacco products that do not meet specifications;
▪requiring manufacturers to take appropriate measures to prevent contamination of tobacco products;
▪requiring investigation and identification of products that do not meet specifications and requiring manufacturers to institute appropriate corrective actions, such as a recall; and
▪establishing the ability to trace all components or parts, ingredients, additives and materials, as well as each batch of finished or bulk tobacco products, to aid in investigations of those that do not meet specifications.
We engaged with the FDA through the rulemaking process, including during the notice-and-comment period, which closed in October 2023. The Biden Administration’s Spring 2024 Unified Regulatory Agenda includes the FDA’s plans to complete rulemaking with respect to this proposed rule by April 2025. If the proposed rule were to take effect, compliance with these requirements could result in increased costs.
**▪**Impact on Our Business; Compliance Costs and User Fees: Additional FDA regulatory actions under the FSPTCA could have a material adverse effect on our business, results of operations, cash flows or financial position in various ways. For example, actions by the FDA could:
▪impact the consumer acceptability of tobacco products;
▪discontinue, delay or prevent the sale or distribution of existing, new or modified tobacco products;
▪limit adult tobacco consumer choices;
▪impose restrictions on communications with adult tobacco consumers;
▪create a competitive advantage or disadvantage for certain tobacco companies;
▪impose additional manufacturing, labeling or packaging requirements;
▪impose additional restrictions at retail;
▪result in increased illicit trade in tobacco products; and
▪otherwise significantly increase the cost of doing business.
The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor products or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including market share and industry volume. See Liquidity and Capital Resources - Payments Under State Settlement Agreements and FDA Regulation below for a discussion of our FDA user fee payments. In addition, compliance with the FSPTCA’s regulatory requirements has resulted, and will continue to result, in additional costs. The amount of additional compliance and related costs has not been material in any given quarter or year-to-date period but could become material, either individually or in the aggregate. The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on our business, results of operations, cash flows or financial position.
**▪**Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, facility closures, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. Investigations or enforcement actions could result in significant costs or otherwise have a material adverse effect on our business, results of operations, cash flows or financial position.
Excise Taxes
Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies.
Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation. Between the end of 1998 and July 29, 2024, the weighted-average state cigarette excise tax increased from $0.36 to $1.93 per pack. As of July 29, 2024, three states (Maryland (effective in July 2024), Colorado (effective in July 2024) and Rhode Island (effective in September 2024)) have enacted excise tax increases in 2024. In addition, various increases are under consideration or have been proposed.
A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. We support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of July 29, 2024, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST. North Carolina has passed legislation that will cause the state to adopt a weight-based tax methodology for MST in July 2025.
An increasing number of states and localities also are imposing excise taxes on e-vapor products and oral nicotine pouches. As of July 29, 2024, 33 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, 13 states and the District of Columbia have enacted legislation to tax oral nicotine pouches.
Tax increases are expected to continue to have an adverse impact on sales of our operating companies’ products through lower consumption levels and the potential shift in adult tobacco consumer purchases from premium to non-premium or discount cigarettes, to lower taxed tobacco products or to counterfeit and contraband products. Lower sales volume and reported share performance of our operating companies’ products could have a material adverse effect on our business, results of operations, cash flows or financial position. In addition, substantial excise tax increases on e-vapor and oral nicotine products may negatively impact adult smokers’ transition to these products, which could materially adversely affect our innovative tobacco businesses and our ability to achieve our Vision.
International Treaty on Tobacco Control
The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of July 29, 2024, 182 countries, as well as the European Union, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the U.S. Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging
cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues.
There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States, either indirectly or as a result of the United States becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 14, during 1997 and 1998, PM USA and other major domestic cigarette manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. Increases in inflation can increase our financial liability under the State Settlement Agreements. The State Settlement Agreements’ inflation calculations require us to apply the higher of 3% or the U.S. Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (“CPI-U”) percentage rate as published in January of each year. As of December 2023, the inflation calculation was approximately 3.4% based on the latest CPI-U data. While this calculation resulted in an increase in our annual payments under the State Settlement Agreements, the increase did not have a material impact on our financial position. We believe that inflation will continue at increased levels in 2024, but do not expect the corresponding increase in annual payments to result in a material financial impact. However, we will continue to monitor the impact of increased inflation on the macroeconomic environment and our businesses.
For a discussion of the impact of the State Settlement Agreements on us, see Liquidity and Capital Resources - Payments Under State Settlement Agreements and FDA Regulation below and Note 14. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). The State Settlement Agreements also place restrictions on the use of brand name sponsorships and brand name non-tobacco products and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and United States territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.
Other International, Federal, State and Local Regulation and Governmental and Private Activity
**▪**International, Federal, State and Local Regulation: Various states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including cigarettes, smokeless tobacco, cigars, e-vapor products and oral nicotine pouches), such as legislation that (i) prohibits the sale of all tobacco products or certain tobacco categories, such as e-vapor, (ii) prohibits the sale of tobacco products with characterizing flavors, such as menthol cigarettes and flavored e-vapor products, (iii) requires the disclosure of health information separate from or in addition to federally mandated health warnings, (iv) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products and (v) requires manufacturers of e-vapor products to certify that they are in compliance with FDA requirements to be allowed to sell in the state. The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As of July 29, 2024, multiple states and localities are considering legislation to ban flavors in one or more tobacco products, and six states (California, Massachusetts, New Jersey, New York, Rhode Island and Utah) and the District of Columbia have passed such legislation. Some of these states, such as New York, Utah and Illinois, exempt certain products that have received FDA market authorization through the PMTA pathway. The legislation in California, which became effective in December 2022, bans the sale of most tobacco products with characterizing flavors, including menthol, mint and wintergreen.
Massachusetts and Utah passed legislation capping the amount of nicotine in e-vapor products. Legislation relating to this issue is pending in one other state.
Similar restrictions to those enacted or proposed in various U.S. states and localities on e-vapor and oral nicotine pouch products have been enacted or proposed internationally.
We have challenged and will continue to challenge certain federal, state and local legislation and other governmental action, including through litigation. Certain legislation imposing restrictions on tobacco products, such as state laws requiring manufacturers of e-vapor products to certify that they are in compliance with federal law in order to sell products in the state, aligns with our Vision, and we actively engage with lawmakers in support of such legislation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on our business, results of operations, cash flows or financial position. Such action also could negatively impact adult smokers’ transition to smoke-free products, which could materially adversely affect our innovative tobacco businesses and our ability to achieve our Vision.
**▪**Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products: After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, in December 2019, the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. As of July 29, 2024, 43 states, the District of Columbia and Puerto Rico have enacted laws increasing the legal age to purchase tobacco products to 21. Although an increase in the minimum age to purchase tobacco products may have a negative impact on our operating companies’ sales volumes, we support raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, as discussed above under Underage Access and Use of Certain Tobacco Products, reflecting our longstanding commitment to combat underage tobacco use.
**▪**Health Effects of Tobacco Products, Including E-vapor Products: Reports with respect to the health effects of smoking have been publicized for many years, including various reports by the U.S. Surgeon General. We believe that the public should be guided by the messages of the U.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products, including e-vapor products. Along with the scientific and public health communities, we continue to study and gather scientific evidence concerning the health effects of e-vapor and other innovative tobacco products. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on legislation and regulation. Scientific determinations as to any health risks or negative health consequences associated with the use of e-vapor and other innovative tobacco products could materially adversely affect our innovative tobacco products businesses and our ability to achieve our Vision.
Most jurisdictions within the United States have restricted smoking in public places and some have restricted vaping in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking and vaping in outdoor places, in private apartments and in cars transporting children.
**▪**Other Legislation or Governmental Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards; establish educational campaigns relating to tobacco consumption or tobacco control programs or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes; prohibit the sale of tobacco products based on environmental concerns; impose responsibility on manufacturers for the disposal, recycling or other treatment of post-consumer goods such as plastic packaging; require tax stamping of smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful. In addition, if a pandemic or similar health emergency occurs, state and local governments may reimpose additional health and safety requirements for all businesses, which could result in the potential temporary closure of certain businesses and facilities. It is possible that tobacco manufacturing and other facilities and the facilities of our suppliers, our suppliers’ suppliers and our trade partners could be subject to additional government-mandated temporary closures and restrictions.
It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. Any such legislation, regulation or other governmental action could have a material adverse impact on our business, results of operations, cash flows or financial position.
**▪**Governmental Investigations: From time to time, we are subject to governmental investigations on a range of matters. For example, we currently are, or recently have been, subject to a number of governmental investigations with respect to our former investment in JUUL, which we divested in March 2023, including the following: (i) the U.S. Federal Trade Commission (“FTC”) issued a Civil Investigative Demand to us while conducting its antitrust review of our former investment
in JUUL seeking information regarding, among other things, our role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee (see Note 14 for a description of the FTC’s administrative complaint against us and JUUL); (ii) the SEC commenced an investigation relating to our acquisition, disclosures and accounting controls in connection with the JUUL investment; and (iii) the New York State Office of the Attorney General and the Commonwealth of Massachusetts Office of the Attorney General, separately, issued independent subpoenas to us seeking documents relating to our former investment in and provision of services to JUUL. For a discussion of our disposition of our former interest in JUUL, see Note 6.
In April 2023, January 2024, February 2024 and April 2024, we agreed to settle the lawsuits relating to our former investment in JUUL initiated by the attorneys general of Minnesota, Alaska, Hawaii and New Mexico, respectively.
Private Sector Activity on Tobacco Products
A number of retailers, including national chains, have discontinued the sale of all tobacco products, and others have discontinued the sale of e-vapor products. Reasons for the discontinuation include change in corporate policy and, with respect to e-vapor products, reported illnesses and the uncertain regulatory environment. Furthermore, third-party digital platforms, such as app stores, have restricted, and in some cases prohibited, communications with adult tobacco consumers concerning tobacco products. It is possible that if this private sector activity becomes more widespread it could have an adverse effect on our business, results of operations, cash flows or financial position.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on our businesses, including the sales volumes and market shares of our companies’ innovative and smoke-free products and traditional tobacco products. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the United States that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illegal disposable e-vapor and oral pouch products may be designed to appeal to youth and are manufactured without scientific standards, exposing consumers to undocumented risks. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment we have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes, imposing legislative or regulatory requirements, or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold, each of which could have an adverse effect on our business, results of operations, cash flows or financial position.
We communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how we can help prevent such activities, enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect our trademarks. We also engage with the FDA and other government agencies to advocate for a well-regulated U.S. tobacco industry that embraces harm reduction and the enforcement of existing regulatory frameworks.
Prohibitory policies, such as California’s ban on the sale of flavored tobacco products, which went into effect in 2022, can have unintended negative consequences, including the proliferation of counterfeit and unregulated products. We actively engage with regulators, state and federal lawmakers, our trade partners and other stakeholders to bring awareness to these issues. When appropriate, we also take legal action to protect our lawful e-vapor product business, such as the lawsuit we filed in federal court in California against manufacturers of illegal e-vapor products in October 2023. All but one defendant was dismissed from this suit without prejudice on procedural grounds in January 2024, and we voluntarily dismissed the remaining defendant in February 2024. We filed a new lawsuit against five manufacturers, four brick-and-mortar retailers and three online retailers of illicit “Elf Bar” e-vapor products in February 2024 in federal court in California.
In June 2024, the U.S. Department of Justice (“DOJ”) and the FDA announced the creation of a federal multi-agency task force to combat the illegal marketing and sale of e-vapor products in the United States. The announcement noted that, in addition to the DOJ and the FDA, the task force will leverage the criminal and civil law enforcement capabilities of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, U.S. Customs and Border Protection, the U.S. Marshals Service, the U.S. Postal Inspection Service and the FTC and that additional agencies may join the task force in the future. The DOJ and the FDA stated that the task force will focus on many topics, such as investigating and prosecuting new criminal, civil, seizure and forfeiture actions under various U.S. laws, including the FSPTCA.
Price, Availability and Quality of Tobacco, Other Raw Materials, Ingredients and Component Parts
Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, production control programs, economic trade sanctions, import duties and tariffs, international trade disruptions, inflation, geopolitical instability, climate and environmental changes and disruptions due to man-made or natural disasters may increase the cost or reduce the supply or quality of tobacco, other raw materials, ingredients or component parts used to manufacture our operating companies’ products. Any significant change in such factors could negatively impact our ability to continue manufacturing and marketing existing products, increase our costs or negatively impact adult tobacco consumer product acceptability and have a material adverse effect on our business and profitability.
As with other agricultural commodities, tobacco price, quality and availability can be influenced by variations in weather patterns, including those caused by climate change, and macroeconomic conditions and imbalances in supply and demand, among other factors. For varieties of tobacco only available in limited geographies, government-mandated prices and production control programs, political instability or government prohibitions on the import or export of tobacco in certain countries pose additional risks to price, availability and quality. In addition, as consumer demand increases for innovative smoke-free products and decreases for combustible and MST products, the volume of tobacco leaf required for production of these products has decreased, resulting in reduced tobacco leaf demand. Reduced demand for tobacco leaf may result in the reduced supply and availability of domestic tobacco, as growers divert resources to other crops or cease farming, and increased costs. The unavailability or unacceptability of any one or more particular varieties of tobacco leaf or the unavailability of nicotine extract necessary to manufacture our operating companies’ products could negatively impact our ability to continue marketing existing products or impact adult tobacco consumer product acceptability, which could have a material adverse effect on our business and profitability. In addition, the nicotine used in our operating companies’ innovative smoke-free products is extracted from tobacco produced in one country. If we are unable to identify alternate sources of nicotine for our companies’ innovative products, we could be exposed to supply risk.
Current macroeconomic conditions and geopolitical instability (including inflation, high interest rates, labor shortages, supply and demand imbalances and geopolitical instability and international armed conflict) have caused and continue to cause worldwide disruptions and delays to supply chains and commercial markets, which limit access to, and increase the cost of, raw materials, ingredients and component parts (for example, tobacco leaf and resins and aluminum used in our packaging). We have implemented and continue to implement various strategies to help secure sufficient supplies of raw materials, ingredients and component parts for production.
In addition, government taxes, restrictions and prohibitions on the sale and use of certain products may limit access to, and increase the costs of, raw materials and component parts and, potentially, impede our ability to sell certain of our products. For example, certain states have passed extended producer responsibility legislation concerning packaging. Because certain of our products’ packaging consists of single-use plastics, single-use plastic bans and extended producer responsibility mandates could result in bans on some of our product packaging or our products and adversely impact our costs and revenues. Additional taxes and limitations on the use of certain single-use plastics have been proposed by the U.S. Congress and various state and local governments. These existing and potential future laws and regulations could increase the costs of, and impair our ability to, source certain materials used in the packaging for our products.
We work to mitigate these risks by maintaining inventory levels of certain tobacco varieties that cover several years, purchasing raw materials, ingredients and component parts from disperse geographic regions throughout the world and entering into long-term contracts with some of our tobacco growers and direct material suppliers. To date, the impact on us of changes in the price, availability and quality of tobacco, other raw materials, ingredients and component parts has not been material. However, the effects of the current macroeconomic and geopolitical conditions on prices, availability and quality of such items may continue, which could have a material adverse effect on our business, results of operations, cash flows or financial position.
Timing of Sales
In the ordinary course of business, we are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Operating Results
The following table provides reconciliations of reported OCI to adjusted OCI for our reportable segments, all other category and total OCI and provides the related OCI margins:
| For the Six Months Ended June 30, 2024 | ||||||||||||||||||||||||||||||||
| (in millions) | Smokeable Products | Oral Tobacco Products | All Other | Total | ||||||||||||||||||||||||||||
| Net revenues | $ | 10,401 | $ | 1,362 | $ | 22 | $ | 11,785 | ||||||||||||||||||||||||
| Excise taxes | (1,742) | (49) | — | (1,791) | ||||||||||||||||||||||||||||
| Revenues net of excise taxes | $ | 8,659 | $ | 1,313 | $ | 22 | $ | 9,994 | ||||||||||||||||||||||||
| Reported OCI | $ | 5,246 | $ | 532 | $ | (172) | $ | 5,606 | ||||||||||||||||||||||||
| NPM Adjustment Items | (6) | — | — | (6) | ||||||||||||||||||||||||||||
| Asset impairment | — | 354 | — | 354 | ||||||||||||||||||||||||||||
| Tobacco and health and certain other litigation items | 38 | — | — | 38 | ||||||||||||||||||||||||||||
| Adjusted OCI | $ | 5,278 | $ | 886 | $ | (172) | $ | 5,992 | ||||||||||||||||||||||||
| Reported OCI margin (1) | 60.6 | % | 40.5 | % | (100.0+)% | 56.1 | % | |||||||||||||||||||||||||
| Adjusted OCI margin (1) | 61.0 | % | 67.5 | % | (100.0+)% | 60.0 | % |
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
For further information on our reportable segments, see Note 11.
Smokeable Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins and provides a reconciliation of reported OCI to adjusted OCI for our smokeable products segment:
| Operating Results | |||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 10,401 | $ | 10,910 | (4.7) | % | $ | 5,495 | $ | 5,820 | (5.6) | % | |||||||||||||||||||||||
| Excise taxes | (1,742) | (1,969) | (908) | (1,041) | |||||||||||||||||||||||||||||||
| Revenues net of excise taxes | $ | 8,659 | $ | 8,941 | $ | 4,587 | $ | 4,779 | |||||||||||||||||||||||||||
| Reported OCI | $ | 5,246 | $ | 5,349 | (1.9) | % | $ | 2,807 | $ | 2,846 | (1.4) | % | |||||||||||||||||||||||
| NPM Adjustment Items | (6) | — | — | — | |||||||||||||||||||||||||||||||
| Tobacco and health and certain other litigation items | 38 | 52 | 20 | 40 | |||||||||||||||||||||||||||||||
| Adjusted OCI | $ | 5,278 | $ | 5,401 | (2.3) | % | $ | 2,827 | $ | 2,886 | (2.0) | % | |||||||||||||||||||||||
| Reported OCI margins (1) | 60.6 | % | 59.8 | % | 0.8 pp | 61.2 | % | 59.6 | % | 1.6 pp | |||||||||||||||||||||||||
| Adjusted OCI margins (1) | 61.0 | % | 60.4 | % | 0.6 pp | 61.6 | % | 60.4 | % | 1.2 pp |
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023
Net revenues, which include excise taxes billed to customers, decreased $509 million (4.7%), due primarily to lower shipment volume ($1,435 million), partially offset by higher pricing ($927 million), which includes higher promotional investments.
Reported OCI decreased $103 million (1.9%), due primarily to lower shipment volume ($930 million) and higher per unit settlement charges and manufacturing costs ($155 million), partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($47 million), which include lower tobacco and health and certain other litigation items.
Adjusted OCI decreased $123 million (2.3%), due primarily to lower shipment volume and higher per unit settlement charges and manufacturing costs, partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($33 million).
Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023
Net revenues, which include excise taxes billed to customers, decreased $325 million (5.6%), due primarily to lower shipment volume ($846 million), partially offset by higher pricing ($524 million), which includes higher promotional investments.
Reported OCI decreased $39 million (1.4%), due primarily to lower shipment volume ($550 million) and higher per unit settlement charges and manufacturing costs ($50 million), partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($38 million), which include lower tobacco and health and certain other litigation items.
Adjusted OCI decreased $59 million (2.0%), due primarily to lower shipment volume and higher per unit settlement charges and manufacturing costs, partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($18 million).
Shipment Volume and Retail Share Results
The following table summarizes our smokeable products segment’s shipment volume performance:
| Shipment Volume | |||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (sticks in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||
| Cigarettes: | |||||||||||||||||||||||||||||||||||
| Marlboro | 31,289 | 34,902 | (10.4) | % | 16,316 | 18,506 | (11.8) | % | |||||||||||||||||||||||||||
| Other premium | 1,573 | 1,779 | (11.6) | % | 826 | 954 | (13.4) | % | |||||||||||||||||||||||||||
| Discount | 1,486 | 2,149 | (30.9) | % | 756 | 1,101 | (31.3) | % | |||||||||||||||||||||||||||
| Total cigarettes | 34,348 | 38,830 | (11.5) | % | 17,898 | 20,561 | (13.0) | % | |||||||||||||||||||||||||||
| Cigars: | |||||||||||||||||||||||||||||||||||
| Black & Mild | 877 | 908 | (3.4) | % | 460 | 465 | (1.1) | % | |||||||||||||||||||||||||||
| Other | 2 | 2 | — | % | 2 | 1 | 100.0 | % | |||||||||||||||||||||||||||
| Total cigars | 879 | 910 | (3.4) | % | 462 | 466 | (0.9) | % | |||||||||||||||||||||||||||
| Total smokeable products | 35,227 | 39,740 | (11.4) | % | 18,360 | 21,027 | (12.7) | % |
Note: Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament and Benson & Hedges; and Discount brands, which include L&M and Basic. Cigarettes volume includes units sold as well as promotional units but excludes units sold for distribution to Puerto Rico, U.S. Territories to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to our smokeable products segment.
The following table summarizes our cigarettes retail share performance:
| Retail Share | |||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Percentage Point Change | 2024 | 2023 | Percentage Point Change | ||||||||||||||||||||||||||||||
| Cigarettes: | |||||||||||||||||||||||||||||||||||
| Marlboro | 42.0 | % | 42.1 | % | (0.1) | 42.0 | % | 42.1 | % | (0.1) | |||||||||||||||||||||||||
| Other premium | 2.3 | 2.3 | — | 2.2 | 2.3 | (0.1) | |||||||||||||||||||||||||||||
| Discount | 2.0 | 2.6 | (0.6) | 2.0 | 2.5 | (0.5) | |||||||||||||||||||||||||||||
| Total cigarettes | 46.3 | % | 47.0 | % | (0.7) | 46.2 | % | 46.9 | % | (0.7) | |||||||||||||||||||||||||
Note: Retail share results for cigarettes are based on data from Circana, LLC (“Circana”), as well as Management Science Associates, Inc. Circana maintains a blended retail service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”), as provided by Management Science Associates, Inc. This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is the standard practice of retail services to periodically refresh their retail scan services, which could restate retail share results that were previously released in these services.
For a discussion of volume trends and factors that impact volume and retail share performance, see Operating Results by Business Segment - Business Environment - Summary above.
Six Months Ended June 30, 2024 Compared with the Six Months Ended June 30, 2023
Our smokeable products segment’s reported and estimated adjusted domestic cigarettes shipment volume decreased 11.5%, driven primarily by the industry’s decline rate (impacted by macroeconomic pressures on adult tobacco consumers’ discretionary income and the growth of illicit e-vapor products), retail share losses and trade inventory movements. When adjusted for trade inventory movements, our smokeable products segment domestic cigarette shipment volume decreased by an estimated 10.5%. When adjusted for trade inventory movements and other factors, total estimated domestic cigarette industry volume decreased by an estimated 9%.
Shipments of premium cigarettes accounted for 95.7% and 94.5% of our smokeable products segment’s reported domestic cigarettes shipment volume for the six months ended June 30, 2024 and 2023, respectively.
Marlboro share of the premium segment was 59.3%, an increase of 0.7 share points.
Total cigarettes industry discount category retail share was 29.2%, an increase of 0.9 share points, primarily due to increased macroeconomic pressures on adult tobacco consumers’ discretionary income.
For a discussion regarding discount category dynamics in 2024 and the economic conditions, including a high inflationary environment, that impact adult tobacco consumer purchasing behavior, see Operating Results by Business Segment - Business Environment - Summary above.
Three Months Ended June 30, 2024 Compared with the Three Months Ended June 30, 2023
Our smokeable products segment’s reported and estimated adjusted domestic cigarettes shipment volume decreased 13.0%, driven primarily by the industry’s decline rate (impacted by macroeconomic pressures on adult tobacco consumers’ discretionary income and the growth of illicit e-vapor products), trade inventory movements and retail share losses. When adjusted for trade inventory movements, our smokeable products segment domestic cigarette shipment volume decreased by an estimated 11%. When adjusted for trade inventory movements, total estimated domestic cigarette industry volume decreased by an estimated 9.5%.
Shipments of premium cigarettes accounted for 95.8% and 94.6% of our smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended June 30, 2024 and 2023, respectively.
Marlboro retail share of the total cigarette category was 42.0%, a decrease of 0.1 share point versus the prior year and unchanged sequentially. Additionally, Marlboro share of the premium segment was 59.4%, an increase of 0.7 share points versus the prior year and 0.1 share point sequentially.
Total cigarettes industry discount category retail share was 29.3%, an increase of 1.0 share point versus the prior year and 0.2 share points sequentially, primarily due to increased macroeconomic pressures on adult tobacco consumers’ discretionary income.
For a discussion regarding discount category dynamics in 2024 and the economic conditions, including a high inflationary environment, that impact adult tobacco consumer purchasing behavior, see Operating Results by Business Segment - Business Environment - Summary above.
Pricing Actions
PM USA and Middleton executed the following pricing actions during 2024 and 2023:
▪Effective April 21, 2024, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.16 per five-pack.
▪Effective April 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol), L&M and Basic by $0.20 per pack. PM USA also increased the list price of all its other cigarette brands by $0.25 per pack.
▪Effective January 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol), L&M and Basic by $0.15 per pack. PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.
▪Effective October 15, 2023, PM USA increased the list price of Marlboro, L&M and Basic by $0.17 per pack. PM USA also increased the list price of all its other cigarette brands by $0.22 per pack.
▪Effective July 23, 2023, PM USA increased the list price of Marlboro, L&M and Basic by $0.16 per pack. PM USA also increased the list price of all its other cigarette brands by $0.21 per pack.
▪Effective June 11, 2023, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.15 per five-pack.
▪Effective April 23, 2023, PM USA increased the list price of Marlboro, L&M and Basic by $0.15 per pack. PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.
▪Effective January 22, 2023, PM USA increased the list price of Marlboro, L&M, Basic and Chesterfield by $0.15 per pack. PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.
In addition:
▪Effective July 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol), L&M and Basic by $0.17 per pack. PM USA also increased the list price of all its other cigarette brands by $0.22 per pack.
Oral Tobacco Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for our oral tobacco products segment:
| Operating Results | |||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 1,362 | $ | 1,308 | 4.1 | % | $ | 711 | $ | 680 | 4.6 | % | |||||||||||||||||||||||
| Excise taxes | (49) | (57) | (24) | (29) | |||||||||||||||||||||||||||||||
| Revenues net of excise taxes | $ | 1,313 | $ | 1,251 | $ | 687 | $ | 651 | |||||||||||||||||||||||||||
| Reported OCI | $ | 532 | $ | 859 | (38.1) | % | $ | 97 | $ | 443 | (78.1) | % | |||||||||||||||||||||||
| Asset impairment | 354 | — | 354 | — | |||||||||||||||||||||||||||||||
| Adjusted OCI | $ | 886 | $ | 859 | 3.1 | % | $ | 451 | $ | 443 | 1.8 | % | |||||||||||||||||||||||
| Reported OCI margins (1) | 40.5 | % | 68.7 | % | (28.2) pp | 14.1 | % | 68.0 | % | (53.9) pp | |||||||||||||||||||||||||
| Adjusted OCI margins (1) | 67.5 | % | 68.7 | % | (1.2) pp | 65.6 | % | 68.0 | % | (2.4) pp |
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023
Net revenues, which include excise taxes billed to customers, increased $54 million (4.1%), due primarily to higher pricing ($119 million), which includes lower promotional investments, partially offset by lower MST shipment volume and a higher percentage of on! shipment volume relative to MST (“volume/mix”) ($64 million).
Reported OCI decreased $327 million (38.1%), due primarily to a non-cash impairment of the Skoal trademark ($354 million), lower volume/mix ($69 million) and higher costs ($22 million), partially offset by higher pricing, which includes lower promotional investments.
Adjusted OCI increased $27 million (3.1%), due primarily to higher pricing, which includes lower promotional investments, partially offset by lower volume/mix and higher costs.
Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023
Net revenues, which include excise taxes billed to customers, increased $31 million (4.6%), due primarily to higher pricing ($59 million), which includes lower promotional investments, partially offset by lower volume/mix ($29 million).
Reported OCI decreased $346 million (78.1%), due primarily to a non-cash impairment of the Skoal trademark ($354 million), lower volume/mix ($30 million) and higher costs ($22 million), partially offset by higher pricing, which includes lower promotional investments.
Adjusted OCI increased $8 million (1.8%), due primarily to higher pricing, which includes lower promotional investments, partially offset by lower volume/mix and higher costs.
Shipment Volume and Retail Share Results
The following table summarizes our oral tobacco products segment’s shipment volume performance:
| Shipment Volume | |||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (cans and packs in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||
| Copenhagen | 203.0 | 223.9 | (9.3) | % | 103.9 | 114.9 | (9.6) | % | |||||||||||||||||||||||||||
| Skoal | 74.2 | 82.9 | (10.5) | % | 37.5 | 42.6 | (12.0) | % | |||||||||||||||||||||||||||
| on! | 74.5 | 55.2 | 35.0 | % | 41.2 | 30.0 | 37.3 | % | |||||||||||||||||||||||||||
| Other | 33.6 | 33.0 | 1.8 | % | 18.1 | 16.9 | 7.1 | % | |||||||||||||||||||||||||||
| Total oral tobacco products | 385.3 | 395.0 | (2.5) | % | 200.7 | 204.4 | (1.8) | % |
Note: Other primarily includes Red Seal and Husky. Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is currently not material to our oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.
The following table summarizes our oral tobacco products segment’s retail share performance (excluding international volume):
| Retail Share | |||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, | For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Percentage Point Change | 2024 | 2023 | Percentage Point Change | ||||||||||||||||||||||||||||||
| Copenhagen | 19.8 | % | 24.7 | % | (4.9) | 19.5 | % | 24.2 | % | (4.7) | |||||||||||||||||||||||||
| Skoal | 7.9 | 9.9 | (2.0) | 7.7 | 9.6 | (1.9) | |||||||||||||||||||||||||||||
| on! | 7.6 | 6.7 | 0.9 | 8.1 | 6.9 | 1.2 | |||||||||||||||||||||||||||||
| Other | 2.6 | 3.0 | (0.4) | 2.6 | 3.0 | (0.4) | |||||||||||||||||||||||||||||
| Total oral tobacco products | 37.9 | % | 44.3 | % | (6.4) | 37.9 | % | 43.7 | % | (5.8) |
Note: Our oral tobacco products segment’s retail share results exclude international volume, which is currently not material to our oral tobacco products segment. Retail share results for oral tobacco products are based on data from Circana, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Oral tobacco products are defined by Circana as domestic tobacco derived oral products, in the form of MST, snus and oral nicotine pouches. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is the standard practice of retail services to periodically refresh their retail scan services, which could restate retail share results that were previously released in these services.
For a discussion of volume trends and factors that impact volume and retail share performance, see Operating Results by Business Segment - Business Environment - Summary above.
Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023
Our oral tobacco products segment’s reported domestic shipment volume decreased 2.5%, driven primarily by retail share losses, partially offset by the industry’s growth rate, calendar differences and other factors. When adjusted for calendar differences and trade inventory movements, our oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 3.5%.
Total oral tobacco products category industry volume increased by an estimated 9% for the six months ended June 30, 2024, primarily driven by growth in oral nicotine pouches, partially offset by declines in MST volumes.
Our oral tobacco products segment’s retail share was 37.9%, as share declines for MST products were primarily driven by oral nicotine pouch segment share growth.
The U.S. nicotine pouch category grew to 40.9% of the U.S. oral tobacco category, an increase of 12.9 share points versus the prior year. In addition, on!’s share of the nicotine pouch category was 18.5%, a decrease of 5.4 share points versus the prior year.
Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023
Our oral tobacco products segment’s reported domestic shipment volume decreased 1.8%, driven primarily by retail share losses, partially offset by the industry’s growth rate, trade inventory movements, calendar differences and other factors. When adjusted for trade inventory movements and calendar differences, our oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 3%.
Our oral tobacco products segment’s retail share was 37.9%, as share declines for MST products were primarily driven by oral nicotine pouch segment share growth.
Total U.S. oral tobacco category share for on! nicotine pouches was 8.1%, an increase of 1.2 share points versus the prior year and 1.0 share point sequentially.
The U.S. nicotine pouch category grew to 41.6% of the U.S. oral tobacco category, an increase of 12.3 share points versus the prior year. In addition, on!’s share of the nicotine pouch category was 19.4%, a decrease of 4.2 share points versus the prior year and an increase of 1.8 share points sequentially.
Pricing Actions
USSTC executed the following pricing actions during 2024 and 2023:
▪Effective April 23, 2024, USSTC increased the list price on its Copenhagen, Skoal and Red Seal brands by $0.10 per can.
▪Effective January 23, 2024, USSTC increased the list price on its Copenhagen, Skoal and Red Seal brands by $0.11 per can.
▪Effective August 22, 2023, USSTC increased the list price on its Copenhagen, Red Seal and Skoal brands by $0.09 per can. In addition, USSTC decreased the list price on select Husky brands by $0.18 per can.
▪Effective July 23, 2023, Helix increased the list price on its on! brand by $0.09 per can.
▪Effective April 25, 2023, USSTC increased the list price on its Copenhagen popular price products*, Red Seal* and Husky brands by $0.09 per can. In addition, USSTC increased the list price on its Skoal brands and on the balance of its Copenhagen brands by $0.10 per can.
▪Effective January 24, 2023, USSTC increased the list price on its Copenhagen, Skoal, Red Seal and Husky brands by $0.09 per can.
In addition:
▪Effective July 23, 2024, USSTC increased the list price on its Copenhagen, Skoal and Red Seal brands by $0.10 per can.
E-Vapor
Our NJOY e-vapor business is reported in our all other category.
Six Months Ended June 30, 2024
Reported domestic shipment volumes for the six months ended June 30, 2024 for NJOY consumables(1) and devices were 23.4 million units and 2.8 million units, respectively.
For the six months ended June 30, 2024 NJOY retail share in the U.S. multi-outlet and convenience channel was 4.8%.
Three Months Ended June 30, 2024
Reported domestic shipment volumes for the three months ended June 30, 2024 for NJOY consumables(1) increased 14.7% sequentially to 12.5 million units. Reported domestic shipment volume for the three months ended June 30, 2024 for NJOY devices increased 80.0% sequentially to 1.8 million units.
In the second quarter of 2024, NJOY retail share in the U.S. multi-outlet and convenience channel increased 1.3 share points sequentially to 5.5%.
(1) E-vapor shipment volume includes NJOY ACE pods and DAILY disposables.
Liquidity and Capital Resources
We are a holding company that is primarily dependent on the capital resources of our subsidiaries to satisfy our liquidity requirements. Our access to the operating cash flows of our subsidiaries consists of cash received from the payment of dividends and distributions and the payment of interest on intercompany loans. At June 30, 2024, our significant subsidiaries were not limited by contractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests. In addition, we receive cash dividends on our interest in ABI and will continue to do so as long as we hold shares in ABI and ABI pays dividends.
At June 30, 2024, we had $1.8 billion of cash and cash equivalents. In addition to having access to the operating cash flows of our subsidiaries, our capital resources include access to credit markets in the form of commercial paper, availability under our $3.0 billion senior unsecured 5-year revolving credit agreement (“Credit Agreement”), which we use for general corporate purposes, and access to credit markets through the issuance of long-term senior unsecured notes. For additional information, see Capital Markets and Other Matters below.
In addition to funding current operations, we primarily use our net cash from operating activities for payment of dividends, share repurchases under our share repurchase programs, repayment of debt, acquisitions of or investments in businesses and assets and capital expenditures.
We believe our cash and cash equivalents balance, along with our future cash flows from operations, capacity for borrowings under our Credit Agreement and access to credit and capital markets, provide sufficient liquidity to meet the needs of our business operations and to satisfy our projected cash requirements for the next 12 months and the foreseeable future.
Capital Markets and Other Matters
Credit Ratings - Our cost and terms of financing and our access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under our Credit Agreement is discussed in Note 12. Debt to our condensed consolidated financial statements in Item 1 (“Note 12”).
At June 30, 2024, the credit ratings and outlook for our indebtedness by major credit rating agencies were:
| Short-term Debt | Long-term Debt | Outlook | |||||||||||||||
| Moody’s Investors Service, Inc. (“Moody’s”) | P-2 | A3 | Negative (1) | ||||||||||||||
| Standard & Poor’s Financial Services LLC (“S&P”) | A-2 | BBB | Positive | ||||||||||||||
| Fitch Ratings Inc. | F2 | BBB | Stable |
(1) On May 6, 2024, Moody’s changed its outlook for our indebtedness to Negative from Stable.
Credit Lines - From time to time, we have short-term borrowing needs to meet our working capital requirements arising from the timing of payments under State Settlement Agreements, quarterly income tax payments and quarterly dividend payments, and generally use our commercial paper program to meet those needs.
At June 30, 2024, we had availability under our Credit Agreement for borrowings of up to an aggregate principal amount of $3.0 billion, and we were in compliance with the covenants in our Credit Agreement. We monitor the credit quality of our bank group and do not know of any potential non-performing credit provider in that group. For further discussion on short-term borrowings, see Note 12.
Long-Term Debt - At June 30, 2024 and December 31, 2023, our total long-term debt was $25.0 billion and $26.2 billion, respectively. During the first quarter of 2024, we repaid in full at maturity our 4.000% and 3.800% senior unsecured notes in the aggregate principal amounts of $776 million and $345 million, respectively. For further details on long-term debt, see Note 12.
At June 30, 2024, our debt-to-Consolidated net earnings and debt-to-Consolidated EBITDA ratios were calculated as follows:
| For the Twelve Months Ended June 30, 2024 (1) | |||||||||||
| (in millions) | |||||||||||
| Consolidated net earnings | $ | 10,158 | |||||||||
| Interest and other debt expense, net | 1,018 | ||||||||||
| Provision for income taxes | 3,340 | ||||||||||
| Depreciation and amortization | 297 | ||||||||||
| EBITDA | 14,813 | ||||||||||
| (Income) loss from investments in equity securities and noncontrolling interests, net | (610) | ||||||||||
| Dividends from less than 50% owned affiliates | 139 | ||||||||||
| Gain on the sale of IQOS System commercialization rights | (2,700) | ||||||||||
| Asset impairment | 354 | ||||||||||
| Fair value adjustment for NJOY Transaction contingent payments | 140 | ||||||||||
| Consolidated EBITDA | $ | 12,136 | |||||||||
| Current portion of long-term debt (2) | $ | 1,553 | |||||||||
| Long-term debt (2**)** | 23,470 | ||||||||||
| Total Debt | $ | 25,023 | |||||||||
| Total Debt / Consolidated net earnings | 2.5 | ||||||||||
| Total Debt / Consolidated EBITDA | 2.1 |
(1) Calculated as of the end of the applicable quarter on a rolling four quarters basis.
(2) Balance at June 30, 2024.
ABI Transaction - As discussed in Note 6, in March 2024, we received pre-tax cash proceeds from the ABI Transaction of approximately $2.4 billion and paid transaction costs of approximately $62 million. We used the proceeds from the ABI Transaction to fund the ASR transactions discussed below.
NJOY Contingent Payments - On June 21, 2024, the FDA issued MGOs for four NJOY e-vapor menthol products. As a result, we became obligated to make cash payments totaling $250 million under the acquisition agreement, which payments occurred in July 2024. For further discussion on the NJOY contingent payments, see Note 2.
Guarantees and Other Similar Matters - As discussed in Note 14, we had unused letters of credit obtained in the ordinary course of business and guarantees (including third-party guarantees) outstanding at June 30, 2024. From time to time, we also issue lines of credit to affiliated entities. As further discussed in Note 4. Supplier Financing to our condensed consolidated financial statements in Item 1 and Note 14, as part of the supplier financing program, Altria guarantees the financial obligations of Altria Client Services LLC under the financing program agreement. In addition, as discussed below in Supplemental Guarantor Financial Information and in Note 12, PM USA guarantees our obligations under our outstanding debt securities, any borrowings under our Credit Agreement and any amounts outstanding under our commercial paper program. These items have not had, and are not expected to have, a significant impact on our liquidity.
Payments Under State Settlement Agreements and FDA Regulation - PM USA has entered into State Settlement Agreements with the states, the District of Columbia and certain U.S. territories that call for certain payments. In addition, PM USA, Middleton and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. For further discussion of State Settlement Agreements, see Health Care Cost Recovery Litigation in Note 14.
Based on current agreements, estimated market share, estimated annual industry volume decline rates and inflation rates, the estimated amounts that we may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees are $3.6 billion on average for the next three years. The estimated amount for 2024 includes PM USA’s obligations under the State Settlement Agreements to pay settling plaintiffs’ attorneys’ fees. We expect PM USA’s obligation to pay these fees will terminate in the fourth quarter of 2024. In addition, the amount excludes the potential impact of any NPM Adjustment Items.
The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year are generally paid in April of the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. We paid approximately $3.1 billion and $3.4 billion for the six months ended June 30, 2024 and 2023, respectively, in connection with the State Settlement Agreements and FDA user fees, primarily all of which was paid in the
second quarter of each period. We recorded $1.9 billion and $2.0 billion of charges to cost of sales for the six months ended June 30, 2024 and 2023, respectively, and $1.0 billion of charges to cost of sales for both the three months ended June 30, 2024 and 2023, in connection with the State Settlement Agreements and FDA user fees. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results. For further discussion on the potential impact of inflation on future payments, see Operating Results by Business Segment - Business Environment - State Settlement Agreements above.
Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of June 30, 2024, PM USA had posted appeal bonds totaling $37 million, which have been collateralized with restricted cash that is included in assets on our condensed consolidated balance sheet.
Litigation is subject to uncertainty, and an adverse outcome or settlement of litigation could have a material adverse effect on our results of operations, cash flows or financial position in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 14.
Equity and Dividends
During the first six months of 2024 and 2023, we paid dividends of $3,420 million and $3,365 million, respectively, an increase of 1.6%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares we repurchased under our share repurchase programs. Our current annualized dividend rate is $3.92 per share. We have a progressive dividend goal targeting mid-single digits dividend growth annually. Future dividend payments remain subject to the discretion of our Board of Directors (“Board of Directors” or “Board”).
ASR - In March 2024, we increased our $1.0 billion share repurchase program to $3.4 billion and entered into the ASR transactions. We paid $2.4 billion for the repurchase of our common stock in the ASR transactions in the first quarter of 2024, and the final settlement of the ASR transactions occurred in the second quarter of 2024. We funded the ASR transactions with proceeds from the ABI Transaction.
For further discussion of our share repurchase programs, see Note 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.
Financial Review
Cash Provided by/Used in Operating Activities
During the first six months of 2024, net cash provided by operating activities was $2,802 million compared with $3,108 million during the first six months of 2023. This decrease was due primarily to lower net revenues and higher litigation payments, partially offset by lower State Settlement Agreements and federal excise tax payments.
We had a working capital deficit at June 30, 2024 and December 31, 2023, and believe we have the ability to fund working capital deficits with cash provided by operating activities, borrowings under our Credit Agreement and access to the credit and capital markets.
Cash Provided by/Used in Investing Activities
During the first six months of 2024, net cash provided by investing activities was $2,279 million compared with net cash used in investing activities of $2,858 million during the first six months of 2023. This change was due primarily to proceeds from the ABI Transaction in 2024 and the NJOY Transaction in 2023.
Cash Provided by/Used in Financing Activities
During the first six months of 2024, net cash used in financing activities was $6,966 million compared with $3,418 million during the first six months of 2023. This increase was due to proceeds from short-term borrowings in 2023 and higher share repurchases and dividends paid in 2024, partially offset by lower repayments of long-term debt in 2024.
New Accounting Guidance Not Yet Adopted
See Note 15. New Accounting Guidance Not Yet Adopted to our condensed consolidated financial statements in Item 1 for a discussion of issued accounting guidance applicable to, but not yet adopted by, us.
Contingencies
See Note 14 for a discussion of contingencies.
Supplemental Guarantor Financial Information
PM USA (“Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (“Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (“Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (“Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor.
Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees:
▪received less than reasonably equivalent value or fair consideration therefor; and
▪either:
▪was insolvent or rendered insolvent by reason of such occurrence;
▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or
▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if:
▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation;
▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
▪it could not pay its debts as they become due.
To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent.
The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor;
▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of the Parent’s long-term senior unsecured debt by S&P of A or higher.
The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP.
Summarized Balance Sheets
(in millions of dollars)
| Parent | Guarantor | |||||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Due from Non-Guarantor Subsidiaries | $ | — | $ | — | $ | 316 | $ | 316 | ||||||||||||||||||
| Other current assets | 2,124 | 4,052 | 748 | 678 | ||||||||||||||||||||||
| Total current assets | $ | 2,124 | $ | 4,052 | $ | 1,064 | $ | 994 | ||||||||||||||||||
| Due from Non-Guarantor Subsidiaries | $ | 6,561 | $ | 6,561 | $ | — | $ | — | ||||||||||||||||||
| Other assets | 8,141 | 9,797 | 1,318 | 1,334 | ||||||||||||||||||||||
| Total non-current assets | $ | 14,702 | $ | 16,358 | $ | 1,318 | $ | 1,334 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Due to Non-Guarantor Subsidiaries | $ | 3,108 | $ | 2,548 | $ | 1,163 | $ | 1,081 | ||||||||||||||||||
| Other current liabilities | 4,137 | 3,708 | 2,514 | 3,665 | ||||||||||||||||||||||
| Total current liabilities | $ | 7,245 | $ | 6,256 | $ | 3,677 | $ | 4,746 | ||||||||||||||||||
| Total non-current liabilities | $ | 26,406 | $ | 27,876 | $ | 588 | $ | 590 |
Summarized Statements of Earnings (Losses)
(in millions of dollars)
| For the Six Months Ended June 30, 2024 | ||||||||||||||||||||
| Parent (1) | Guarantor (2) | |||||||||||||||||||
| Net revenues | $ | — | $ | 9,818 | ||||||||||||||||
| Gross profit | — | 5,535 | ||||||||||||||||||
| Net earnings (losses) | (207) | 3,720 | ||||||||||||||||||
(1) For the six months ended June 30, 2024, net earnings (losses) include $184 million of intercompany interest income from non-guarantor subsidiaries and $232 million of interest expense from non-guarantor subsidiaries.
(2) For the six months ended June 30, 2024, net earnings (losses) include $154 million of intercompany interest income from non-guarantor subsidiaries.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
This Form 10-Q contains statements concerning our expectations, plans, objectives, future financial performance and other statements that are not historical facts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or
assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected. You should bear this in mind as you consider our forward-looking statements and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes, including with respect to our ability to achieve our Vision, to differ materially from those contained in, or implied by, any forward-looking statements we make. Any such statement is qualified by reference to the following cautionary statements. We elaborate on these important factors and the risks we face throughout this Form 10-Q, particularly in the “Executive Summary” and “Business Environment” sections preceding our discussion of the operating results of our segments above, and in our other publicly filed reports, including our 2023 Form 10-K. These factors and risks include the following:
▪our inability to anticipate and respond to changes in adult tobacco consumer preferences and purchase behavior;
▪our inability to compete effectively;
▪the growth of the e-vapor category, including illegal disposable e-vapor products, which contributes to reductions in domestic cigarette consumption levels and shipment volume;
▪the risks associated with illicit trade in tobacco products, including counterfeit products, illegally imported products, illegal disposable e-vapor products, illicit oral nicotine products, and products designed to avoid the regulatory framework for tobacco products, such as products using nicotine analogues, each of which contribute to reductions in the consumption levels and shipment volumes of our businesses’ products;
▪our failure to commercialize innovative products, including tobacco products that may reduce health risks relative to other tobacco products and appeal to adult tobacco consumers;
▪changes, including in macroeconomic and geopolitical conditions (including inflation), that result in shifts in adult tobacco consumer disposable income and purchasing behavior, including choosing lower-priced and discount brands or products, and reductions in shipment volumes;
▪unfavorable outcomes with respect to litigation proceedings or any governmental investigations, including significant monetary and non-monetary remedies and importation bans ;
▪the risks associated with significant federal, state and local government actions, including FDA regulatory actions and inaction, and various private sector actions;
▪increases in tobacco product-related taxes;
▪our failure to complete or manage successfully strategic transactions, including the NJOY Transaction and other acquisitions, dispositions, joint ventures and investments in third parties, or realize the anticipated benefits of such transactions;
▪significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of changes in macroeconomic, climate and geopolitical conditions;
▪our reliance on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers and the risks associated with an extended disruption at a facility or in service by a supplier, distributor or distribution chain service provider;
▪the risk that we may be required to write down intangible assets, including trademarks and goodwill, due to impairment;
▪the risk that we could decide, or be required, to recall products;
▪the various risks related to health epidemics and pandemics and the measures that international, federal, state and local governments, agencies, law enforcement and health authorities implement to address them;
▪our inability to attract and retain a highly skilled and diverse workforce due to the decreasing social acceptance of tobacco usage, tobacco control actions and other factors;
▪the risks associated with the various U.S. and foreign laws and regulations to which we are subject due to our international business operations;
▪the risks concerning a challenge to our tax positions, an increase in the income tax rate or other changes to federal or state tax laws;
▪the risks associated with legal and regulatory requirements related to climate change and other environmental sustainability matters;
▪disruption and uncertainty in the credit and capital markets, including risk of losing access to these markets;
▪a downgrade or potential downgrade of our credit ratings;
▪our inability to attract investors due to increasing investor expectations of our performance relating to corporate responsibility factors, including environmental, social and governance matters;
▪the failure of our, or our key service providers’ or key suppliers’, information systems to function as intended, or cyber-attacks or security breaches affecting us or our key service providers or key suppliers;
▪our failure, or the failure of our key service providers or key suppliers, to comply with laws related to personal data protection, privacy, artificial intelligence and information security;
▪the risk that the expected benefits of our investment in ABI may not materialize in the expected manner or timeframe or at all, including due to macroeconomic and geopolitical conditions; foreign currency exchange rates; ABI’s business results; ABI’s share price; impairment losses on the value of our investment; our incurrence of additional tax liabilities related to our investment in ABI; and reductions in the number of directors that we can have appointed to the ABI board of directors; and
▪the risks associated with our investment in Cronos, including legal, regulatory and reputational risks and the risk that the expected benefits of the transaction may not materialize in the expected timeframe or at all.
You should understand that it is not possible to predict or identify all factors and risks. Consequently, you should not consider the foregoing list to be complete. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
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