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Investments in Equity Securities | 9 Months Ended
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Sep. 30, 2022
Investments [Abstract] |
Investments in Equity Securities | Investments in Equity Securities The carrying amount of our investments consisted of the following:
(in millions) |  | September 30, 2022 |  | December 31, 2021
ABI |  | $ | 9,048 |  |  | $ | 11,144 |
JUUL |  | 350 |  |  | 1,705 |
Cronos (1) |  | 416 |  |  | 632 |
Total |  | $ | 9,814 |  |  | $ | 13,481 |
(1) Our investment in Cronos at September 30, 2022 and December 31, 2021 consisted of our equity method investment in Cronos of $415 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 investments in equity securities consisted of the following:
| For the Nine Months Ended September 30, |  | For the Three Months Ended September 30,
(in millions) | 2022 |  | 2021 |  | 2022 |  | 2021
ABI (1) | $ | 2,155 |  |  | $ | 5,644 |  |  | $ | 2,367 |  |  | $ | 6,036 |
Cronos (1) | 197 |  |  | 145 |  |  | 11 |  |  | (21) |
(Income) losses from investments under equity method of accounting | 2,352 |  |  | 5,789 |  |  | $ | 2,378 |  |  | $ | 6,015 |
JUUL (2) | 1,355 |  |  | — |  |  | 100 |  |  | (100) |
(Income) losses from investments in equity securities | $ | 3,707 |  |  | $ | 5,789 |  |  | $ | 2,478 |  |  | $ | 5,915 |
(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 United States generally accepted accounting principles (“GAAP”) and (ii) adjustments to our investment required under the equity method of accounting. (2) Investment in JUUL is accounted for as an investment in an equity security measured at fair value. See below for further discussion of the change from equity method of accounting in the third quarter of 2022. Investment in ABI At September 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 December 31, 2021, the fair value of our equity investment in ABI was $11.9 billion (carrying value of $11.1 billion), which exceeded its carrying value by $0.8 billion or approximately 7%. In May 2022, the fair value of our equity investment in ABI declined below its carrying value and has not recovered. At June 30, 2022, the fair value of our equity investment in ABI was below its carrying value by $1.1 billion or approximately 9%. 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 recovery. In preparing our financial statements for the period ended June 30, 2022, we evaluated these factors and concluded that the decline in fair value of our equity investment in ABI at June 30, 2022 below its carrying value was temporary and, therefore, no impairment was recorded at that time. In preparing our financial statements for the period ended September 30, 2022, we considered the same accounting guidance described above to determine if the decline in fair value is other than temporary. We evaluated the factors related to the fair value decline, including the macroeconomic and geopolitical factors that have significantly impacted certain foreign exchange rates and global equity markets. We concluded that the decline in fair value of our equity investment in ABI at September 30, 2022 was other than temporary as we now anticipate that the full recovery to the carrying value will take longer than previously expected. As a result, we recorded a non-cash, pre-tax impairment charge of $2.5 billion for the nine and three months ended September 30, 2022, which was recorded to (income) losses from investments in equity securities in our condensed consolidated statements of earnings (losses). This impairment charge reflects the difference between the fair value of our equity investment in ABI using ABI’s share price at September 30, 2022 and the carrying value of our equity investment in ABI at September 30, 2022. At September 30, 2022, prior to recording the impairment charge, the fair value of our equity investment in ABI was below its carrying value by approximately 22%. After recording the impairment charge, each of the fair value and carrying value of our equity investment in ABI at September 30, 2022 was $9.0 billion. At September 30, 2022, the carrying value of our equity investment in ABI exceeded its share of ABI’s net assets attributable to equity holders of ABI by approximately $2.5 billion. Substantially all of this difference is comprised of goodwill and other indefinite-lived intangible assets (consisting primarily of trademarks). At September 30, 2021, the fair value of our equity investment in ABI had declined below its carrying value by $6.2 billion. We considered the same accounting guidance described above to determine if the decline in fair value was other than temporary. In preparing our financial statements for the period ended September 30, 2021, we concluded that the decline in fair value of our equity investment in ABI at September 30, 2021 was other than temporary. As a result, we recorded a non-cash, pre-tax impairment charge of $6.2 billion for the nine and three months ended September 30, 2021, which was recorded to (income) losses from investments in equity securities in our condensed consolidated statements of earnings (losses). This impairment charge reflected the difference between the fair value of our equity investment in ABI using ABI’s share price at September 30, 2021 and the carrying value of our equity investment in ABI at September 30, 2021. 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 converted at our election into voting shares in November 2020 (“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 September 30, 2022, we had a 35% economic ownership interest in JUUL, consisting of 42 million voting shares. We are subject to a standstill restriction under which we may not acquire additional JUUL shares above our 35% interest and agreed not to sell or transfer any of our JUUL shares until December 20, 2024. Furthermore, at the time of the investment, we agreed to non-competition obligations generally requiring that we participate in the e-vapor business only through JUUL. In January 2020, we amended certain JUUL Transaction agreements and entered into a new cooperation agreement. One of the provisions was the option to be released from our non-compete obligation under certain circumstances, including if the carrying value of our investment in JUUL was not more than 10% of its initial carrying value of $12.8 billion. 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, in September 2022, we exercised our option to be released from our JUUL non-competition obligations, resulting in (i) the permanent termination of our non-competition obligations to JUUL, (ii) the loss of our JUUL board designation rights (other than the right to appoint one independent director so long as our ownership continues to be at least 10%), our preemptive rights, our consent rights and certain other rights with respect to our investment in JUUL and (iii) the conversion of our JUUL shares to single vote common stock, significantly reducing our voting power. We do not currently intend to exercise our remaining governance rights or to vote our JUUL shares other than as a passive investor. Additionally, as part of the amendment to certain JUUL Transaction agreements in January 2020, 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 with respect to certain litigation in which we and JUUL are both defendants against third-party plaintiffs. 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 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. In making this election, we believed measuring our investment at fair value provided 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. As a result of our loss of certain rights due to our exercise of our option to be released from our JUUL non-competition obligations in the third quarter of 2022, we no longer have the ability to exercise significant influence over the operating and financial policies of JUUL. Therefore, we are no longer able to account for our investment in JUUL as an equity method investment. As of September 30, 2022, we accounted for our investment in JUUL as an investment in an equity security. We will continue to measure our investment in JUUL at fair value, in accordance with GAAP. Our condensed consolidated statements of earnings (losses) 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 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 September 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 laws; (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 investments in equity securities |  | — |
Balance at December 31, 2021 |  | $ | 1,705 |
Unrealized gains (losses) included in (income) losses from investments in equity securities |  | (1,355) |
Balance at September 30, 2022 |  | $ | 350 |
For the nine months ended September 30, 2022, we recorded non-cash, pre-tax unrealized losses of $1,355 million 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, (iii) projections of higher operating expenses resulting in lower long-term operating margins and (iv) an increase in the discount rate due to changes in market factors, partially offset by the effect of passage of time on the projected cash flows. For the three months ended September 30, 2022, we recorded a non-cash, pre-tax unrealized loss of $100 million 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 an increase in the discount rate due to changes in market factors, partially offset by the effect of passage of time on the projected cash flows. For the three months ended September 30, 2021, we recorded a non-cash, pre-tax unrealized gain of $100 million 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 nine and three months ended September 30, 2021, compared to the assumptions used for the December 31, 2020 valuation. Investment in Cronos At September 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. 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 recovery. In preparing our financial statements for the period ended June 30, 2022, we evaluated these factors and concluded that the decline in fair value of our equity investment in Cronos below its carrying value at June 30, 2022 was other than temporary. As a result, we recorded a non-cash, pre-tax impairment charge of $107 million in the second quarter of 2022, which was recorded to (income) losses from investments in equity securities in our condensed consolidated statements of earnings (losses). 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, each of the fair value and carrying value of our equity method investment in Cronos at June 30, 2022 was $437 million. At September 30, 2022, the fair value of our equity method investment in Cronos exceeded its carrying value by $22 million or approximately 5%. As part of our Investment in Cronos, at September 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 September 30, 2022, we estimate the Fixed-price Preemptive Rights allows us to purchase up to an additional approximately 8 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 September 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 would be approximately CAD $1.6 billion and CAD $0.1 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 October 24, 2022). At September 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 (losses) 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 Nine Months Ended September 30, |  | For the Three Months Ended September 30,
(in millions) | 2022 |  | 2021 |  | 2022 |  | 2021
Fixed-price Preemptive Rights | $ | 1 |  |  | $ | 21 |  |  | $ | — |  |  | $ | 17 |
Cronos warrant | 13 |  |  | 107 |  |  | — |  |  | 118 |
Total | $ | 14 |  |  | $ | 128 |  |  | $ | — |  |  | $ | 135 |

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