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Investments in Equity Securities | 9 Months Ended
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Sep. 30, 2020
Investments [Abstract] |
Investments in Equity Securities | Investments in Equity Securities: Altria’s investments consisted of the following:
|  | Carrying Amount
|  | September 30, 2020 |  | December 31, 2019
|  | (in millions)
ABI |  | $ | 16,716 |  |  | $ | 18,071 |
JUUL |  | 1,605 |  |  | 4,205 |
Cronos (1) |  | 1,087 |  |  | 1,305 |
Total |  | $ | 19,408 |  |  | $ | 23,581 |
(1) September 30, 2020 includes Altria’s equity method investment in Cronos ($986 million), the Cronos warrant ($86 million) and the Fixed-price Preemptive Rights ($15 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. Earnings (losses) from equity investments accounted for under the equity method of accounting consisted of the following:
|  | For the Nine Months Ended September 30, |  | For the Three Months Ended September 30,
|  | 2020 |  | 2019 |  | 2020 |  | 2019
|  | (in millions)
ABI (1) |  | $ | (306) |  |  | $ | 640 |  |  | $ | (418) |  |  | $ | 252 |
Cronos |  | — |  |  | 226 |  |  | (54) |  |  | 81 |
Total |  | $ | (306) |  |  | $ | 866 |  |  | $ | (472) |  |  | $ | 333 |
(1) At September 30, 2020 Altria recorded pre-tax losses associated with its share of ABI’s completion of the sale of its Australia subsidiary and ABI’s goodwill impairment charge associated with its Africa businesses. These amounts include Altria’s share of amounts recorded by ABI in its second quarter of 2020, as well as additional adjustments related to (i) conversion from international financial reporting standards to United States generally accepted accounting principles, and (ii) adjustments to Altria’s investment required under the equity method of accounting. 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. 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. Investment in ABI At September 30, 2020, Altria had a 10.0% ownership in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. Altria’s ownership percentage decreased from 10.1% at March 31, 2020 due to the issuance of additional shares by 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 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 September 30, 2020 and December 31, 2019 was $10.7 billion (carrying value of $16.7 billion) and $16.1 billion (carrying value of $18.1 billion), respectively, which was less than its carrying value by approximately 36% and 11%, respectively. 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. The economic uncertainties of the COVID-19 pandemic have also impacted ABI’s business. Altria has evaluated the duration and magnitude of the fair value decline at September 30, 2020, ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery. Altria concluded, both at September 30, 2020 and December 31, 2019, that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded. 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”). 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 ▪in the event of 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 as well as which, if any, of its voting and governance rights to exercise if Altria does elect to effect such conversion. Altria has until November 30, 2020 to convert its JUUL shares under the regulations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), after which Altria would have to re-file for antitrust review with the FTC to again seek the ability to convert. For further discussion on the FTC litigation, see Note 12. Contingencies - Antitrust Litigation. In the event of 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. At September 30, 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 September 30, 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 September 30, 2020. JUUL announced a strategic update in September 2020, which includes its plans for a significant global workforce reduction, its evaluation of its resource allocation and the possibility of exiting various international markets. As part of the preparation of Altria’s financial statements for the period ended September 30, 2020, Altria performed its qualitative assessment of impairment indicators for its investment in JUUL and determined that JUUL’s strategic update was an indicator of impairment at September 30, 2020, given the significant deterioration in JUUL’s business prospects. Given the existence of this impairment indicator, Altria performed a quantitative valuation of its investment in JUUL as of September 30, 2020 and recorded a non-cash pre-tax charge of $2.6 billion for the nine and three months ended September 30, 2020, reported as impairment of JUUL equity securities in its condensed consolidated statements of earnings. The impairment charge was driven by Altria’s projections of lower JUUL revenues over time due to lower pricing assumptions and delays in JUUL achieving previously forecasted operating margin performance. These drivers were the result of: (i) JUUL’s revised international expansion plans and (ii) the evolving U.S. e-vapor category and associated competitive dynamics. In 2019, Altria recorded total non-cash pre-tax impairment charges of $8.6 billion ($4.5 billion in the third quarter of 2019 and $4.1 billion in the fourth quarter of 2019) related to its investment in JUUL resulting in a $4.2 billion carrying value of its investment in JUUL at December 31, 2019. At September 30, 2019, Altria performed a qualitative assessment for impairment indicators and concluded that impairment indicators existed. These indicators included 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 (“FDA”) 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. Based on its quantitative valuation of its investment in JUUL, the third-quarter 2019 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, which resulted in a non-cash pre-tax charge of $4.5 billion. 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, which included a variety of class action lawsuits and personal injury claims, as well as cases brought by state attorneys general and local governments. The fourth-quarter impairment charge resulted substantially from increased discount rates applied to future cash flow projections, due to the significant risk created by the increase in the number of legal cases pending against JUUL, which resulted in an additional non-cash pre-tax charge of $4.1 billion at December 31, 2019. 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 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 as of September 30, 2020, December 31, 2019 and September 30, 2019, 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 competitive dynamics and 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. 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; ▪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 September 30, 2020, Altria estimates the Fixed-price Preemptive Rights allows Altria to purchase up to an additional approximately 35 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 79 million common shares at September 30, 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 October 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 September 30, 2020, Altria had a 44% ownership in Cronos, consisting of 156.6 million shares, which Altria accounts for under the equity method of accounting. Altria’s ownership percentage decreased from 45% at June 30, 2020 due to the issuance of additional shares by Cronos. 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 September 30, 2020 and December 31, 2019 was $0.8 billion and $1.2 billion, respectively, compared with its carrying value of $1.0 billion at September 30, 2020 and December 31, 2019. At September 30, 2020, the fair value of Altria’s equity method investment in Cronos was less than its carrying value by approximately 20%. 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.

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