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Section 1: 10-Q (FORM 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number 1-08940
Altria Group, Inc.
(Exact name of registrant as specified in its charter)
Virginia
 
 
13-3260245
 
(State or other jurisdiction of incorporation or organization)
 
 
(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 (804) 274-2200 
 Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
               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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes   þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
 
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
  
 
 
 
 
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    No   þ
At April 21, 2020, there were 1,858,368,058 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.


Table of Contents    



ALTRIA GROUP, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
  
 
  
Page No.
PART I -
  
FINANCIAL INFORMATION
  
 
 
 
 
 
Item 1.
  
Financial Statements (Unaudited)
  
 
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
  
  
 
 
 
 
 
 
  
  
 
 
 
 
Item 2.
  
  
 
 
 
 
 
Item 3.
  
  
 
 
 
 
Item 4.
  
  
 
 
 
 
PART II -
  
OTHER INFORMATION
  
 
 
 
 
 
Item 1.
  
  
 
 
 
 
Item 1A.
  
  
 
 
 
 
Item 2.
  
  
 
 
 
 
 
Item 6.
  
  
 
 
 
 
Signature
  
  


2

Table of Contents    

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
 
Cash and cash equivalents
 
$
5,616

 
$
2,117

Receivables
 
147

 
152

Inventories:
 

 

Leaf tobacco
 
895

 
874

Other raw materials
 
193

 
192

Work in process
 
467

 
696

Finished product
 
451

 
531

 
 
2,006

 
2,293

Other current assets
 
166

 
262

Total current assets
 
7,935

 
4,824

Property, plant and equipment, at cost
 
5,103

 
5,074

Less accumulated depreciation
 
3,106

 
3,075

 
 
1,997

 
1,999

Goodwill
 
5,177

 
5,177

Other intangible assets, net
 
12,668

 
12,687

Investments in equity securities
 
23,861

 
23,581

Other assets
 
980

 
1,003

Total Assets
 
$
52,618

 
$
49,271

 
See notes to condensed consolidated financial statements.

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Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)
 
 
 
March 31, 2020
 
December 31, 2019
Liabilities
 
 
 
 
Short-term borrowings
 
$
3,000

 
$

Current portion of long-term debt
 

 
1,000

Accounts payable
 
278

 
325

Accrued liabilities:
 
 
 
 
Marketing
 
467

 
393

Settlement charges
 
4,419

 
3,346

Other
 
1,032

 
1,533

Income taxes
 
393

 
12

Dividends payable
 
1,565

 
1,565

Total current liabilities
 
11,154

 
8,174

Long-term debt
 
26,971

 
27,042

Deferred income taxes
 
5,191

 
5,083

Accrued pension costs
 
427

 
473

Accrued postretirement health care costs
 
1,798

 
1,797

Other liabilities
 
402

 
345

Total liabilities
 
45,943

 
42,914

Contingencies (Note 11)
 

 

Redeemable noncontrolling interest
 
38

 
38

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

 
935

Additional paid-in capital
 
5,959

 
5,970

Earnings reinvested in the business
 
36,528

 
36,539

Accumulated other comprehensive losses
 
(2,533
)
 
(2,864
)
Cost of repurchased stock
(947,593,259 shares at March 31, 2020 and
947,979,763 shares at December 31, 2019)
 
(34,346
)
 
(34,358
)
Total stockholders’ equity attributable to Altria
 
6,543

 
6,222

Noncontrolling interests
 
94

 
97

Total stockholders’ equity
 
6,637

 
6,319

Total Liabilities and Stockholders’ Equity
 
$
52,618

 
$
49,271

See notes to condensed consolidated financial statements.


4

Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
Net revenues
 
$
6,359

 
$
5,628

Cost of sales
 
2,173

 
1,578

Excise taxes on products
 
1,313

 
1,239

Gross profit
 
2,873

 
2,811

Marketing, administration and research costs
 
537

 
533

Asset impairment and exit costs
 

 
40

Operating income
 
2,336

 
2,238

Interest and other debt expense, net
 
275

 
384

Net periodic benefit income, excluding service cost
 
(27
)
 
(1
)
Earnings from equity investments
 
(157
)
 
(86
)
Loss on Cronos-related financial instruments
 
137

 
425

Earnings before income taxes
 
2,108

 
1,516

Provision for income taxes
 
558

 
395

Net earnings
 
1,550

 
1,121

Net (earnings) losses attributable to noncontrolling interests
 
2

 
(1
)
Net earnings attributable to Altria
 
$
1,552

 
$
1,120

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria
 
$
0.83

 
$
0.60

See notes to condensed consolidated financial statements.


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Table of Contents    

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

 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
Net earnings
 
$
1,550

 
$
1,121

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Benefit plans
 
21

 
29

ABI
 
298

 
(199
)
Currency translation adjustments and other
 
12

 

Other comprehensive earnings (losses), net of deferred
income taxes
 
331

 
(170
)
 
 
 
 
 
Comprehensive earnings
 
1,881

 
951

Comprehensive (earnings) losses attributable to noncontrolling interests
 
2

 
(1
)
Comprehensive earnings attributable to Altria
 
$
1,883

 
$
950

See notes to condensed consolidated financial statements.

6

Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Three Months Ended March 31, 2020 and 2019
(in millions of dollars, except per share data)
(Unaudited)
 

 
 
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, 2019
 
$
935

 
$
5,970

 
$
36,539

 
$
(2,864
)
 
$
(34,358
)
 
$
97

 
$
6,319

Net earnings (1)
 

 

 
1,552

 

 

 
(3
)
 
1,549

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

 

 

 
331

 

 

 
331

Stock award activity
 

 
(11
)
 

 

 
12

 

 
1

Cash dividends declared ($0.84 per share)
 

 

 
(1,563
)
 

 

 

 
(1,563
)
Balances, March 31, 2020
 
$
935

 
$
5,959

 
$
36,528

 
$
(2,533
)
 
$
(34,346
)
 
$
94

 
$
6,637


 
 
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, 2018
 
$
935

 
$
5,961

 
$
43,962

 
$
(2,547
)
 
$
(33,524
)
 
$
2

 
$
14,789

Net earnings (1)
 

 

 
1,120

 

 

 

 
1,120

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

 

 

 
(170
)
 

 

 
(170
)
Stock award activity
 

 
(18
)
 

 

 
11

 

 
(7
)
Cash dividends declared ($0.80 per share)
 

 

 
(1,500
)
 

 

 

 
(1,500
)
Repurchases of common stock
 

 

 

 

 
(151
)
 

 
(151
)
Balances, March 31, 2019
 
$
935

 
$
5,943

 
$
43,582

 
$
(2,717
)
 
$
(33,664
)
 
$
2

 
$
14,081


(1)
Amounts attributable to noncontrolling interests for the three months ended March 31, 2020 and 2019 exclude net earnings of $1 million due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the condensed consolidated balance sheets.

See notes to condensed consolidated financial statements.



7

Table of Contents    

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

 
 
For the Three Months Ended
March 31,
 
 
2020
 
2019
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
1,550

 
$
1,121

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
65

 
53

Deferred income tax provision (benefit)
 
26

 
(72
)
Earnings from equity investments
 
(157
)
 
(86
)
Loss on Cronos-related financial instruments
 
137

 
425

Asset impairment and exit costs, net of cash paid
 
(23
)
 
17

Cash effects of changes:
 
 
 
 
Receivables
 
5

 
(16
)
Inventories
 
(5
)
 
(25
)
Accounts payable
 
(45
)
 
(189
)
Income taxes
 
495

 
471

Accrued liabilities and other current assets
 
(421
)
 
(513
)
Accrued settlement charges
 
1,073

 
913

Pension plan contributions
 
(4
)
 
(3
)
Pension provisions and postretirement, net
 
(20
)
 
(8
)
Other, net
 
453

 
201

Net cash provided by (used in) operating activities
 
3,129

 
2,289

Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
(52
)
 
(38
)
Investment in Cronos
 

 
(1,831
)
Other, net
 

 
(81
)
Net cash provided by (used in) investing activities
 
$
(52
)
 
$
(1,950
)

See notes to condensed consolidated financial statements.


8

Table of Contents    

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

 
 
For the Three Months Ended
March 31,
 
 
2020
 
2019
Cash Provided by (Used in) Financing Activities
 
 
 
 
Proceeds from short-term borrowings
 
$
3,000

 
$

Repayment of short-term borrowings
 

 
(12,800
)
Long-term debt issued
 

 
16,265

Long-term debt repaid
 
(1,000
)
 

Repurchases of common stock
 

 
(151
)
Dividends paid on common stock
 
(1,563
)
 
(1,502
)
Other, net
 
(10
)
 
(129
)
Net cash provided by (used in) financing activities
 
427

 
1,683

Cash, cash equivalents and restricted cash:
 
 
 
 
Increase (decrease)
 
3,504

 
2,022

Balance at beginning of period
 
2,160

 
1,433

Balance at end of period
 
$
5,664

 
$
3,455

 
 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s condensed consolidated balance sheets:
 
 
At March 31, 2020
 
At December 31, 2019
Cash and cash equivalents
 
$
5,616

 
$
2,117

Restricted cash included in other current assets (1)
 
3

 

Restricted cash included in other assets (1)
 
45

 
43

Cash, cash equivalents and restricted cash
 
$
5,664

 
$
2,160

(1)
Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 11. Contingencies.

See notes to condensed consolidated financial statements.

9

Table of Contents    


Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Background and Basis of Presentation:

Background

When used in these notes, the term "Altria” refers to Altria Group, Inc. and its subsidiaries, unless otherwise specified or unless otherwise required.

At March 31, 2020, Altria Group, Inc.’s 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 moist smokeless tobacco (“MST”) and snus 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 owned an 80% interest in Helix Innovations LLC (“Helix”), which is engaged in the manufacture and sale of oral nicotine pouches. 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 March 31, 2020, 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 March 31, 2020, 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.

At March 31, 2020, Altria had a 35% economic interest in JUUL Labs, Inc. (“JUUL”), which Altria accounts for as an investment in an equity security. JUUL is engaged in the manufacture and sale of e-vapor products globally and is the U.S. leader in e-vapor.

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 third quarter of 2019. The financial results of Helix are included in Altria’s condensed consolidated financial statements as part of its oral tobacco products segment (formerly 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 March 2019, Altria completed its acquisition of a 45% ownership in Cronos Group Inc. (“Cronos”), a global cannabinoid company headquartered in Toronto, Canada. At March 31, 2020, Altria had a 45% ownership 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 4. Investments in Equity Securities.

Share Repurchases

In January 2018, Altria’s Board of Directors (the “Board of Directors”) authorized a new $1.0 billion share repurchase program 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.


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Table of Contents

In July 2019, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2019 share repurchase program”). During the first quarter of 2020, there were no share repurchases made under the July 2019 share repurchase program. In April 2020, the Board of Directors rescinded the $500 million remaining in the July 2019 share repurchase program to strengthen Altria’s liquidity position amidst the COVID-19 pandemic.

Altria’s share repurchase activity for the three months ended March 31, 2019 was as follows:
(in millions, except per share data)
 
2019
Total number of shares repurchased
 
2.7

Aggregate cost of shares repurchased
 
$
151

Average price per share of shares repurchased
 
$
56.34



Basis of Presentation

The interim condensed consolidated financial statements of Altria are unaudited. It is the opinion of Altria’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected in the interim condensed consolidated financial statements. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

In the first quarter of 2020, Altria renamed its smokeless products segment as the oral tobacco products segment.

These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in Altria’s Annual Report on Form 10-K for the year ended December 31, 2019.

On January 1, 2020, Altria adopted Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments and all related ASU amendments (collectively “ASU No. 2016-13”). This 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 adoption of ASU No. 2016-13 did not have a material impact on Altria’s condensed consolidated financial statements.

Additionally, on January 1, 2020, Altria adopted ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU No. 2018-15”). This 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 adoption of ASU No. 2018-15 did not have a material impact on Altria’s condensed consolidated financial statements.

For a description of issued accounting guidance applicable to, but not yet adopted by, Altria, see Note 13. New Accounting Guidance Not Yet Adopted.

Certain immaterial prior year amounts have been reclassified to conform with the current year’s presentation.

Note 2. Revenues from Contracts with Customers:

Altria disaggregates net revenues based on product type. For further discussion, see Note 9. 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 condensed consolidated balance sheets. Cash discounts at March 31, 2020 and December 31, 2019 were de minimis, 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 condensed consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $219 million and $362 million at March 31, 2020 and December 31, 2019, respectively. When cash is received in advance of product shipment, Altria’s businesses satisfy their performance

11

Table of Contents

obligations within three days of receiving payment. At March 31, 2020 and December 31, 2019, 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 $147 million and $152 million at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019, 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 condensed 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 MST and snus 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 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 condensed 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 condensed consolidated financial statements.

Note 3. Asset Impairment, Exit and Implementation Costs:

Pre-tax asset impairment, exit and implementation costs consisted of the following:
 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
 
 
Implementation Costs (1)
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs (1)
 
Total
 
(in millions)
Smokeable products
 
$

 
$

 
$
36

 
$
8

 
$
44

Oral tobacco products
 

 

 
8

 
1

 
9

Wine
 
392

 
392

 

 

 

All other
 

 

 
(5
)
 

 
(5
)
General corporate
 

 

 
1

 

 
1

Total
 
392

 
392

 
40

 
9

 
49

Plus amounts included in net periodic benefit income, excluding service cost (2)
 

 

 
12

 

 
12

Total
 
$
392

 
$
392

 
$
52

 
$
9

 
$
61

(1) Included in cost of sales for 2020 and marketing, administration and research costs for 2019 in Altria’s condensed consolidated statements of earnings.
(2) Represents curtailment costs. See Note 6. Benefit Plans.
 
 
 
 
 
 


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Implementation costs for 2020 were related to Ste. Michelle’s inventory-related charges, as discussed below. The 2019 pre-tax asset impairment, exit and implementation costs were related to the cost reduction program, which was completed in 2019.

The movement in the restructuring liabilities, substantially all of which were severance liabilities, related to the cost reduction program was as follows:
 
(in millions)
Balances at December 31, 2019
$
67

Charges

Cash spent
(23
)
Balances at March 31, 2020
$
44



Wine Business Strategic Reset

Evolving adult consumer preferences have posed strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increased inventory levels in recent periods. Against a backdrop of product volume demand uncertainty and long-term non-cancelable grape purchase commitments, which have been further negatively impacted by the economic uncertainty surrounding the COVID-19 pandemic, Ste. Michelle has experienced additional increases in inventory levels that at March 31, 2020 significantly exceed long-term forecasted demand.

As a result, in connection with the preparation of Altria’s first quarter financial statements, Ste. Michelle recorded pre-tax charges of $392 million, which were included in cost of sales in Altria’s condensed consolidated statement of earnings for the three months ended March 31, 2020. The charges consisted of the following: (i) write-off of inventory ($292 million) as Ste. Michelle no longer believes that the benefit of the blending and production plans for its inventory outweighs inventory carrying cost given the reduced product volume demand; and (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believes no longer have a future economic benefit ($100 million). Such commitments will continue to require cash payments as grape commitments are fulfilled over the next five years.

Given such uncertainty in economic conditions and product volume demand, as well as long-term supply-side contractual challenges, Altria and Ste. Michelle undertook a review of the wine business. As a result, Altria and Ste. Michelle implemented a strategic reset in order to maximize Ste. Michelle’s profitability and achieve improved long-term cash-flow generation. This strategic reset includes: (i) an updated approach to forecasting demand; (ii) supply chain optimization; (iii) SKU rationalization to reduce the number of products and eliminate underperforming brands; and (iv) streamlining operations by reducing future capital expenditures, working capital requirements and ongoing operating costs.

Additionally, Ste. Michelle expects to record additional charges of approximately $25 million during the remainder of 2020, consisting of inventory disposal costs and other charges.


Note 4. Investments in Equity Securities:

Altria’s investments consisted of the following:
 
 
Carrying Amount
 
 
March 31, 2020
 
December 31, 2019
 
 
(in millions)
ABI
 
$
18,453

 
$
18,071

JUUL
 
4,205

 
4,205

Cronos (1)
 
1,203

 
1,305

Total
 
$
23,861

 
$
23,581

(1) March 31, 2020 includes Altria’s equity method investment in Cronos ($1,037 million), the Cronos warrant ($132 million) and the Fixed-price Preemptive Rights ($34 million) and December 31, 2019 includes Altria’s equity method investment in Cronos ($1,002 million), the Cronos warrant ($234 million) and the Fixed -price Preemptive Rights ($69 million), as discussed further below.


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Earnings from equity investments accounted for under the equity method of accounting consisted of the following:
 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in millions)
ABI
 
$
134

 
$
86

Cronos (1)
 
23

 

Total
 
$
157

 
$
86

(1) Represents Altria’s share of Cronos’s earnings, which includes the change in fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares. As a result of the acquisition of Cronos in March 2019 and Altria reporting its share of Cronos’s results using a one-quarter lag, no equity earnings from Altria’s investment in Cronos were recorded for the three months ended March 31, 2019.

Altria reviews its equity investments accounted for under the equity method of accounting (ABI and Cronos) for impairment on a quarterly basis in connection with the preparation of its financial statements by comparing the fair value of each of its investments to its respective 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. For further discussion, see Investment in ABI and Investment in Cronos below.

Investment in ABI

At March 31, 2020, Altria had a 10.1% ownership in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of 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.

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 forecloses on the Restricted Shares, the relevant 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 March 31, 2020 and December 31, 2019 was $8.8 billion (carrying value of $18.5 billion) and $16.1 billion (carrying value of $18.1 billion), respectively, which was less than its carrying by approximately 52% and 11%, respectively. As recently as September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value. In October 2019, the fair value of Altria’s equity investment in ABI declined below its carrying value and has not recovered. Altria has evaluated the factors related to the fair value decline, including the recent impact on the fair value of ABI’s shares amidst the COVID-19 pandemic, which has impacted the equity markets. Altria has also evaluated ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded at March 31, 2020 and December 31, 2019, the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded.

Consistent with the one-quarter lag for reporting ABI’s results in Altria’s financial results, in the second quarter of 2020 Altria will record its share of ABI’s first quarter 2020 net mark-to-market losses on certain ABI financial instruments associated with ABI’s share commitments, primarily related to ABI’s derivative financial instruments used to hedge exposure to approximately 100 million shares of ABI common stock. Such activity is primarily driven by the change in ABI’s share price, which decreased from 72.71 to 40.47 at December 31, 2019 and March 31, 2020, respectively.


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Investment in JUUL

In December 2018, Altria made a minority investment in JUUL for $12.8 billion. In exchange for the investment, Altria received a 35% economic interest in JUUL through non-voting shares, which are convertible at Altria’s election into voting shares (“Share Conversion”), and for no additional payment, a security convertible into additional non-voting or voting shares, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). During 2019, Altria recorded total pre-tax impairment charges of $8.6 billion related to its investment in JUUL resulting in a $4.2 billion carrying value of its investment in JUUL at December 31, 2019.

Altria received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain its ownership percentage and 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.

On January 28, 2020, Altria and JUUL amended certain JUUL Transaction agreements and entered into a new cooperation agreement, which included the following provisions:
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 discontinued all other services as of March 31, 2020;
Altria will have 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 cooperation agreement, with statutes of limitation being tolled during the one-year period;
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; and
upon Share Conversion, JUUL will:
restructure JUUL’s current seven-member Board of Directors to a nine-member board that will 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.

On April 1, 2020, the U.S. Federal Trade Commission (“FTC”) issued an administrative complaint challenging Altria’s investment in JUUL. The FTC has not sought to preliminarily enjoin Altria from converting its non-voting JUUL shares to voting shares. Altria has not converted its non-voting JUUL shares to voting shares and is considering whether to do so. For further discussion on the FTC litigation, see Note 11. Contingencies -  Antitrust Litigation.

At March 31, 2020 and December 31, 2019, Altria had a 35% economic interest in JUUL. Altria accounted for its investment in JUUL as an investment in an equity security as of March 31, 2020. 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 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 March 31, 2020.

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

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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.

Altria performed its qualitative assessment of potential impairment indicators for its investment in JUUL, which included the consideration of potential impacts of COVID-19 on JUUL’s business, as part of the preparation of its financial statements for the period ended March 31, 2020. Altria’s assessment did not result in impairment at March 31, 2020. The carrying value of Altria’s investment in JUUL was $4.2 billion at March 31, 2020 and December 31, 2019.

Upon Share Conversion, Altria expects to account for its investment in JUUL under the fair value option. Under this option, Altria’s consolidated statement of earnings 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.

Investment in Cronos

In March 2019, Altria completed its acquisition of:
149.8 million newly issued common shares of Cronos (“Acquired Common Shares”), which represented a 45% economic and voting interest and is accounted for under the equity method of accounting;
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 March 31, 2020, Altria estimates the Fixed-price Preemptive Rights allows 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 March 31, 2020) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.
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 5. 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;
$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.

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 $0.4 billion, respectively, based on the CAD to USD exchange rate on April 27, 2020).
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 5. Financial Instruments.
At March 31, 2020, Altria had a 45% ownership 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.

The fair value of Altria’s equity method investment in Cronos is based on unadjusted quoted prices in active markets for Cronos’s common shares and was classified in Level 1 of the fair value hierarchy. The fair value of Altria’s equity method investment in Cronos at March 31, 2020 and December 31, 2019 was $0.9 billion and $1.2 billion, respectively, compared with its carrying value of $1.0 billion at March 31, 2020 and December 31, 2019. At March 31, 2020, the fair value of Altria’s

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equity method investment in Cronos was less than its carrying value by approximately 14%. Based on Altria’s evaluation of the duration and magnitude of the fair value decline, Altria’s evaluation of Cronos’s financial condition (including its strong cash position) and near-term prospects, and Altria’s intent and ability to hold its investment in Cronos until recovery, Altria concluded that the decline in fair value of its equity method investment in Cronos below its carrying value is temporary and, therefore, no impairment was recorded.

Note 5. 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 both March 31, 2020 and December 31, 2019, Altria had foreign currency contracts with aggregate notional amounts of $2,246 million. At March 31, 2020, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $4,595 million and $4,666 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.

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.

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 Credit Agreement (see Note 10. Debt) 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 March 31, 2020 approximated its carrying value. Altria had no short-term borrowings at December 31, 2019.

Altria’s estimate of the fair value of its total long-term debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria’s total long-term debt at March 31, 2020 and December 31, 2019 was $28.3 billion and $30.7 billion, respectively, as compared with its carrying value of $27.0 billion and $28.0 billion, respectively.


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Altria’s Fixed-price Preemptive Rights and warrant related to its investment in Cronos, which is further discussed in Note 4. 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 Cronos warrant are estimated using Black-Scholes option-pricing models, adjusted for observable inputs (which are classified in Level 1 of the fair value hierarchy), including share price, and unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:
 
 
March 31, 2020
 
December 31, 2019
 
March 31, 2020
 
December 31, 2019
 
 
Fixed-price Preemptive Rights
 
Cronos Warrant
Share price (1)
 
C$7.99
 
C$9.97
 
C$7.99
 
C$9.97
Expected life (2)