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Section 1: 8-K (FINANCIAL STATEMENTS)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________________________________________________________
FORM 8-K
________________________________________________________________________________________________________________
 CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 30, 2020
________________________________________________________________________________________________________________
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________________________________
Virginia
  
1-08940
  
13-3260245
(State or other jurisdiction
of incorporation)
  
(Commission File Number)
  
(I.R.S. Employer
Identification No.)
6601 West Broad Street,
Richmond,
Virginia
23230
(Address of principal executive offices)        
 
 
(Zip Code)
Registrant’s telephone number, including area code: (804274-2200
_______________________________________________________________________________________________________________
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Common Stock, $0.33 1/3 par value
MO
New York Stock Exchange
1.000% Notes due 2023
MO23A
New York Stock Exchange
1.700% Notes due 2025
MO25
New York Stock Exchange
2.200% Notes due 2027
MO27
New York Stock Exchange
3.125% Notes due 2031
MO31
New York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o




Item 8.01.
Other Events.
Filed as part of this Current Report on Form 8-K are the consolidated balance sheets of Altria Group, Inc. (“Altria”) and subsidiaries as of December 31, 2019 and 2018, and the related consolidated statements of earnings (losses), comprehensive earnings (losses), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 (the “Financial Statements”); report of management on internal control over financial reporting; and the independent registered public accounting firm’s report on the Financial Statements and the effectiveness of internal control over financial reporting. The Financial Statements, report of management on internal control over financial reporting and the independent registered public accounting firm’s report on the Financial Statements and the effectiveness of internal control over financial reporting will also be filed as part of Altria’s Annual Report on Form 10-K for the year ended December 31, 2019.
Item 9.01.
Financial Statements and Exhibits.
(d)
Exhibits
 
23
 
 
 
 
 
 
99.1
 
 
 
 
 
 
99.2
 
 
 
 
 
 
99.3
 
 
 
 
 
 
104
 
The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 101)

2




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
ALTRIA GROUP, INC.
 
 
 
 
 
By:
 
/s/ WILLIAM F. GIFFORD, JR.
 
Name:
 
William F. Gifford, Jr.
 
Title:
 
Vice Chairman and Chief Financial Officer

DATE: January 30, 2020


3
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Section 2: EX-23.1 (CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)

Exhibit


Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Post-Effective Amendment No. 13 to the Registration Statement on Form S-14 (File No. 2-96149) and in the Registration Statements on Form S-3 (File No. 333-221133) and Form S-8 (File Nos. 333-28631, 33-10218, 33-13210, 33-14561, 33-48781, 33-59109, 333-43478, 333-43484, 333-128494, 333-139523, 333-148070, 333-156188, 333-167516, 333-170185, 333-204477 and 333-209701) of Altria Group, Inc. of our report dated January 30, 2020 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
January 30, 2020



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Section 3: EX-99.1 (FINANCIAL STATEMENTS)

Exhibit
Exhibit 99.1








Altria Group, Inc. and Subsidiaries
Consolidated Financial Statements as of
December 31, 2019 and 2018, and for Each of the
Three Years in the Period Ended December 31, 2019





Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
 
at December 31,
2019

 
2018

Assets
 
 
 
Cash and cash equivalents
$
2,117

 
$
1,333

Receivables
152

 
142

Inventories:
 
 
 
Leaf tobacco
874

 
940

Other raw materials
192

 
186

Work in process
696

 
647

Finished product
531

 
558

 
2,293

 
2,331

Income taxes
116

 
167

Other current assets
146

 
326

Total current assets
4,824

 
4,299

 
 
 
 
Property, plant and equipment, at cost:
 
 
 
Land and land improvements
353

 
309

Buildings and building equipment
1,461

 
1,442

Machinery and equipment
2,998

 
2,981

Construction in progress
262

 
218

 
5,074

 
4,950

Less accumulated depreciation
3,075

 
3,012

 
1,999

 
1,938

 
 
 
 
Goodwill
5,177

 
5,196

Other intangible assets, net
12,687

 
12,279

Investments in equity securities
23,581

 
30,496

Other assets
1,003

 
1,251

Total Assets
$
49,271

 
$
55,459


See notes to consolidated financial statements.


2


Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
____________________________________________

at December 31,
2019

 
2018

Liabilities
 
 
 
Short-term borrowings
$

 
$
12,704

Current portion of long-term debt
1,000

 
1,144

Accounts payable
325

 
399

Accrued liabilities:
 
 
 
Marketing
393

 
586

Settlement charges
3,346

 
3,454

Other
1,545

 
1,403

Dividends payable
1,565

 
1,503

Total current liabilities
8,174

 
21,193

 
 
 
 
Long-term debt
27,042

 
11,898

Deferred income taxes
5,083

 
4,993

Accrued pension costs
473

 
544

Accrued postretirement health care costs
1,797

 
1,749

Other liabilities
345

 
254

Total liabilities
42,914

 
40,631

Contingencies (Note 19)

 

Redeemable noncontrolling interest
38

 
39

Stockholders’ Equity
 
 
 
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued)
935

 
935

Additional paid-in capital
5,970

 
5,961

Earnings reinvested in the business
36,539

 
43,962

Accumulated other comprehensive losses
(2,864
)
 
(2,547
)
Cost of repurchased stock
(947,979,763 shares at December 31, 2019 and
931,903,722 shares at December 31, 2018)
(34,358
)
 
(33,524
)
Total stockholders’ equity attributable to Altria
6,222

 
14,787

Noncontrolling interests
97

 
2

Total stockholders’ equity
6,319

 
14,789

Total Liabilities and Stockholders’ Equity
$
49,271

 
$
55,459

 

See notes to consolidated financial statements.



3


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings (Losses)
(in millions of dollars, except per share data)
____________________________________
 
for the years ended December 31,
2019

 
2018

 
2017

Net revenues
$
25,110

 
$
25,364

 
$
25,576

Cost of sales
7,085

 
7,373

 
7,531

Excise taxes on products
5,314

 
5,737

 
6,082

Gross profit
12,711

 
12,254

 
11,963

Marketing, administration and research costs
2,226

 
2,756

 
2,338

Asset impairment and exit costs
159

 
383

 
32

Operating income
10,326

 
9,115

 
9,593

Interest and other debt expense, net
1,280

 
665

 
705

Net periodic benefit (income) cost, excluding service cost
(37
)
 
(34
)
 
37

Earnings from equity investments
(1,725
)
 
(890
)
 
(532
)
Impairment of JUUL equity securities
8,600

 

 

Loss on Cronos-related financial instruments
1,442

 

 

(Gain) loss on ABI/SABMiller business combination

 
33

 
(445
)
Earnings (losses) before income taxes
766

 
9,341

 
9,828

Provision (benefit) for income taxes
2,064

 
2,374

 
(399
)
Net earnings (losses)
(1,298
)
 
6,967

 
10,227

Net (earnings) losses attributable to noncontrolling interests
5

 
(4
)
 
(5
)
Net earnings (losses) attributable to Altria
$
(1,293
)
 
$
6,963

 
$
10,222

Per share data:
 
 
 
 
 
Basic earnings (losses) per share attributable to Altria
$
(0.70
)
 
$
3.69

 
$
5.31

Diluted earnings (losses) per share attributable to Altria
$
(0.70
)
 
$
3.68

 
$
5.31


See notes to consolidated financial statements.



4


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings (Losses)
(in millions of dollars)
_______________________

for the years ended December 31,
 
2019

 
2018

 
2017

Net earnings (losses)
 
$
(1,298
)
 
$
6,967

 
$
10,227

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
 
 
Benefit plans
 
(24
)
 
68

 
209

ABI
 
(319
)
 
(309
)
 
(54
)
Currency translation adjustments and other
 
26

 
(1
)
 

Other comprehensive earnings (losses), net of deferred income taxes
 
(317
)
 
(242
)
 
155

 
 
 
 
 
 
 
Comprehensive earnings (losses)
 
(1,615
)
 
6,725

 
10,382

Comprehensive (earnings) losses attributable to noncontrolling interests
 
5

 
(4
)
 
(5
)
Comprehensive earnings (losses) attributable to Altria
 
$
(1,610
)
 
$
6,721

 
$
10,377


See notes to consolidated financial statements.



5


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
__________________
 
for the years ended December 31,
2019

 
2018

 
2017

Cash Provided by (Used in) Operating Activities
 
 
 
 
 
Net earnings (losses)
$
(1,298
)
 
$
6,967

 
$
10,227

Adjustments to reconcile net earnings (losses) to operating cash flows:
 
 
 
 
 
Depreciation and amortization
226

 
227

 
209

Deferred income tax provision (benefit)
(95
)
 
(57
)
 
(3,126
)
Earnings from equity investments
(1,725
)
 
(890
)
 
(532
)
(Gain) loss on ABI/SABMiller business combination

 
33

 
(445
)
Dividends from ABI
396

 
657

 
806

Loss on Cronos-related financial instruments
1,442

 

 

Impairment of JUUL equity securities
8,600

 

 

Asset impairment and exit costs, net of cash paid
41

 
354

 
(38
)
Cash effects of changes:
 
 
 
 
 
Receivables
(8
)
 

 
10

Inventories
42

 
(129
)
 
(171
)
Accounts payable
(79
)
 
27

 
(55
)
Income taxes
89

 
218

 
(294
)
Accrued liabilities and other current assets
11

 
(21
)
 
(85
)
Accrued settlement charges
(108
)
 
980

 
(1,259
)
Pension and postretirement plans contributions
(56
)
 
(41
)
 
(294
)
Pension provisions and postretirement, net
(52
)
 
(13
)
 
(11
)
Other, net
411

 
79

 
(41
)
Net cash provided by (used in) operating activities
7,837

 
8,391

 
4,901

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
Capital expenditures
(246
)
 
(238
)
 
(199
)
Acquisitions of businesses and assets
(421
)
 
(15
)
 
(415
)
Investment in JUUL
(5
)
 
(12,800
)
 

Investment in Cronos
(1,899
)
 

 

Other, net
173

 
65

 
147

Net cash provided by (used in) investing activities
(2,398
)
 
(12,988
)
 
(467
)

See notes to consolidated financial statements.



6


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
__________________

for the years ended December 31,
2019

 
2018

 
2017

Cash Provided by (Used in) Financing Activities
 
 
 
 
 
Proceeds from short-term borrowings
$

 
$
12,800

 
$

Repayment of short-term borrowings
(12,800
)
 

 

Long-term debt issued
16,265

 

 

Long-term debt repaid
(1,144
)
 
(864
)
 

Repurchases of common stock
(845
)
 
(1,673
)
 
(2,917
)
Dividends paid on common stock
(6,069
)
 
(5,415
)
 
(4,807
)
Other, net
(119
)
 
(132
)
 
(47
)
Net cash provided by (used in) financing activities
(4,712
)
 
4,716

 
(7,771
)
Cash, cash equivalents and restricted cash:
 
 
 
 
 
Increase (decrease)
727

 
119

 
(3,337
)
Balance at beginning of year
1,433

 
1,314

 
4,651

Balance at end of year
$
2,160

 
$
1,433

 
$
1,314

Cash paid:
Interest
$
1,102

 
$
704

 
$
696

 
Income taxes
$
1,977

 
$
2,307

 
$
3,036

The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s consolidated balance sheets:
 
 
 
 
at December 31,
2019

 
2018

 
2017

Cash and cash equivalents
$
2,117

 
$
1,333

 
$
1,253

Restricted cash included in other current assets (1)

 
57

 
25

Restricted cash included in other assets (1)
43

 
43

 
36

Cash, cash equivalents and restricted cash
$
2,160

 
$
1,433

 
$
1,314

(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 19. Contingencies.

See notes to consolidated financial statements.



7


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
____________________________________
 
 
Attributable to Altria
 
 
 
  
Common
Stock

 
Additional
Paid-in
Capital

 
Earnings
Reinvested in
the Business

 
Accumulated
Other
Comprehensive
Losses

 
Cost of
Repurchased
Stock

 
Non-
controlling
Interests

 
Total
Stockholders’
Equity

Balances, December 31, 2016
$
935

 
$
5,893

 
$
36,906

 
$
(2,052
)
 
$
(28,912
)
 
$
3

 
$
12,773

Net earnings (losses) (1)

 

 
10,222

 

 

 

 
10,222

Other comprehensive earnings (losses), net
of deferred income taxes

 

 

 
155

 

 

 
155

Stock award activity

 
59

 

 

 
(35
)
 

 
24

Cash dividends declared ($2.54 per share)

 

 
(4,877
)
 

 

 

 
(4,877
)
Repurchases of common stock

 

 

 

 
(2,917
)
 

 
(2,917
)
Balances, December 31, 2017
935

 
5,952

 
42,251

 
(1,897
)
 
(31,864
)
 
3

 
15,380

Reclassification due to adoption of ASU 2018-02 (2)

 

 
408

 
(408
)
 

 

 

Net earnings (losses) (1)

 

 
6,963

 

 

 

 
6,963

Other comprehensive earnings (losses), net
of deferred income taxes

 

 

 
(242
)
 

 

 
(242
)
Stock award activity

 
9

 

 

 
13

 

 
22

Cash dividends declared ($3.00 per share)

 

 
(5,660
)
 

 

 

 
(5,660
)
Repurchases of common stock

 

 

 

 
(1,673
)
 

 
(1,673
)
Other

 

 

 

 

 
(1
)
 
(1
)
Balances, December 31, 2018
935

 
5,961

 
43,962

 
(2,547
)
 
(33,524
)
 
2

 
14,789

Net earnings (losses) (1)

 

 
(1,293
)
 

 

 
(7
)
 
(1,300
)
Other comprehensive earnings (losses), net of deferred income taxes

 

 

 
(317
)
 

 

 
(317
)
Stock award activity

 
9

 

 

 
11

 

 
20

Cash dividends declared ($3.28 per share)

 

 
(6,130
)
 

 

 

 
(6,130
)
Repurchases of common stock

 

 

 

 
(845
)
 

 
(845
)
Issuance of noncontrolling interest in Helix

 

 

 

 

 
88

 
88

Other

 

 

 

 

 
14

 
14

Balances, December 31, 2019
$
935

 
$
5,970

 
$
36,539

 
$
(2,864
)
 
$
(34,358
)
 
$
97

 
$
6,319

   
(1) Amounts attributable to noncontrolling interests for each of the years ended December 31, 2019, 2018 and 2017 exclude net earnings of $2 million, $4 million and $5 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the consolidated balance sheets at December 31, 2019, 2018 and 2017.
(2) In 2018, Altria adopted Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), and reclassified the stranded income tax effects of the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) on items with accumulated other comprehensive losses to earnings reinvested in the business.

See notes to consolidated financial statements.



8


Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_______________________________

Note 1.     Background and Basis of Presentation
Background: At December 31, 2019, Altria Group, Inc.’s (“Altria”) wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”), which are engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; UST LLC (“UST”), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine; and Philip Morris Capital Corporation (“PMCC”), which maintains a portfolio of finance assets, substantially all of which are leveraged leases. In addition, Altria owns an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of on! oral nicotine pouches. In December 2018, Altria refocused its innovative product efforts, which included the discontinuation of production and distribution of all e-vapor products by Nu Mark LLC (“Nu Mark”). Prior to that time, Nu Mark was engaged in the manufacture and sale of innovative tobacco products. Other Altria wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria and its subsidiaries. Altria’s 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. At December 31, 2019, Altria’s significant wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.
At December 31, 2019, Altria had a 10.1% ownership in Anheuser-Busch InBev SA/NV (“ABI”), which Altria accounts for under the equity method of accounting using a one-quarter lag. Altria receives cash dividends on its interest in ABI and will continue to do so as long as ABI pays dividends.
During the third quarter of 2019, Helix acquired Burger Söhne Holding and its subsidiaries as well as certain affiliated companies (the “Burger Group”) that are engaged in the manufacture and sale of on! oral nicotine pouches. At closing, Altria indirectly owned an 80% interest in Helix, for which Altria paid $353 million in the third quarter of 2019. The financial results of Helix are included in Altria’s consolidated financial statements as part of its smokeless products segment, with the 20% minority ownership interest in Helix (held by the former shareholders of the Burger Group) included as a noncontrolling interest. The final purchase price allocation, which is subject to post-closing adjustments, will be completed by the third quarter of 2020.
In December 2018, Altria, through a wholly-owned subsidiary, purchased shares of non-voting convertible common stock of JUUL Labs, Inc. (“JUUL”), representing a 35% economic interest. JUUL is engaged in the manufacture and sale of e-vapor products globally and is the U.S. leader in e-vapor. At December 31, 2019, Altria had a 35% economic interest in JUUL, which Altria accounts for as an investment in an equity security.
In March 2019, Altria, through a subsidiary, completed its acquisition of a 45% economic and voting interest in Cronos Group Inc. (“Cronos”), a global cannabinoid company headquartered in Toronto, Canada. At December 31, 2019, Altria had a 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of accounting using a one-quarter lag.
For further discussion of Altria’s investments in equity securities, see Note 7. Investments in Equity Securities.
Basis of Presentation: The consolidated financial statements include Altria, as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria has the ability to exercise significant influence over the operating and financial policies of the investee are accounted for under the equity method of accounting. Equity investments in which Altria does not have the ability to exercise significant influence over the operating and financial policies of the investee are accounted for as an investment in an equity security. All intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, lives and valuation assumptions for goodwill and other intangible assets, impairment evaluations for equity investments, marketing programs, income taxes, and the estimated residual values of finance leases. Actual results could differ from those estimates.
On January 1, 2019, Altria adopted ASU No. 2016-02, Leases (Topic 842) and all related ASU amendments (collectively “ASU No. 2016-02”), which requires entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Altria has elected to apply the guidance retrospectively at the beginning of the period of adoption. As a result, comparative periods prior to adoption will continue to be presented in accordance with prior lease guidance, including disclosures. The impact of the adoption was not material to Altria’s consolidated financial statements. As a result of the adoption, Altria and its subsidiaries,


9


as lessees, recorded right-of-use assets and lease liabilities of $179 million at January 1, 2019 for its leases, which were all operating leases. There was no cumulative effect adjustment to the opening balance of earnings reinvested in the business. Right-of-use assets and lease liabilities on Altria’s consolidated balance sheet at December 31, 2019 were not materially different than the amounts recorded upon adoption of ASU No. 2016-02.
Additionally, in accordance with ASU No. 2016-02, lessor accounting for leveraged leases that commenced before the January 1, 2019 adoption date of ASU No. 2016-02 is unchanged unless there is a change in the scope of, or the consideration for, such leases. As a result, adoption of ASU No. 2016-02 as it relates to PMCC’s leveraged leases had no impact on Altria’s consolidated financial statements at the adoption date. During 2019, PMCC had no new leases nor any changes in the scope of or the consideration for its existing leveraged leases.
During the fourth quarter of 2019, in conjunction with its annual impairment testing, Altria adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment. For further discussion, see Note 4. Goodwill and Other Intangible Assets, net.
On December 31, 2019, Altria adopted ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU No. 2018-14”), which amends certain defined benefit plan disclosures. The adoption of ASU No. 2018-14 had no impact on the amount of defined benefit plan assets, obligations or expenses recognized by Altria’s businesses. For further discussion, see Note 17. Benefit Plans.
Certain immaterial prior year amounts have been adjusted to conform with the current year’s presentation.

Note 2. Summary of Significant Accounting Policies
Cash and Cash Equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.
Depreciation, Amortization, Impairment Testing and Asset Valuation: Property, plant and equipment are stated at historical costs and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
Altria reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Altria groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If Altria determines that an impairment exists, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
Altria conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria to perform an interim review. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit, but is limited to the total amount of goodwill allocated to a reporting unit. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the intangible asset is considered impaired and is reduced to fair value in the period identified.
Altria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment by comparing the fair value of each of its investments to their carrying value. If the carrying value of an investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and reduced to fair value, and the impairment is recognized in the period identified. The factors used to make this determination include the duration and magnitude of the fair value decline, the financial condition and near-term prospects of the investee, and Altria’s intent and ability to hold its investment until recovery.
Altria reviews its equity investment in JUUL (which is accounted for as an equity security without a readily determinable fair value) for impairment by performing a qualitative assessment of impairment indicators. If a qualitative assessment indicates that Altria’s investment in JUUL is impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value in the period identified.
Derivative Financial Instruments: Altria enters into derivatives to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps.
Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Derivative financial instruments that qualify for hedge accounting are designated as either fair value hedges, cash flow hedges or net investment hedges at the inception of the contracts. For fair value hedges, changes in the fair value of the derivative, as well as the offsetting changes in the


10


fair value of the hedged item, are recorded in the consolidated statements of earnings (losses) each period. For cash flow hedges, changes in the fair value of the derivative are recorded each period in accumulated other comprehensive earnings (losses) and are reclassified to the consolidated statements of earnings (losses) in the same periods in which operating results are affected by the respective hedged item. For net investment hedges, changes in the fair value of the derivative or foreign currency transaction gains or losses on a nonderivative hedging instrument are recorded in accumulated other comprehensive earnings (losses) to offset the change in the value of the net investment being hedged. Such amounts remain in accumulated other comprehensive earnings (losses) until the complete or substantially complete liquidation of the underlying foreign operations occurs or, for investments in foreign entities accounted for under the equity method of accounting, Altria’s economic interest in the underlying foreign entity decreases. Cash flows from hedging instruments are classified in the same manner as the respective hedged item in the consolidated statements of cash flows.
To qualify for hedge accounting, the hedging relationship, both at inception of the hedge and on an ongoing basis, is expected to be highly effective at offsetting changes in the fair value of the hedged risk during the period that the hedge is designated. Altria formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, the strategy for undertaking the hedge transaction and method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, if it becomes probable that a forecasted transaction will not occur, the hedge would no longer be considered effective and all of the derivative gains and losses would be recorded in the consolidated statement of earnings (losses) in the current period.
For financial instruments that are not designated as hedging instruments or do not qualify for hedge accounting, changes in fair value are recorded in the consolidated statements of earnings (losses) each period. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes.
Employee Benefit Plans: Altria provides a range of benefits to certain employees and retired employees, including pension, postretirement health care and postemployment benefits. Altria records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates.
Altria recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. The gains or losses and prior service costs or credits recorded as components of other comprehensive earnings (losses) are subsequently amortized into net periodic benefit cost in future years.
Environmental Costs: Altria is subject to laws and regulations relating to the protection of the environment. Altria provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change.
Compliance with environmental laws and regulations, including the payment of any remediation and compliance costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria’s consolidated results of operations, capital expenditures, financial position or cash flows. See Note 19. Contingencies - Environmental Regulation.
Fair Value Measurements: Altria measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Altria uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs used to measure fair value are:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Guarantees: Altria recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 19. Contingencies for a further discussion of guarantees.
Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Altria records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Altria recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Altria recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes in its consolidated statements of earnings (losses).


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Inventories: The last-in, first-out (“LIFO”) method is used to determine the cost of substantially all tobacco inventories. The cost of the remaining inventories is determined using the first-in, first-out (“FIFO”) and average cost methods. Inventories that are measured using the LIFO method are stated at the lower of cost or market. Inventories that are measured using the FIFO and average cost methods are stated at the lower of cost and net realizable value. It is a generally recognized industry practice to classify leaf tobacco and wine inventories as current assets although part of such inventory, because of the duration of the curing and aging process, ordinarily would not be used within one year.
Litigation Contingencies and Costs: Altria and its subsidiaries record provisions in the consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs in the consolidated statements of earnings (losses). See Note 19. Contingencies.
Marketing Costs: Altria’s businesses promote their products with consumer incentives, trade promotions and consumer engagement programs. These consumer incentive and trade promotion activities, which include discounts, coupons, rebates, in-store display incentives and volume-based incentives, do not create a distinct deliverable and are, therefore, recorded as a reduction of revenues. Consumer engagement program payments are made to third parties. Altria’s businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs in Altria’s consolidated statements of earnings (losses). For interim reporting purposes, Altria’s businesses charge consumer engagement programs and certain consumer incentive expenses to operations as a percentage of sales, based on estimated sales and related expenses for the full year.
Revenue Recognition: Altria’s businesses generate substantially all of their revenue from sales contracts with customers. While Altria’s businesses enter into separate sales contracts with each customer for each product type, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. All performance obligations are satisfied within one year; therefore, costs to obtain contracts are expensed as incurred and unsatisfied performance obligations are not disclosed. There is no financing component because Altria expects, at contract inception, that the period between when Altria’s businesses transfer product to the customer and when the customer pays for that product will be one year or less.
Altria’s businesses define net revenues as revenues, which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns (also referred to as returned goods) and sales incentives. Altria’s businesses exclude from the transaction price sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on cigarettes, cigars, smokeless tobacco or wine billed to customers).
Altria’s businesses recognize revenues from sales contracts with customers upon shipment of goods when control of such products is obtained by the customer. Altria’s businesses determine that a customer obtains control of the product upon shipment when title of such product and risk of loss transfers to the customer. Altria’s businesses account for shipping and handling costs as fulfillment costs and such amounts are classified as part of cost of sales in Altria’s consolidated statements of earnings (losses). Altria’s businesses record an allowance for returned goods, based principally on historical volume and return rates, which is included in other accrued liabilities on Altria’s consolidated balance sheets. Altria’s businesses record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction to revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period) based principally on historical volume, utilization and redemption rates. Expected payments for sales incentives are included in accrued marketing liabilities on Altria’s consolidated balance sheets.
Payment terms vary depending on product type. Altria’s businesses consider payments received in advance of product shipment as deferred revenue, which is included in other accrued liabilities on Altria’s consolidated balance sheets until revenue is recognized. PM USA receives payment in advance of a customer obtaining control of the product. USSTC receives substantially all payments within one business day of the customer obtaining control of the product. Ste. Michelle receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in receivables on Altria’s consolidated balance sheets.


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New Accounting Guidance Not Yet Adopted: The following table provides a description of issued accounting guidance applicable to, but not yet adopted by, Altria:
Standards
Description
Effective Date for Public Entity
Effect on Financial Statements
ASU Nos. 2016-13; 2018-19; 2019-04; 2019-05; 2019-10; 2019-11 Measurement of Credit Losses on Financial Instruments (Topic 326)

The guidance replaces the current incurred loss impairment methodology for recognizing credit losses for financial assets with a methodology that reflects the entity’s current estimate of all expected credit losses and requires consideration of a broader range of reasonable and supportable information for estimating credit losses.

The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period.
Altria’s adoption of this guidance is not expected to have a material impact on its consolidated financial statements.
ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Subtopic 350-40)

The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.
Altria’s adoption of this guidance is not expected to have a material impact on its consolidated financial statements.
ASU 2019-12 Simplifying the Accounting for Income Taxes (Topic 740)
The guidance removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes.

The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including adoption in any interim period.

Altria is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

ASU 2020-01 Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities.
The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including adoption in any interim period.
Altria is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.



Note 3.     Revenues from Contracts with Customers
Altria disaggregates net revenues based on product type. For further discussion, see Note 16. Segment Reporting.
Altria’s businesses offer cash discounts to customers for prompt payment and calculate cash discounts as a percentage of the list price based on historical experience and agreed-upon payment terms. Altria’s businesses record an allowance for cash discounts, which is included as a contra-asset against receivables on Altria’s consolidated balance sheets. There was no allowance for cash discounts at December 31, 2019 and 2018, and there were no differences between amounts recorded as an allowance for cash discounts and cash discounts subsequently given to customers.
Altria’s businesses that receive payments in advance of product shipment record such payments as deferred revenue. These payments are included in other accrued liabilities on Altria’s consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $362 million and $288 million at December 31, 2019 and 2018, respectively. When cash is received in advance of product shipment, Altria’s businesses satisfy their performance obligations within three days of receiving payment. At December 31, 2019 and 2018, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.
Receivables, which primarily reflect sales of wine produced and/or distributed by Ste. Michelle, were $152 million and $142 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, there were no expected differences between amounts recorded and subsequently received, and Altria’s businesses did not record an allowance for doubtful accounts against these receivables.
Altria’s businesses record an allowance for returned goods, which is included in other accrued liabilities on Altria’s consolidated balance sheets. While all of Altria’s tobacco operating companies sell tobacco products with dates relative to freshness as printed on product packaging, it is USSTC’s policy to accept authorized sales returns from its customers for products that have passed such dates due to the limited shelf life of USSTC’s smokeless tobacco products. Altria’s businesses record estimated sales returns, which are based principally on historical volume and return rates, as a reduction to revenues. Actual sales returns will differ from estimated sales returns to the extent actual results differ from estimated assumptions. Altria’s businesses reflect differences between actual and estimated


13


sales returns in the period in which the actual amounts become known. These differences, if any, have not had a material impact on Altria’s consolidated financial statements. All returned goods are destroyed upon return and not included in inventory. Consequently, Altria’s businesses do not record an asset for their right to recover goods from customers upon return.
Sales incentives include variable payments related to goods sold by Altria’s businesses. Altria’s businesses include estimates of variable consideration as a reduction to revenues upon shipment of goods to customers. The sales incentives that require significant estimates and judgments are as follows:
Price promotion payments- Altria’s businesses make price promotion payments, substantially all of which are made to their retail partners to incent the promotion of certain product offerings in select geographic areas.
Wholesale and retail participation payments- Altria’s businesses make payments to their wholesale and retail partners to incent merchandising and sharing of sales data in accordance with each business’s trade agreements.
These estimates primarily include estimated wholesale to retail sales volume and historical acceptance rates. Actual payments will differ from estimated payments to the extent actual results differ from estimated assumptions. Differences between actual and estimated payments are reflected in the period such information becomes available. These differences, if any, have not had a material impact on Altria’s consolidated financial statements.

Note 4. Goodwill and Other Intangible Assets, net
Goodwill and other intangible assets, net, by segment were as follows:
 
Goodwill
 
Other Intangible Assets, net
(in millions)
December 31, 2019

 
December 31, 2018

 
December 31, 2019

 
December 31, 2018

Smokeable products
$
99

 
$
99

 
$
3,071

 
$
3,037

Smokeless products
5,078

 
5,023

 
9,196

 
8,825

Wine

 
74

 
238

 
239

Other

 

 
182

 
178

Total
$
5,177

 
$
5,196

 
$
12,687

 
$
12,279

At December 31, 2019 and 2018, the accumulated impairment losses related to goodwill were $185 million and $111 million, respectively.
Other intangible assets consisted of the following: 
 
December 31, 2019
 
December 31, 2018
(in millions)
Gross Carrying Amount

 
Accumulated Amortization

 
Gross Carrying Amount

 
Accumulated Amortization

Indefinite-lived intangible assets
$
11,676

 
$

 
$
11,846

 
$

Definite-lived intangible assets
1,275

 
264

 
654

 
221

Total other intangible assets
$
12,951

 
$
264

 
$
12,500

 
$
221

At December 31, 2019, indefinite-lived intangible assets consist substantially of trademarks from Altria’s 2009 acquisition of UST ($9.0 billion) and 2007 acquisition of Middleton ($2.6 billion). Definite-lived intangible assets, which consist primarily of intellectual property, customer relationships and certain cigarette trademarks, are amortized over a weighted-average period of 20 years. Pre-tax amortization expense for definite-lived intangible assets during the years ended December 31, 2019, 2018 and 2017, was $44 million, $38 million and $21 million, respectively. In the fourth quarter of 2019, due to a change in estimated useful life, $170 million for an indefinite-lived intangible asset in the smokeable products segment was reclassified to a definite-lived intangible asset, due to an anticipated change in the way the asset will be utilized in the future. Annual amortization expense for each of the next five years is estimated to be approximately $70 million, assuming no additional transactions occur that require the amortization of intangible assets.


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The changes in goodwill and net carrying amount of intangible assets were as follows:
 
2019
 
2018
(in millions)
Goodwill
 
Other Intangible Assets, net
 
Goodwill
 
Other Intangible Assets, net
Balance at January 1
$
5,196

 
$
12,279

 
$
5,307

 
$
12,400

Changes due to:
 
 
 
 
 
 
 
   Acquisitions (1)
55

 
451

 

 
15

   Asset impairment
(74
)
 

 
(111
)
 
(98
)
   Amortization

 
(43
)
 

 
(38
)
Balance at December 31
$
5,177

 
$
12,687

 
$
5,196

 
$
12,279

(1) Substantially all of the 2019 changes reflect Helix’s acquisition of the Burger Group, which held assets consisting primarily of intellectual property. For further discussion, see Note 1. Background and Basis of Presentation.
During the fourth quarter of 2019, in conjunction with its annual impairment testing, Altria adopted ASU 2017-04, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, an impairment charge is recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit.
During 2019, upon completion of Altria’s annual impairment testing of goodwill and other indefinite-lived intangible assets, Altria concluded that goodwill of $74 million in the wine segment was fully impaired as the wine reporting unit was impacted by a slowing growth rate in the premium wine category and higher inventories.
During 2018, Altria recorded goodwill and other intangible asset impairment charges of $111 million and $44 million, respectively, related to Altria’s decision in the fourth quarter of 2018 to refocus its innovative product efforts, which included Nu Mark’s discontinuation of production and distribution of all e-vapor products.
In addition, during 2018, upon completion of Altria’s annual impairment testing, Altria concluded that the $54 million carrying value of the Columbia Crest trademark in the wine segment was fully impaired as Columbia Crest has been negatively impacted by an accelerated decline in the $7 to $10 premium wine segment, increased competition and reduction in trade support.
During 2017, Altria’s quantitative annual impairment test of goodwill and indefinite-lived intangible assets resulted in no impairment charges.

Note 5. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs consisted of the following:
(in millions)
Asset Impairment
and Exit Costs
 
Implementation Costs
 
Total
For the year ended December 31,
2019

 
2018

 
2017

 
2019 (1)

 
2018 (2)

 
2017 (2)

 
2019

 
2018

 
2017

Smokeable products
$
59

 
$
79

 
$
4

 
$
33

 
$
1

 
$
17

 
$
92

 
$
80

 
$
21

Smokeless products
9

 
20

 
28

 
5

 
3

 
28

 
14

 
23

 
56

Wine (3)
76

 
54

 

 

 

 

 
76

 
54

 

All other
14

 
227

 

 
(10
)
 
63

 

 
4

 
290

 

General corporate
1

 
3

 

 

 

 

 
1

 
3

 

Total
159

 
383

 
32

 
28

 
67

 
45

 
187

 
450

 
77

Plus amounts included in net periodic benefit (income) cost, excluding service cost(4)
29

 
3

 
1

 

 

 

 
29

 
3

 
1

Total
$
188

 
$
386

 
$
33

 
$
28

 
$
67

 
$
45

 
$
216

 
$
453

 
$
78

(1) Included in cost of sales ($2 million) and marketing, administration and research costs ($26 million) in Altria’s consolidated statement of earnings (losses).
(2) Included in cost of sales in Altria’s consolidated statements of earnings (losses).
(3) Includes impairment of goodwill for the wine reporting unit in 2019 and impairment of the Columbia Crest trademark in 2018. See Note 4. Goodwill and Other Intangible Assets, net.
(4) Represents settlement and curtailment costs. See Note 17. Benefit Plans.
The 2019 pre-tax asset impairment, exit and implementation costs were related to the cost reduction program and the refocus of innovative product efforts discussed below, and the goodwill impairment for the wine reporting unit.


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Substantially all of the 2018 pre-tax asset impairment, exit and implementation costs were related to the refocus of innovative product efforts and the cost reduction program discussed below, and the impairment of the Columbia Crest trademark.
The pre-tax asset impairment, exit and implementation costs for 2017 were related to the facilities consolidation discussed below.
The movement in the restructuring liabilities, substantially all of which were severance liabilities, for the years ended December 31, 2019 and 2018 was as follows:
(in millions)
 
Balances at December 31, 2017
$
33

Charges
154

Cash spent
(32
)
Balances at December 31, 2018
155

Charges
59

Cash spent
(147
)
Balances at December 31, 2019
$
67

Refocus of Innovative Product Efforts: During the fourth quarter of 2018, Altria refocused its innovative product efforts, which included Nu Mark’s discontinuation of production and distribution of all e-vapor products. During the year ended December 31, 2019, Altria incurred pre-tax charges of $9 million, consisting of asset impairment, exit and implementation costs. During 2018, Altria incurred pre-tax charges of $272 million, consisting of asset impairment and exit costs of $209 million primarily related to the impairment of goodwill and other intangible assets and other charges of $63 million related to inventory write-offs and accelerated depreciation. The pre-tax charges related to the refocus of innovative product efforts have been completed. The majority of the charges related to these efforts did not result in cash payments.
Cost Reduction Program: In December 2018, Altria announced a cost reduction program that includes workforce reductions and third-party spending reductions across the businesses. As a result of the cost reduction program, Altria recorded total pre-tax restructuring charges of $254 million, which included employee benefit-related curtailment and settlement costs. Of this amount, Altria incurred pre-tax charges of $133 million in 2019 and $121 million in 2018. The total charges, the majority of which will result in cash expenditures, related primarily to employee separation costs of $202 million and other costs of $52 million. The pre-tax charges related to this cost reduction program have been substantially completed. Cash payments related to this cost reduction program of $136 million were made during the year ended December 31, 2019. There were no cash payments related to this program in 2018.
Facilities Consolidation: In October 2016, Altria announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. In the first quarter of 2018, Middleton completed the transfer of its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”), and USSTC completed the transfer of its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. At December 31, 2018, pre-tax charges related to the consolidation were completed.
As a result of the consolidation, Altria recorded total pre-tax charges of $155 million. During 2018 and 2017, Altria recorded pre-tax charges of $6 million and $78 million, respectively. The total charges related primarily to accelerated depreciation and asset impairment ($55 million), employee separation costs ($40 million) and other exit and implementation costs ($60 million).
Cash payments related to the consolidation of $3 million were made during the year ended December 31, 2019, for total cash payments of $100 million since inception. At December 31, 2019, cash payments related to the consolidation were completed.

Note 6. Inventories
The cost of approximately 56% and 58% of inventories at December 31, 2019 and 2018, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.6 billion and $0.7 billion lower than the current cost of inventories at December 31, 2019 and 2018, respectively.




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Note 7. Investments in Equity Securities
Altria’s investments at December 31, 2019 and 2018 consisted of the following:
 
 
Carrying Amount
(in millions)
 
December 31, 2019
 
December 31, 2018
ABI
 
$
18,071

 
$
17,696

JUUL
 
4,205

 
12,800

Cronos (1)
 
1,305

 

Total
 
$
23,581

 
$
30,496

(1) Includes investment in Acquired Common Shares ($1,002 million), the Cronos warrant ($234 million) and the Fixed-price Preemptive Rights ($69 million) as discussed further below.
Earnings from equity investments accounted for under the equity method of accounting for the years ended December 31, 2019, 2018 and 2017 consisted of the following:
(in millions)
 
2019
 
2018
 
2017
ABI
 
$
1,229

 
$
890

 
$
532

Cronos (1)
 
496

 

 

Total
 
$
1,725

 
$
890

 
$
532

(1) Represents Altria’s share of Cronos’s earnings, substantially all of which relate to the change in fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.
Investment in ABI
At December 31, 2019, Altria had a 10.1% economic and voting interest in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. The Restricted Shares:
are unlisted and not admitted to trading on any stock exchange;
are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021;
are convertible into ordinary shares of ABI on a one-for-one basis after the end of this five-year lock-up period;
rank equally with ordinary shares of ABI with regards to dividends and voting rights; and
have director nomination rights with respect to ABI.
Altria accounts for its investment in ABI under the equity method of accounting because Altria has the ability to exercise significant influence over the operating and financial policies of ABI, including having active representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board committees. Through this representation, Altria participates in ABI policy making processes.
Altria reports its share of ABI’s results using a one-quarter lag because ABI’s results are not available in time for Altria to record them in the concurrent period.
Summary financial data of ABI is as follows:
 
For Altria’s Year Ended December 31,
(in millions)
2019 (1)
 
2018 (1)
 
2017 (1)
Net revenues
$
54,187

 
$
55,500

 
$
56,004

Gross profit
$
33,735

 
$
34,986

 
$
34,376

Earnings from continuing operations
$
10,530

 
$
9,020

 
$
6,769

Net earnings
$
10,530

 
$
9,020

 
$
6,845

Net earnings attributable to ABI
$
9,189

 
$
7,641

 
$
5,473

 
At September 30,
(in millions)
2019 (1)
 
2018 (1)
Current assets
$
27,353

 
$
20,289

Long-term assets
$
199,591

 
$
207,921

Current liabilities
$
36,819

 
$
32,019

Long-term liabilities
$
119,025

 
$
130,812

Noncontrolling interests
$
8,765

 
$
7,251

(1) Reflects the one-quarter lag.


17


At December 31, 2019, Altria’s carrying value of its equity investment in ABI exceeded its share of ABI’s net assets attributable to equity holders of ABI by approximately $11.8 billion. Substantially all of this difference is comprised of goodwill and other indefinite-lived intangible assets (consisting primarily of trademarks).
The fair value of Altria’s equity investment in ABI is based on: (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets, for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder were to foreclose on the Restricted Shares, the encumbered Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.
The fair value of Altria’s equity investment in ABI at December 31, 2019 and 2018 was $16.1 billion (carrying value of $18.1 billion) and $13.1 billion (carrying value of $17.7 billion), respectively, which was less than its carrying value by 11% and 26%, respectively, at December 31, 2019 and 2018. During 2019, the fair value increased and at September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value by 4%. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value. Based on Altria’s evaluation of the duration and magnitude of the fair value decline, Altria’s evaluation of ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery, Altria concluded that the decline in fair value of its investment in ABI below its carrying value is temporary and, therefore, no impairment was recorded.
In the fourth quarter of 2019, Altria recorded a net pre-tax gain of $284 million in earnings from equity investments in Altria’s consolidated statement of earnings (losses), related to the completion in September 2019 of ABI’s initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited.
At September 30, 2019, ABI had derivative financial instruments used to hedge its share price related to 92.4 million of its share commitments. ABI’s share price in Euros at December 31, 2019 and September 30, 2019 was €72.71 and €87.42, respectively. Consistent with the one-quarter lag for reporting ABI’s results in Altria’s financial results, Altria will record its share of ABI’s fourth quarter 2019 mark-to-market losses associated with these derivative financial instruments in the first quarter of 2020.
At September 30, 2016, Altria had an approximate 27% ownership of SABMiller plc (“SABMiller”), which Altria accounted for under the equity method of accounting. In October 2016, Anheuser-Busch InBev SA/NV completed its business combination with SABMiller, and Altria received cash and shares representing a 9.6% ownership in the combined company. For the years ended December 31, 2018 and 2017, Altria recorded pre-tax losses of $33 million and gains of $445 million, respectively, related to the planned completion of the remaining ABI divestitures in (gain) loss on ABI/SABMiller business combination in Altria’s consolidated statements of earnings (losses).
Investment in JUUL
In December 2018, Altria, through a wholly-owned subsidiary, purchased shares of JUUL’s non-voting Class C-1 Common Stock for an aggregate price of $12.8 billion, which will convert automatically to shares of voting Class C Common Stock upon antitrust clearance (“Share Conversion”), and for no additional payment, a security convertible into additional shares of Class C-1 Common Stock or Class C Common Stock, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). At December 31, 2019 and 2018, Altria owned 35% of the issued and outstanding capital stock of JUUL.
Altria received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Altria is subject to a standstill restriction under which it may not acquire additional JUUL shares above its 35% interest. Furthermore, Altria agreed not to sell or transfer any of its JUUL shares until December 20, 2024.
As part of the JUUL Transaction, Altria and JUUL entered into a services agreement pursuant to which Altria agreed to provide JUUL with certain commercial services, as requested by JUUL, for an initial term of six years. Altria also agreed to grant JUUL a non-exclusive, royalty-free perpetual, irrevocable, sublicensable license to Altria’s non-trademark licensable intellectual property rights in the e-vapor field, subject to the terms and conditions set forth in an intellectual property license agreement between the parties.
Additionally, Altria agreed to non-competition obligations generally requiring that it participate in the e-vapor business only through JUUL as long as Altria is supplying JUUL services, which Altria is committed to doing until at least December 20, 2024.
As previously disclosed, in April 2019 in connection with antitrust review, Altria and JUUL received a request for additional information (commonly referred to as a “second request”) from the U.S. Federal Trade Commission (the “FTC”). In October 2019, Altria and JUUL certified substantial compliance with the second request. Based on the timing agreement among Altria, JUUL and the FTC staff, Share Conversion will not occur before the end of the 70th calendar day following certification of substantial compliance by Altria and JUUL unless the FTC completes its review prior to that day. This agreement has been subject to extensions for the convenience of the parties; however, Altria believes the FTC will complete its review in the first half of 2020.


18


On January 28, 2020, Altria and JUUL amended certain JUUL Transaction agreements and entered into a new cooperation agreement, which include the following provisions:
Effective January 28, 2020:
Altria will continue to provide regulatory affairs support for JUUL’s pursuit of its pre-market tobacco applications (PMTA) and/or its modified risk tobacco products authorization (MRTP) and will discontinue all other services by the end of the first quarter of 2020;
Altria has the option to be released from its non-compete obligation (i) in the event JUUL is prohibited by federal law from selling e-vapor products in the U.S. for a continuous period of at least 12 months (subject to tolling of this period in certain circumstances) or (ii) if the carrying value of Altria’s investment in JUUL is not more than 10% of its initial carrying value of $12.8 billion;
Altria and JUUL agreed that for a period of one year they will not pursue any litigation against each other in connection with any conduct that occurred prior to the date of such agreement, with statutes of limitation being tolled during the one-year period; and
with respect to certain litigation in which Altria and JUUL are both defendants against third-party plaintiffs, Altria will not pursue any claims against JUUL for indemnification or reimbursement except for any non-contractual claims for contribution or indemnity where a judgment has been entered against Altria and JUUL.
Upon Share Conversion, JUUL will:
restructure JUUL’s current seven-member Board of Directors to a nine-member board to include independent board members. The new structure will include: (i) three independent directors (one of whom will be designated by Altria and two of whom will be designated by JUUL stockholders other than Altria) unanimously certified as independent by a nominating committee, which will include at least one Altria designee, (ii) two directors designated by Altria, (iii) three directors designated by JUUL stockholders other than Altria, and (iv) the JUUL Chief Executive Officer; and
create a Litigation Oversight Committee, which will include two Altria designated directors (one of whom will chair the Litigation Oversight Committee) that will have oversight authority and review of litigation management for matters in which JUUL and Altria are co-defendants and have or reasonably could have a written joint defense agreement in effect between them. Subject to certain limitations, the Litigation Oversight Committee will recommend to JUUL changes to outside counsel and litigation strategy by majority vote, with disagreements by JUUL’s management being resolved by majority vote of JUUL’s Board of Directors.
Also, upon Share Conversion, Altria expects to account for its equity investment in JUUL under the fair value option. Under this option, Altria’s consolidated statement of earnings (losses) will include any cash dividends received from its investment in JUUL as well as any changes in the fair value of the investment, which will be calculated quarterly.
At December 31, 2019, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares do not have a readily determinable fair value, Altria has elected to measure its investment in JUUL at its cost minus any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There have been no upward or downward adjustments to the carrying value of Altria’s investment in JUUL resulting from observable price changes in orderly transactions since the JUUL Transaction through December 31, 2019.
Altria reviews its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators on a quarterly basis in connection with the preparation of its financial statements. If this qualitative assessment indicates that Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value.
As part of the preparation of its financial statements for the periods ended September 30, 2019 and December 31, 2019, Altria performed its respective qualitative assessments of impairment indicators for its investment in JUUL and determined that indicators of impairment existed.
At September 30, 2019, these indicators included recent significant adverse changes in both the e-vapor regulatory environment and the industry in which JUUL operates. While there was no single determinative event or factor, Altria considered in totality the following indicators of impairment: the increased likelihood of a United States Food and Drug Administration compliance policy prohibiting the sale of certain flavored e-vapor products in the U.S. market without a pre-market authorization; various e-vapor bans put in place by certain states and cities in the U.S. and in certain international markets, coupled with the increased potential for additional bans in the future; and the impact of heightened adverse publicity, including news reports and public health advisories concerning vaping-related lung injuries and deaths.
At December 31, 2019, Altria determined that a significant increase in the number of legal cases pending against JUUL in the fourth quarter of 2019 resulted in an additional indicator of impairment. There were approximately 340 cases (an increase of over 80% since the filing


19


of Altria’s 2019 Third Quarter Form 10-Q at October 31, 2019) outstanding against JUUL at December 31, 2019, including a variety of class action lawsuits and personal injury claims, as well as cases brought by state attorneys general and local governments. Following completion of Altria’s valuation of JUUL as of September 30, 2019, these incremental outstanding legal cases against JUUL, as well as the expectation that the number of legal cases against JUUL will continue to increase, have increased the risk that JUUL will not achieve Altria’s projection of JUUL’s future cash flows. While Altria has not made any assumptions, or drawn any conclusions, regarding the merits or likelihood of success of any of these cases, litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. This uncertainty has increased the risk that JUUL may not be able to obtain financing and/or fund working capital requirements, financial obligations and international expansion plans.
Given the existence of these impairment indicators, Altria performed quantitative valuations of its investment in JUUL as of September 30, 2019 and December 31, 2019 and recorded total pre-tax charges of $8.6 billion for the year ended December 31, 2019, reported as impairment of JUUL equity securities in its consolidated statement of earnings (losses). Of this amount, Altria recorded pre-tax charges of $4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019. The third-quarter impairment charge was due primarily to lower e-vapor sales volume assumptions in the U.S. and international markets and a delay in achieving operating margin performance, as compared to the assumptions at the time of the JUUL Transaction. The fourth-quarter impairment charge results substantially from increased discount rates applied to future cash flow projections, due to the significant risk created by the increase in number of legal cases pending against JUUL.
Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of future cash flows for the U.S. and international markets at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing future cash flows. Future cash flows in the U.S. were based on a range of scenarios that consider various potential regulatory and market outcomes.
In determining the fair value of its investment in JUUL, Altria made various judgments, estimates and assumptions, the most significant of which were sales volume, operating margins, discount rates and perpetual growth rates. Additionally, Altria made significant assumptions regarding the likelihood and extent of various potential regulatory actions and the continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy.
As disclosed in Note 9. Short-term Borrowings and Borrowing Arrangements, Altria financed the JUUL Transaction through a senior unsecured term loan agreement (the “Term Loan Agreement”). Costs incurred to effect the investment in JUUL were recognized as expenses in Altria’s consolidated statements of earnings (losses). For the years ended December 31, 2019 and 2018, Altria incurred $8 million and $85 million, respectively, of pre-tax acquisition-related costs, consisting primarily of advisory fees, substantially all of which were recorded in marketing, administration and research costs.

Investment in Cronos
In March 2019, Altria, through a subsidiary, completed its acquisition of:
149.8 million newly issued common shares of Cronos (“Acquired Common Shares”), which represented a 45% economic and voting interest;
anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of Canadian dollar (“CAD”) $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of December 31, 2019, Altria estimates the Fixed-price Preemptive Rights will allow Altria to purchase up to an additional approximately 37 million common shares of Cronos; and
a warrant providing Altria the ability to purchase up to an additional 10% of common shares of Cronos (approximately 78 million common shares at December 31, 2019) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.
If exercised in full, the exercise prices for the warrant and Fixed-price Preemptive Rights are approximately CAD $1.5 billion and CAD $0.6 billion (approximately USD $1.1 billion and $0.5 billion, respectively, based on the CAD to USD exchange rate on January 27, 2020).
The total purchase price for the Acquired Common Shares, Fixed-price Preemptive Rights and warrant (collectively, “Investment in Cronos”) was CAD $2.4 billion (U.S. dollar (“USD”) $1.8 billion). Upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own a maximum of 55% of the outstanding common shares of Cronos.
In accounting for the acquisition of these assets as of the date of closing, the Fixed-price Preemptive Rights and warrant were recorded at each of their fair values using Black-Scholes option-pricing models, based on the assumptions described in Note 8. Financial Instruments. In addition, a deferred tax liability related to the Fixed-price Preemptive Rights and warrant was recorded. The residual of the purchase price was allocated to the Acquired Common Shares. Accordingly, the CAD $2.4 billion (USD $1.8 billion) purchase price was recorded in USD as follows:
$1.2 billion to the warrant;


20


$0.5 billion to the Fixed-price Preemptive Rights;
$0.4 billion to the Acquired Common Shares; and
$0.3 billion to a deferred tax liability.
For a discussion of derivatives related to Altria’s investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 8. Financial Instruments.
At December 31, 2019, Altria had a 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of accounting. Altria reports its share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for Altria to record them in the concurrent period.
Altria nominated four directors, including one director who is independent from Altria, who serve on Cronos’s seven-member Board of Directors.
Summary financial data of Cronos is as follows:
 
For Altria’s Year Ended December 31,
(in millions)
2019 (1)
Net revenues
$
21

Gross profit
$
10

Net earnings (2)
$
1,117

(in millions)
At September 30, 2019 (1)
Current assets
$
1,575

Long-term assets
$
511

Current liabilities
$
457

Long-term liabilities
$
7

Noncontrolling interests
$

(1) Reflecting the one-quarter lag: (i) summary financial data of Cronos’s results for Altria’s year ended December 31, 2019 include Cronos’s results for the period March 8, 2019 through September 30, 2019, and (ii) summary financial data of Cronos’s financial position is disclosed at September 30, 2019.
(2) Substantially all of Cronos’s net earnings related to changes in fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.
At December 31, 2019, Altria’s carrying amount of its Acquired Common Shares in Cronos exceeded its share of Cronos’s net assets attributable to equity holders of Cronos by approximately $0.2 billion. Substantially all of this difference is comprised of definite-lived intangible assets (consisting of licenses, distribution agreements and developed technology).
The fair value of Altria’s Acquired Common Shares in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s Acquired Common Shares in Cronos at December 31, 2019 was $1.2 billion compared with its carrying value of $1.0 billion.

Note 8. Financial Instruments
Altria enters into derivative financial instruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes.
Altria’s investment in ABI, whose functional currency is the Euro, exposes Altria to foreign currency exchange risk on the carrying value of its investment. To manage this risk, Altria designates certain foreign exchange contracts, including cross-currency swap contracts and forward contracts (collectively, “foreign currency contracts”), and Euro denominated unsecured long-term notes (“foreign currency denominated debt”) as net investment hedges of Altria’s investment in ABI.
At December 31, 2019 and December 31, 2018, Altria had foreign currency contracts with aggregate notional amounts of $2,246 million and $1,226 million, respectively. At December 31, 2019, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $5,057 million and $4,741 million, respectively. At December 31, 2018, Altria had no foreign currency denominated debt.
Altria’s estimates of the fair values of its foreign currency contracts are determined using valuation models with significant inputs that are readily available in public markets, or can be derived from observable market transactions, and therefore are classified in Level 2 of the fair value hierarchy. An adjustment for credit risk and nonperformance risk is included in the fair values of foreign currency contracts.


21


Altria’s estimate of the fair value of its debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria’s total long-term debt at December 31, 2019 and 2018, was $30.7 billion and $12.5 billion, respectively, as compared with its carrying value of $28.0 billion and $13.0 billion, respectively.
Altria’s Fixed-price Preemptive Rights and warrant related to its investment in Cronos, which is further discussed in Note 7. Investments in Equity Securities, are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and warrant are estimated using Black-Scholes option-pricing models, adjusted for unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:
 
 
December 31, 2019
 
March 8, 2019
 
December 31, 2019
 
March 8, 2019
 
 
Fixed-price Preemptive Rights
 
Warrant
Expected life (1)
 
1.67 years
 
2.32 years
 
3.18 years
 
4 years
Expected volatility (2)
 
81.61%
 
93.02%
 
81.61%
 
93.02%
Risk-free interest rate (3)(4)
 
1.71%
 
1.61%
 
1.69%
 
1.67%
Expected dividend yield (5)
 
—%
 
—%
 
—%
 
—%
(1) Based on the weighted-average expected life of the Fixed-price Preemptive Rights (with a range from approximately 0.25 years to 7 years at December 31, 2019 and March 8, 2019) and the March 8, 2023 expiration date of the warrant.
(2) Based on a blend of historical volatility levels of the underlying equity security and peer companies.
(3) Based on the implied yield currently available on Canadian Treasury zero coupon issues weighted for the remaining expected life of the Fixed-price Preemptive Rights.
(4) Based on the implied yield currently available on Canadian Treasury zero coupon issues and the expected life of the warrant.
(5) Based on Cronos’s expected dividend payments.
The following table provides a reconciliation of the beginning and ending balance of the Fixed-price Preemptive Rights and warrant, which are classified in Level 3 of the fair value hierarchy:
 
 
(in millions)
Balance at December 31, 2018
 
$

Initial investment in Fixed-price Preemptive Rights and warrant
 
1,736

Exercise of Fixed-price Preemptive Rights
 
(22
)
Pre-tax earnings (losses) recognized in net earnings
 
(1,411
)
Balance at December 31, 2019
 
$
303

Altria elects to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on its consolidated balance sheets. The fair values of Altria’s derivative financial instruments on a gross basis included on the consolidated balance sheets were as follows:
 
Fair Value of Assets
 
Fair Value of Liabilities
(in millions)
Balance Sheet Classification
 
December 31, 2019
 
December 31, 2018
 
Balance Sheet Classification
December 31, 2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
Foreign currency contracts
Other current assets
 
$
46

 
$
37

 
Other accrued liabilities
$
7

 
$

Foreign currency contracts
Other assets
 

 
4

 
Other liabilities
21

 
4

Total
 
$
46

 
$
41

 
 
$
28

 
$
4

 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Cronos warrant
Investments in equity securities
 
$
234

 
$

 
 
 
 
 
Fixed-price Preemptive Rights
Investments in equity securities
 
69

 

 
 
 
 
 
Total
 
 
$
303

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives
 
 
$
349

 
$
41

 
 
$
28

 
$
4

Altria records in its consolidated statements of earnings (losses) any changes in the fair values of the Fixed-price Preemptive Rights and warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur. For the year ended December 31, 2019, Altria recognized pre-tax unrealized losses of $1,411 million, consisting of $434 million and $977 million, representing the changes in the fair values of the Fixed-price Preemptive Rights and warrant, respectively.


22


In January and February 2019, Altria entered into derivative financial instruments in the form of forward contracts, which were settled on March 7, 2019, to hedge Altria’s exposure to CAD to USD foreign currency exchange rate movements, in relation to the CAD $2.4 billion purchase price for the Cronos transaction. The aggregate notional amounts of the forward contracts were USD $1.8 billion (CAD $2.4 billion). The forward contracts did not qualify for hedge accounting; therefore, in the first quarter of 2019, pre-tax losses of USD $31 million representing changes in the fair values of the forward contracts were recorded in loss on Cronos-related financial instruments in Altria’s consolidated statement of earnings (losses).
Counterparties to Altria’s foreign currency contracts are domestic and international financial institutions. Altria is exposed to potential losses due to non-performance by these counterparties. Altria manages its credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure Altria has with each counterparty and monitoring the financial condition of each counterparty. The counterparty agreements also contain provisions that require Altria to maintain an investment grade credit rating. In the event Altria’s credit rating falls below investment grade, counterparties to Altria’s foreign currency contracts can require Altria to post collateral. No collateral was received or posted related to derivative assets and liabilities at December 31, 2019 and December 31, 2018.
Net Investment Hedging: The pre-tax effects of Altria’s net investment hedges on accumulated other comprehensive losses and the consolidated statements of earnings (losses) were as follows:
 
 
Gain (Loss) Recognized in Accumulated Other Comprehensive Losses (1)
 
Gain (Loss) Recognized
in Net Earnings (Losses)(1) (2)
 
 
For the Years Ended December 31,
(in millions)
 
2019
 
2018
 
2019
 
2018
Foreign currency contracts
 
$
23

 
$
69

 
$
36

 
$
35

Foreign currency denominated debt
 
35

 

 

 

Total
 
$
58

 
$
69

 
$
36

 
$
35

(1) Net investment hedging activity was not material to Altria for the year ended December 31, 2017.
(2) Related to amounts excluded from effectiveness testing.
The changes in the fair value of the foreign currency contracts and in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate were recognized in accumulated other comprehensive losses related to ABI. Gains on the foreign currency contracts arising from components excluded from effectiveness testing were recognized in interest and other debt expense, net in the consolidated statements of earnings (losses) based on an amortization approach.

Note 9. Short-Term Borrowings and Borrowing Arrangements
At December 31, 2019, Altria had no short-term borrowings. At December 31, 2018, Altria had $12.7 billion of short-term borrowings, which was net of approximately $95 million of debt issuance costs, under the term loan agreement discussed below.
In December 2018, Altria entered into a senior unsecured term loan agreement in connection with its investments in JUUL and Cronos (the “Term Loan Agreement”). At December 31, 2018, Altria had aggregate short-term borrowings under the Term Loan Agreement of $12.8 billion at an average interest rate of approximately 3.5%. Borrowings under the Term Loan Agreement were set to mature on December 19, 2019. In February 2019, Altria repaid all of the outstanding $12.8 billion of short-term borrowings under the Term Loan Agreement with net proceeds from the issuance of long-term senior unsecured notes. See Note 10. Long-Term Debt. Upon repayment, the Term Loan Agreement terminated in accordance with its terms. In 2019, Altria recorded approximately $95 million of pre-tax acquisition-related costs for the write-off of the debt issuance costs related to the Term Loan Agreement, which were recorded in interest and other debt expense, net in Altria’s consolidated statement of earnings (losses).
Altria’s estimate of the fair value of its short-term borrowings is derived from discounted future cash flows based on the contractual terms of the Term Loan Agreement and observable interest rates and is classified in Level 2 of the fair value hierarchy. The fair value of Altria’s short-term borrowings at December 31, 2018 approximated its carrying value.
At December 31, 2018, accrued interest on short-term borrowings of $15 million was included in other accrued liabilities on Altria’s consolidated balance sheet.
At December 31, 2019, Altria had a senior unsecured 5-year revolving credit agreement (the “Credit Agreement”). The Credit Agreement, which is used for general corporate purposes, provides for borrowings up to an aggregate principal amount of $3.0 billion. The Credit Agreement expires on August 1, 2023 and includes an option, subject to certain conditions, for Altria to extend the Credit Agreement for two additional one-year periods. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”), or a mutually agreed upon benchmark rate, plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“Standard & Poor’s”). The applicable percentage based on Altria’s long-term senior unsecured debt ratings at December 31, 2019


23


for borrowings under the Credit Agreement was 1.0%. The Credit Agreement does not include any other rating triggers, or any provisions that could require the posting of collateral. At December 31, 2019 and 2018, Altria had no borrowings under the Credit Agreement. The credit line available to Altria at December 31, 2019 under the Credit Agreement was $3.0 billion.
The Credit Agreement includes various covenants, one of which requires Altria to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Consolidated Interest Expense of not less than 4.0 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, 2019, the ratio of consolidated EBITDA to Consolidated Interest Expense, calculated in accordance with the Credit Agreement, was 8.2 to 1.0. At December 31, 2019, Altria was in compliance with its covenants in the Credit Agreement. The terms “Consolidated EBITDA” and “Consolidated Interest Expense,” each as defined in the Credit Agreement, include certain adjustments.
Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 20. Condensed Consolidating Financial Information.

Note 10. Long-Term Debt
At December 31, 2019 and 2018, Altria’s long-term debt consisted of the following:
(in millions)
2019

 
2018

USD notes, 2.625% to 10.20%, interest payable semi-annually, due through 2059 (1)
$
23,259

 
$
13,000

USD Debenture, 7.75%, interest payable semi-annually, due 2027
42

 
42

Euro notes, 1.000% to 3.125%, interest payable annually, due through 2031(2)
4,741

 

 
28,042

 
13,042

Less current portion of long-term debt
1,000

 
1,144

 
$
27,042

 
$
11,898

(1) Weighted-average coupon interest rate of 4.6% at December 31, 2019 and 2018.
(2) Weighted-average coupon interest rate of 2.0% at December 31, 2019.
At December 31, 2019, aggregate maturities of Altria’s long-term debt were as follows:
(in millions)
 
 
2020
 
$
1,000

 
2021
 
1,500

 
2022
 
2,900

 
2023
 
1,752

 
2024
 
2,400

 
Thereafter
18,723

 
 
 
28,275

 
Less:
debt issuance costs
154

 
 
debt discounts
79

 
 
 
$
28,042

 
At December 31, 2019 and 2018, accrued interest on long-term debt of $470 million and $207 million, respectively, was included in other accrued liabilities on Altria’s consolidated balance sheets.
Altria Senior Notes: In February 2019, Altria issued USD denominated and Euro denominated long-term senior unsecured notes in the aggregate principal amounts of $11.5 billion and €4.25 billion, respectively. Altria immediately converted the proceeds of the Euro denominated notes into USD of $4.8 billion. The net proceeds from the Euro notes and a portion of the net proceeds from the USD notes were used to repay in full the $12.8 billion of short-term borrowings under the Term Loan Agreement, which were incurred to fund Altria’s investment in JUUL. The remaining net proceeds from the USD notes were used to fund Altria’s investment in Cronos in the first quarter of 2019 and for other general corporate purposes. The notes contain the following terms:
USD denominated notes
$1.0 billion at 3.490%, due 2022, interest payable semiannually beginning August 14, 2019;
$1.0 billion at 3.800%, due 2024, interest payable semiannually beginning August 14, 2019;
$1.5 billion at 4.400%, due 2026, interest payable semiannually beginning August 14, 2019;
$3.0 billion at 4.800%, due 2029, interest payable semiannually beginning August 14, 2019;
$2.0 billion at 5.800%, due 2039, interest payable semiannually beginning August 14, 2019;
$2.5 billion at 5.950%, due 2049, interest payable semiannually beginning August 14, 2019; and
$0.5 billion at 6.200%, due 2059, interest payable semiannually beginning August 14, 2019.


24


Euro denominated notes
€1.25 billion at1.000%, due 2023, interest payable annually beginning February 15, 2020;
€0.75 billion at 1.700%, due 2025, interest payable annually beginning June 15, 2020;
€1.0 billion at 2.200%, due 2027, interest payable annually beginning June 15, 2020; and
€1.25 billion at 3.125%, due 2031, interest payable annually beginning June 15, 2020.
All of Altria’s outstanding notes are senior unsecured obligations and rank equally in right of payment with all of Altria’s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria and (ii) the notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.
During 2019, Altria repaid in full at maturity notes in the aggregate principal amount of $1,144 million.
Altria designated its Euro denominated notes as a net investment hedge of its investment in ABI. For further discussion, see Note 8. Financial Instruments.
For discussion of the fair value of Altria’s long-term debt, see Note 8. Financial Instruments.
The obligations of Altria under the notes are guaranteed by PM USA as further discussed in Note 20. Condensed Consolidating Financial Information.

Note 11. Capital Stock
At December 31, 2019, Altria had 12 billion shares of authorized common stock; issued, repurchased and outstanding shares of common stock were as follows:
 
Shares Issued

 
Shares Repurchased

 
Shares Outstanding

Balances, December 31, 2016
2,805,961,317

 
(862,689,093
)
 
1,943,272,224

Stock award activity

 
(408,891
)
 
(408,891
)
Repurchases of common stock

 
(41,604,141
)
 
(41,604,141
)
Balances, December 31, 2017
2,805,961,317

 
(904,702,125
)
 
1,901,259,192

Stock award activity

 
676,727

 
676,727

Repurchases of common stock

 
(27,878,324
)
 
(27,878,324
)
Balances, December 31, 2018
2,805,961,317

 
(931,903,722
)
 
1,874,057,595

Stock award activity

 
427,276

 
427,276

Repurchases of common stock

 
(16,503,317
)
 
(16,503,317
)
Balances, December 31, 2019
2,805,961,317

 
(947,979,763
)
 
1,857,981,554

At December 31, 2019, Altria had 39,288,323 shares of common stock reserved for stock-based awards under Altria’s stock plans.
At December 31, 2019, 10 million shares of serial preferred stock, $1.00 par value, were authorized; no shares of serial preferred stock have been issued.
Dividends: During the third quarter of 2019, Altria’s Board of Directors (the “Board of Directors”) approved a 5% increase in the quarterly dividend rate to $0.84 per share of Altria common stock versus the previous rate of $0.80 per share. The current annualized dividend rate is $3.36 per share. Future dividend payments remain subject to the discretion of the Board of Directors.
Share Repurchases: In July 2015, the Board of Directors authorized a $1.0 billion share repurchase program that it expanded to $3.0 billion in October 2016 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”). In January 2018, Altria completed the July 2015 share repurchase program, under which it purchased a total of 58.7 million shares of its common stock at an average price of $68.15 per share.
Following the completion of the July 2015 share repurchase program, the Board of Directors authorized a new $1.0 billion share repurchase program in January 2018 that it expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”). In June 2019, Altria completed the January 2018 share repurchase program, under which it purchased a total of 34.0 million shares of its common stock at an average price of $58.86 per share.
In July 2019, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2019 share repurchase program”). At December 31, 2019, Altria had $500 million remaining in the July 2019 share repurchase program. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.


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For the years ended December 31, 2019, 2018 and 2017, Altria’s total share repurchase activity was as follows:
 
 
July 2019 Share Repurchase Program
 
January 2018 Share Repurchase Program
 
July 2015 Share Repurchase Program
 
Total
(in millions, except per share data)
 
2019
 
2019
 
2018
 
2018
 
2017
 
2019
 
2018
 
2017
Total number of shares repurchased
10.1

 
6.4

 
27.6

 
0.3

 
41.6

 
16.5

 
27.9

 
41.6

Aggregate cost of shares repurchased
$
500

 
$
345

 
$
1,655

 
$
18

 
$
2,917

 
$
845

 
$
1,673

 
$
2,917

Average price per share of shares repurchased
$
49.29

 
$
54.36

 
$
59.89

 
$
71.68

 
$
70.10

 
$
51.24

 
$
60.00

 
$
70.10



Note 12. Stock Plans
Under the Altria 2015 Performance Incentive Plan (the “2015 Plan”), Altria may grant stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), deferred stock units and other stock-based awards, as well as cash-based annual and long-term incentive awards to employees of Altria or any of its subsidiaries or affiliates. Any awards granted pursuant to the 2015 Plan may be in the form of performance-based awards, including performance stock units (“PSUs”), which are subject to the achievement or satisfaction of performance goals and performance cycles. Up to 40 million shares of common stock may be issued under the 2015 Plan. In addition, under the 2015 Stock Compensation Plan for Non-Employee Directors (the “Directors Plan”), Altria may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria.
Shares available to be granted under the 2015 Plan and the Directors Plan at December 31, 2019, were 36,078,232 and 831,560, respectively.
Restricted Stock and RSUs: During the vesting period, these shares include nonforfeitable rights to dividends or dividend equivalents and may not be sold, assigned, pledged or otherwise encumbered. Such shares are subject to forfeiture if certain employment conditions are not met. Altria estimates the number of awards expected to be forfeited and adjusts this estimate when subsequent information indicates that the actual number of forfeitures is likely to differ from previous estimates. Shares of restricted stock and RSUs generally vest three years after the grant date.
The fair value of the shares of restricted stock and RSUs at the date of grant, net of estimated forfeitures, is amortized to expense ratably over the restriction period, which is generally three years. Altria recorded pre-tax compensation expense related to restricted stock and RSUs for the years ended December 31, 2019, 2018 and 2017 of $28 million, $39 million and $49 million, respectively. The deferred tax benefit recorded related to this compensation expense was $7 million, $9 million and $18 million for the years ended December 31, 2019, 2018 and 2017, respectively. The unamortized compensation expense related to RSUs was $50 million at December 31, 2019 and is expected to be recognized over a weighted-average period of approximately two years. Altria has not granted any restricted stock since 2014 and had no restricted stock outstanding at December 31, 2017.
RSU activity was as follows for the year ended December 31, 2019:
 
Number of Shares

 
Weighted-Average Grant Date Fair Value Per Share

Balance at December 31, 2018
2,129,626

 
$
64.94

Granted
719,677

 
$
52.03

Vested
(611,657
)
 
$
59.78

Forfeited
(328,004
)
 
$
66.52

Balance at December 31, 2019
1,909,642

 
$
61.46

The weighted-average grant date fair value of RSUs granted during the years ended December 31, 2019, 2018 and 2017 was $37 million, $60 million and $46 million, respectively, or $52.03, $67.17 and $71.05 per RSU, respectively. The total fair value of restricted stock and RSUs that vested during the years ended December 31, 2019, 2018 and 2017 was $30 million, $65 million and $95 million, respectively.
PSUs: Altria granted an aggregate of 181,409, 177,338 and 187,886 of PSUs during 2019, 2018 and 2017, respectively. The payout of PSUs requires the achievement of certain performance measures, which were predetermined at the time of grant, over a three-year performance cycle. These performance measures consist of Altria’s adjusted diluted earnings per share compounded annual growth rate and Altria’s total shareholder return relative to a predetermined peer group. PSUs are also subject to forfeiture if certain employment conditions are not met. At December 31, 2019, Altria had 360,685 PSUs outstanding, with a weighted-average grant date fair value of $58.41 per PSU. The fair value of PSUs at the date of grant, net of estimated forfeitures, is amortized to expense over the performance period. Altria recorded pre-tax compensation expense related to PSUs for the years ended December 31, 2019, 2018 and 2017 of $4 million, $7 million and $6 million, respectively. The unamortized compensation expense related to PSUs was $10 million at both December 31, 2019 and 2018.


26



Note 13. Earnings (Losses) per Share
Basic and diluted earnings (losses) per share (“EPS”) were calculated using the following:
 
For the Years Ended December 31,
(in millions)
2019