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Investments in Equity Securities | 6 Months Ended
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Jun. 30, 2022
Investments [Abstract] |
Investments in Equity Securities | Investments in Equity Securities The carrying amount of our investments consisted of the following:
(in millions) |  | June 30, 2022 |  | December 31, 2021
ABI |  | $ | 11,702 |  |  | $ | 11,144 |
JUUL |  | 450 |  |  | 1,705 |
Cronos (1) |  | 438 |  |  | 632 |
Total |  | $ | 12,590 |  |  | $ | 13,481 |
(1) Our investment in Cronos at June 30, 2022 and December 31, 2021 consisted of our equity method investment in Cronos of $437 million and $617 million, respectively, and also included the Cronos warrant and the Fixed-price Preemptive Rights, which are measured at fair value (collectively, “Investment in Cronos”). See below for further discussion. (Income) losses from equity investments accounted for under the equity method of accounting and fair value option consisted of the following:
| For the Six Months Ended June 30, |  | For the Three Months Ended June 30,
(in millions) | 2022 |  | 2021 |  | 2022 |  | 2021
ABI (1) | $ | (212) |  |  | $ | (392) |  |  | $ | (12) |  |  | $ | (74) |
Cronos (1) | 186 |  |  | 166 |  |  | 120 |  |  | 99 |
(Income) losses from investments under equity method of accounting | (26) |  |  | (226) |  |  | $ | 108 |  |  | $ | 25 |
JUUL | 1,255 |  |  | 100 |  |  | 1,155 |  |  | (100) |
(Income) losses from equity investments | $ | 1,229 |  |  | $ | (126) |  |  | $ | 1,263 |  |  | $ | (75) |
(1) Includes our share of amounts recorded by our investees and additional adjustments, if required, related to (i) the conversion from international financial reporting standards to GAAP and (ii) adjustments to our investment required under the equity method of accounting. Investment in ABI At June 30, 2022, we had an approximate 10% ownership 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 convertible by us into ordinary shares of ABI on a one-for-one basis; ▪rank equally with ordinary shares of ABI with regards to dividends and voting rights; and ▪have director nomination rights with respect to ABI. The Restricted Shares were subject to a five-year lock-up period that ended October 10, 2021. As of this filing, we have not elected to convert our Restricted Shares into ordinary shares of ABI. We account for our investment in ABI under the equity method of accounting because we have 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, we participate in ABI’s policy making processes. We report our share of ABI’s results using a one-quarter lag because ABI’s results are not available in time for us to record them in the concurrent period. The fair value of our 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. We can convert the Restricted Shares to ordinary shares at our discretion. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share. At June 30, 2022, the fair value of our equity investment in ABI was $10.6 billion (carrying value of $11.7 billion), which was below its carrying value by $1.1 billion or approximately 9%. The fair value of our equity investment in ABI at December 31, 2021 was $11.9 billion, which exceeded its carrying value of $11.1 billion by approximately 7%. Accounting guidance requires the evaluation of the following factors when determining if the decline in fair value is other than temporary: (i) the duration and magnitude of the fair value decline; (ii) the financial condition and near-term prospects of the investee; and (iii) the investor’s intent and ability to hold its equity investment until full recovery to its carrying value in the near term. In preparing our financial statements for the period ended June 30, 2022, we have evaluated these factors, including the macroeconomic and geopolitical factors that have resulted in significant changes to certain foreign exchange rates, including the Euro to U.S. dollar exchange rate. Additionally, ABI has delivered consistent business and earnings performance over the past several quarters demonstrating its ability to continue to execute its strategies and navigate challenges. At June 30, 2022, we concluded that the decline in fair value of our equity investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded. At July 25, 2022, the fair value of our equity investment in ABI was below its carrying value by $0.9 billion or approximately 8%. Investment in JUUL In December 2018, we made an investment in JUUL for $12.8 billion and received a 35% economic interest in JUUL through non-voting shares, which were convertible at our election into voting shares (“Share Conversion”), and a security convertible into additional non-voting or voting shares, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). At June 30, 2022, we had a 35% ownership interest in JUUL, consisting of 42 million voting shares. We received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain our ownership percentage and we are subject to a standstill restriction under which we may not acquire additional JUUL shares above our 35% interest. Furthermore, we agreed not to sell or transfer any of our JUUL shares until December 20, 2024. As part of the JUUL Transaction, we entered into a services agreement with JUUL pursuant to which we agreed to provide JUUL with certain commercial services, as requested by JUUL, for an initial term of six years. In January 2020, we amended certain JUUL Transaction agreements and entered into a new cooperation agreement. In conjunction with these amendments, the parties agreed that we would discontinue all services as of March 31, 2020 except regulatory affairs support for JUUL’s pursuit of its pre-market tobacco applications and/or its modified risk tobacco products applications. We also agreed to non-competition obligations generally requiring that we participate in the e-vapor business only through JUUL. However, we have the option to be released from our non-compete obligation (i) in the event JUUL is prohibited by federal law from selling e-vapor products in the United States for a continuous period of at least 12 months (subject to tolling of this period in certain circumstances), (ii) if the carrying value of our investment in JUUL is not more than 10% of its initial carrying value of $12.8 billion or (iii) if we are no longer providing JUUL services as of December 20, 2024. If any of the conditions described above are met and we elect to be released from our non-competition obligations, we would lose our board designation rights (other than the right to appoint one independent director so long as our ownership continues to be at least 10%), preemptive rights, consent rights and certain other rights with respect to our investment in JUUL and, in addition, our JUUL shares would be converted to single vote common stock, which would result in a significant reduction in our voting power. As discussed below, at June 30, 2022, the carrying value of our investment in JUUL was $450 million, which was less than 10% of our initial carrying value of $12.8 billion. As a result, we currently have the option to be released from our non-competition obligations. However, as of this filing, we have not elected to be released from our non-competition obligations. We retain our option to be released from the non-competition obligations in accordance with our relationship agreement with JUUL. Additionally, with respect to certain litigation in which we and JUUL are both defendants against third-party plaintiffs, we agreed not to 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 us and JUUL. In April 2020, the U.S. Federal Trade Commission (“FTC”) issued an administrative complaint challenging our investment in JUUL. In February 2022, the administrative law judge dismissed the FTC’s complaint. FTC complaint counsel appealed that decision to the FTC, which appeal remains pending. For further discussion, see Note 11. Contingencies - Antitrust Litigation. In November 2020, we exercised our rights to convert our non-voting JUUL shares into voting shares. We do not currently intend to exercise our additional governance rights obtained upon Share Conversion, including the right to elect directors to JUUL’s board, as described below, or to vote our JUUL shares other than as a passive investor. If we choose to exercise our governance rights, JUUL has agreed to: ▪ 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 us and two of whom will be designated by JUUL stockholders other than us) unanimously certified as independent by a nominating committee, which will include at least one Altria designee, (ii) two directors designated by us, (iii) three directors designated by JUUL stockholders other than us 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). The committee will have oversight authority and review of litigation management for matters in which JUUL and we 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. In June 2022, the U.S. Food and Drug Administration (“FDA”) issued marketing denial orders (“MDOs”) to JUUL ordering all of JUUL’s products currently marketed in the United States off the market. In July 2022, the FDA administratively stayed the MDOs on a temporary basis, citing its determination that there are scientific issues unique to the JUUL pre-market tobacco applications that warrant additional review. This administrative stay temporarily suspends the MDOs and JUUL’s products currently remain on the market. Following Share Conversion in the fourth quarter of 2020, we elected to account for our equity method investment in JUUL under the fair value option. Under this option, our condensed consolidated statements of earnings include any cash dividends received from our investment in JUUL and any changes in the estimated fair value of our investment, which is calculated quarterly. We believe the fair value option provides quarterly transparency to investors as to the fair market value of our investment in JUUL, given the changes and volatility in the e-vapor category since our initial investment, as well as the lack of publicly available information regarding JUUL’s business or a market-derived valuation. We use an income approach to estimate the fair value of our investment in JUUL. The income approach reflects the discounting of future cash flows for the United States 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. In determining the estimated fair value of our investment in JUUL, at June 30, 2022 and December 31, 2021, we made certain judgments, estimates and assumptions, the most significant of which were likelihood of certain potential regulatory and liquidity outcomes, sales volume, operating margins, discount rates and perpetual growth rates. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy. Additionally, in determining these significant assumptions, we made judgments regarding the (i) likelihood of certain potential regulatory actions impacting the e-vapor category and specifically whether the FDA will ultimately authorize JUUL’s products, which have received MDOs and are now under additional administrative review; (ii) likelihood of JUUL maintaining adequate liquidity to fund projected cash needs, the absence of which could result in JUUL seeking protection under bankruptcy or other insolvency law; (iii) risk created by the number and types of legal cases pending against JUUL; (iv) expectations for the future state of the e-vapor category, including competitive dynamics; and (v) timing of international expansion plans. Due to these uncertainties, our future cash flow projections of JUUL are based on a range of scenarios that consider certain potential regulatory, liquidity and market outcomes. The following table provides a reconciliation of the beginning and ending balance of our investment in JUUL, which is classified in Level 3 of the fair value hierarchy:
|  | Investment
(in millions) |  | Balance
Balance at December 31, 2020 |  | $ | 1,705 |
Unrealized gains (losses) included in (income) losses from equity investments |  | — |
Balance at December 31, 2021 |  | $ | 1,705 |
Unrealized gains (losses) included in (income) losses from equity investments |  | (1,255) |
Balance at June 30, 2022 |  | $ | 450 |
For the six and three months ended June 30, 2022, we recorded non-cash, pre-tax unrealized losses of $1,255 million and $1,155 million, respectively, as a result of changes in the estimated fair value of our investment in JUUL. The decrease in the estimated fair value was primarily driven by (i) a decrease in the likelihood of a favorable outcome from the FDA for JUUL’s products that are currently marketed in the United States, which have received MDOs and are now under additional administrative review, (ii) a decrease in the likelihood of JUUL maintaining adequate liquidity to fund projected cash needs, which could result in JUUL seeking protection under bankruptcy or other insolvency law, and (iii) projections of higher operating expenses resulting in lower long-term operating margins. For the six and three months ended June 30, 2021, we recorded a non-cash, pre-tax unrealized loss of $100 million and a non-cash, pre-tax unrealized gain of $100 million, respectively, as a result of changes in the estimated fair value of our investment in JUUL. There were no material changes to the significant assumptions used in the valuations, as described above, during the six and three months ended June 30, 2021, compared to the assumptions used for the December 31, 2020 valuation. Investment in Cronos At June 30, 2022, we had a 41.4% ownership interest in Cronos, consisting of 156.6 million shares, which we account for under the equity method of accounting. We report our share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for us to record them in the concurrent period. The fair value of our 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 and carrying value of our equity method investment in Cronos at December 31, 2021 was $617 million. At March 31, 2022, the fair value of our equity method investment in Cronos exceeded its carrying value by $55 million or approximately 10%. In the second quarter of 2022, the fair value of our equity method investment in Cronos declined below its carrying value and had not recovered as of June 30, 2022. Accounting guidance requires the evaluation of the following factors when determining if the decline in fair value is other than temporary: (i) the duration and magnitude of the fair value decline; (ii) the financial condition and near-term prospects of the investee; and (iii) the investor’s intent and ability to hold its equity method investment until full recovery to its carrying value in the near-term. In preparing our financial statements for the period ended June 30, 2022, we evaluated these factors and determined that there was not sufficient evidence to conclude that the impairment was temporary. As a result, we recorded a non-cash, pre-tax impairment charge of $107 million for the six and three months ended June 30, 2022, which was recorded to (income) losses from equity investments in our condensed consolidated statement of earnings. The impairment charge reflects the difference between the fair value of our equity method investment in Cronos using Cronos’s share price and the Canadian dollar (“CAD”) to U.S. dollar exchange rate at June 30, 2022 and the carrying value of our equity method investment in Cronos at June 30, 2022. At June 30, 2022, prior to recording the impairment charge, the fair value of our equity method investment in Cronos was less than its carrying value by approximately 20%. After recording the impairment charge, the fair value and carrying value of our equity method investment in Cronos at June 30, 2022 were both $437 million. As part of our Investment in Cronos, at June 30, 2022, we also owned: ▪anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain our ownership percentage. Certain of the anti-dilution protections provide us the ability to purchase additional Cronos common shares at a per share exercise price of CAD $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on our assumptions as of June 30, 2022, we estimate the Fixed-price Preemptive Rights allows us to purchase up to an additional approximately 11 million common shares of Cronos; and ▪a warrant providing us the ability to purchase an additional approximate 10% of common shares of Cronos (approximately 84 million common shares at June 30, 2022) 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 $1.6 billion and CAD $0.2 billion, respectively (approximately U.S. dollar $1.2 billion and $0.1 billion, respectively, based on the CAD to U.S. dollar exchange rate on July 25, 2022). At June 30, 2022, upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, we would own approximately 52% of the outstanding common shares of Cronos. The Fixed-price Preemptive Rights and Cronos warrant 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). We elect to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on our condensed consolidated balance sheets in investments in equity securities. We record in our condensed consolidated statements of earnings any changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur. We recorded non-cash, pre-tax unrealized (gains) losses, representing the changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant, as follows:
| For the Six Months Ended June 30, |  | For the Three Months Ended June 30,
(in millions) | 2022 |  | 2021 |  | 2022 |  | 2021
Fixed-price Preemptive Rights | $ | 1 |  |  | $ | 4 |  |  | $ | 1 |  |  | $ | 18 |
Cronos warrant | 13 |  |  | (11) |  |  | 3 |  |  | 85 |
Total | $ | 14 |  |  | $ | (7) |  |  | $ | 4 |  |  | $ | 103 |

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