ALTRIA : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion should be read in conjunction with the other sections
of this Annual Report on Form 10-K, including the consolidated financial
statements and related notes contained in Item 8, and the discussion of risk
factors that may affect future results in Item 1A.
Description of the Company
For a description of Altria, see Item 1. Business, and Background in Note 1.


                                       14

--------------------------------------------------------------------------------

Table of Contents

Altria's reportable segments are smokeable products, smokeless products and
wine. The financial services and the innovative tobacco products businesses are
included in an all other category due to the continued reduction of the lease
portfolio of PMCC and the relative financial contribution of Altria's innovative
tobacco products businesses to Altria's consolidated results.
Effective with the first quarter of 2020, Altria's smokeless products segment
will be renamed as the oral tobacco products segment. Altria's oral tobacco
products segment will include financial results, volume and retail share
performance from USSTC's core MST and snus businesses and Helix's on! oral
nicotine pouches. Prior period volume and retail share data will be updated to
reflect these changes.

Executive Summary
Consolidated Results of Operations
The changes in Altria's net earnings (losses) and diluted EPS attributable to
Altria for the year ended December 31, 2019, from the year ended December 31,
2018, were due primarily to the following:
(in millions, except per share data)                         Net Earnings       Diluted EPS
For the year ended December 31, 2018                       $        6,963     $        3.68
2018 NPM Adjustment Items                                            (109 )           (0.06 )
2018 Asset impairment, exit, implementation and
acquisition-related costs                                             432              0.23
2018 Tobacco and health litigation items                               98              0.05
2018 ABI-related special items                                        (68 )           (0.03 )
2018 (Gain) loss on ABI/SABMiller business combination                 26              0.01
2018 Tax items                                                        197              0.11
Subtotal 2018 special items                                           576              0.31
2019 Asset impairment, exit, implementation and
acquisition-related costs                                            (269 )           (0.15 )
2019 Tobacco and health litigation items                              (58 )           (0.03 )
2019 Impairment of JUUL equity securities                          (8,600 )           (4.60 )
2019 ABI-related special items                                        280              0.15
2019 Cronos-related special items                                    (640 )           (0.34 )
2019 Tax items                                                         99              0.05
Subtotal 2019 special items                                        (9,188 )           (4.92 )
Fewer shares outstanding                                                -              0.04
Change in tax rate                                                    (65 )           (0.03 )
Operations                                                            421              0.22
For the year ended December 31, 2019                       $       (1,293 )

$ (0.70 )

See the discussion of events affecting the comparability of statement of
earnings (losses) amounts in the Consolidated Operating Results section of the
following Discussion and Analysis.
?   Fewer Shares Outstanding: Fewer shares outstanding during 2019 compared with
    2018 were due primarily to shares repurchased by Altria under its share
    repurchase programs.

? Change in Tax Rate: The change in tax rate was driven primarily by lower

dividends from ABI.

? Operations: The increase of $421 million in operations shown in the table

above was due primarily to the following:

? higher income from the smokeable and smokeless products segments;

?    lower spending as a result of Altria's decision in 2018 to refocus its
     innovative product efforts; and

? higher earnings from Altria's equity investment in ABI;

partially offset by higher interest and other debt expense, net, due to debt
incurred in connection with the Cronos and JUUL transactions.
For further details, see the Consolidated Operating Results and Operating
Results by Business Segment sections of the following Discussion and Analysis.
2020 Forecasted Results
Altria forecasts that its 2020 full-year adjusted diluted EPS growth rate is
expected to be in the range of 4% to 7% over its 2019 full-year adjusted diluted
EPS base of $4.22, as shown in the table below. Altria's 2020 guidance reflects
increased investments related to PM USA's


                                       15

--------------------------------------------------------------------------------

Table of Contents

commercialization efforts for IQOS, Helix's plans to manufacture and expand U.S.
distribution of on! and one extra shipping day in the first quarter of 2020.
This forecasted growth rate excludes estimated per share charges in 2020 of
$0.05 for tax expense, representing a partial reversal of the tax basis benefit
recorded in 2017 attributable to the deemed repatriation tax related to Altria's
investment in ABI. For further discussion, see Note 15.
Altria expects its 2020 full-year adjusted effective tax rate will be in a range
of 23.5% to 24.5%.

Reconciliation of 2019 Reported Diluted EPS to 2019 Adjusted Diluted EPS 2019 Reported diluted EPS

$ (0.70 )
Asset impairment, exit, implementation and acquisition-related costs    0.15
Tobacco and health litigation items                                     

0.03

Impairment of JUUL equity securities                                    4.60
ABI-related special items                                              (0.15 )
Cronos-related special items                                            0.34
Tax items                                                              (0.05 )
2019 Adjusted diluted EPS                                            $  4.22


Altria's full-year adjusted diluted EPS guidance and full-year forecast for its
adjusted effective tax rate exclude the impact of certain income and expense
items that management believes are not part of underlying operations. These
items may include, for example, restructuring charges, asset impairment charges,
acquisition-related costs, equity investment-related special items (including
any changes in fair value for the equity investment and any related warrants and
preemptive rights), certain tax items, charges associated with tobacco and
health litigation items, and resolutions of certain non-participating
manufacturer ("NPM") adjustment disputes under the 1998 Master Settlement
Agreement (such dispute resolutions are referred to as "NPM Adjustment Items"
and are more fully described in Health Care Cost Recovery Litigation - NPM
Adjustment Disputes in Note 19).
Altria's management cannot estimate on a forward-looking basis the impact of
certain income and expense items, including those items noted in the preceding
paragraph, on Altria's reported diluted EPS and its reported effective tax rate
because these items, which could be significant, may be unusual or infrequent,
are difficult to predict and may be highly variable. As a result, Altria does
not provide a corresponding United States generally accepted accounting
principles ("U.S. GAAP") measure for, or reconciliation to, its adjusted diluted
EPS guidance or its adjusted effective tax rate forecast.
The factors described in Item 1A represent continuing risks to this forecast.
While Altria reports its financial results in accordance with U.S. GAAP, its
management reviews certain financial results, including diluted EPS, on an
adjusted basis, which excludes certain income and expense items, including those
items noted above. Altria's management does not view any of these special items
to be part of Altria's underlying results as they may be highly variable, may be
unusual or infrequent, are difficult to predict and can distort underlying
business trends and results. Altria's management also reviews income tax rates
on an adjusted basis. Altria's adjusted effective tax rate may exclude certain
tax items from its reported effective tax rate. Altria's management believes
that adjusted financial measures provide useful additional insight into
underlying business trends and results and provide a more meaningful comparison
of year-over-year results. Adjusted financial measures are used by management
and regularly provided to Altria's chief operating decision maker (the "CODM")
for planning, forecasting and evaluating business and financial performance,
including allocating resources and evaluating results relative to employee
compensation targets. These adjusted financial measures are not consistent with
U.S. GAAP and may not be calculated the same as similarly titled measures used
by other companies. These adjusted financial measures should thus be considered
as supplemental in nature and not considered in isolation or as a substitute for
the related financial information prepared in accordance with U.S. GAAP.
Discussion and Analysis
Critical Accounting Policies and Estimates
Note 2 includes a summary of the significant accounting policies and methods
used in the preparation of Altria's consolidated financial statements. In most
instances, Altria must use an accounting policy or method because it is the only
policy or method permitted under U.S. GAAP.
The preparation of financial statements includes the use of estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of net revenues and expenses during the reporting
periods. If actual amounts are ultimately different from previous estimates, the
revisions are included in Altria's consolidated results of operations for the
period in which the actual amounts become known. Historically, the aggregate
differences, if any, between Altria's estimates and actual amounts in any year
have not had a significant impact on its consolidated financial statements.


                                       16

--------------------------------------------------------------------------------

Table of Contents

The following is a review of the more significant assumptions and estimates, as
well as the accounting policies and methods, used in the preparation of Altria's
consolidated financial statements:
?Consolidation: The consolidated financial statements include Altria, as well as
its wholly-owned and majority-owned subsidiaries. Investments in which Altria
currently has the ability to exercise significant influence over the operating
and financial policies of the investee are accounted for under the equity method
of accounting. Equity investments in which Altria does not have the ability to
exercise significant influence over the operating and financial policies of the
investee are accounted for as an investment in an equity security. All
intercompany transactions and balances have been eliminated.
Upon antitrust clearance, Altria expects to account for its equity method
investment in JUUL using the fair value option. Under the fair value option,
Altria's consolidated statements of earnings (losses) will include any cash
dividends from its investment in JUUL and any changes in the fair value of its
investment, which will be calculated quarterly. Altria believes the fair value
option provides quarterly transparency to investors as to the fair market value
of Altria's investment in JUUL, given the changes and volatility in the e-vapor
category since Altria's initial investment, as well as the lack of publicly
available information regarding JUUL's business or a market-derived valuation.
?Revenue Recognition: Altria's businesses generate substantially all of their
revenue from sales contracts with customers. While Altria's businesses enter
into separate sales contracts with each customer for each product type, all
sales contracts are similarly structured. These contracts create an obligation
to transfer product to the customer. All performance obligations are satisfied
within one year; therefore, costs to obtain contracts are expensed as incurred
and unsatisfied performance obligations are not disclosed. There is no financing
component because Altria's businesses expect, at contract inception, that the
period between when Altria's businesses transfer product to the customer and
when the customer pays for that product will be one year or less.
Altria's businesses define net revenues as revenues, which include excise taxes
and shipping and handling charges billed to customers, net of cash discounts for
prompt payment, sales returns (also referred to as returned goods) and sales
incentives. Altria's businesses exclude from the transaction price sales taxes
and value-added taxes imposed at the time of sale (which do not include excise
taxes on cigarettes, cigars, smokeless tobacco or wine billed to customers).
Altria's businesses recognize revenues from sales contracts with customers upon
shipment of goods when control of such products is obtained by the customer.
Altria's businesses determine that a customer obtains control of the product
upon shipment when title of such product and risk of loss transfers to the
customer. Altria's businesses account for shipping and handling costs as
fulfillment costs and such amounts are classified as part of cost of sales in
Altria's consolidated statements of earnings. Altria's businesses record an
allowance for returned goods, based principally on historical volume and return
rates, which is included in other accrued liabilities on Altria's consolidated
balance sheets. Altria's businesses record sales incentives, which consist of
consumer incentives and trade promotion activities, as a reduction to revenues
(a portion of which is based on amounts estimated as being due to wholesalers,
retailers and consumers at the end of a period) based principally on historical
volume, utilization and redemption rates. Expected payments for sales incentives
are included in accrued marketing liabilities on Altria's consolidated balance
sheets.
Payment terms vary depending on product type. Altria's businesses consider
payments received in advance of product shipment as deferred revenue, which is
included in other accrued liabilities on Altria's consolidated balance sheets
until revenue is recognized. PM USA receives payment in advance of a customer
obtaining control of the product. USSTC receives substantially all payments
within one business day of the customer obtaining control of the product. Ste.
Michelle receives substantially all payments from customers within 45 days of
the customer obtaining control of the product. Amounts due from customers are
included in receivables on Altria's consolidated balance sheets.
For further discussion, see Note 3. Revenues from Contracts with Customers to
the consolidated financial statements in Item 8.
?Depreciation, Amortization, Impairment Testing and Asset Valuation: Altria
depreciates property, plant and equipment and amortizes its definite-lived
intangible assets using the straight-line method over the estimated useful lives
of the assets. Machinery and equipment are depreciated over periods up to 25
years, and buildings and building improvements over periods up to 50 years.
Definite-lived intangible assets are amortized over their estimated useful lives
up to 25 years.
Altria reviews long-lived assets, including definite-lived intangible assets,
for impairment whenever events or changes in business circumstances indicate
that the carrying value of the assets may not be fully recoverable. Altria
performs undiscounted operating cash flow analyses to determine if an impairment
exists. These analyses are affected by general economic conditions and projected
growth rates. For purposes of recognition and measurement of an impairment for
assets held for use, Altria groups assets and liabilities at the lowest level
for which cash flows are separately identifiable. If Altria determines that an
impairment exists, any related impairment loss is calculated based on fair
value. Impairment losses on assets to be disposed of, if any, are based on the
estimated proceeds to be received, less costs of disposal. Altria also reviews
the estimated remaining useful lives of long-lived assets whenever events or
changes in business circumstances indicate the lives may have changed.
Altria conducts a required annual review of goodwill and indefinite-lived
intangible assets for potential impairment, and more frequently if an event
occurs or circumstances change that would require Altria to perform an interim
review. If the carrying value of a reporting unit that includes goodwill exceeds
its fair value, which is determined using discounted cash flows, goodwill is
considered impaired. The amount of impairment loss is measured as the difference
between the carrying value and the fair value of a reporting unit, but is
limited to the total


                                       17

--------------------------------------------------------------------------------

Table of Contents

amount of goodwill allocated to a reporting unit. If the carrying value of an
indefinite-lived intangible asset exceeds its fair value, which is determined
using discounted cash flows, the intangible asset is considered impaired and is
reduced to fair value in the period identified.
Goodwill by reporting unit and indefinite-lived intangible assets at December
31, 2019 were as follows:
                                    Indefinite-Lived
(in millions)        Goodwill      Intangible Assets
Cigarettes         $       22    $                 2
Smokeless products      5,078                  8,801
Cigars                     77                  2,640
Wine                        -                    233
Total              $    5,177    $            11,676


During 2019, Altria completed its quantitative annual impairment test of
goodwill and indefinite-lived intangible assets performed as of October 1, 2019.
Upon completion of this testing, Altria concluded that the goodwill of $74
million in the wine segment was fully impaired as the wine reporting unit was
impacted by a slowing growth rate in the premium wine category and higher
inventories. In performing the 2019 quantitative annual impairment test for the
wine reporting unit, Altria concluded that the fair value of the unit as a whole
was approximately 25% below its carrying value of approximately $1.5 billion
after the impairment charge discussed above. Altria also evaluated all wine
reporting unit assets, including current assets, property, plant and equipment,
and other long-lived assets other than goodwill and concluded that these assets
were fairly stated at December 31, 2019.
The results of the 2019 quantitative annual impairment test of goodwill and
indefinite-lived intangible assets for the other reporting units and trademarks
are indicated below.
The estimated fair values of the cigarettes and cigars reporting units and the
indefinite-lived intangible assets within the cigars reporting unit
substantially exceeded their carrying values.
The estimated fair values of the smokeless products reporting unit and the
indefinite-lived intangible assets within the reporting unit substantially
exceeded their carrying values, with the exception of the Skoal trademark. At
December 31, 2019, the estimated fair value of the Skoal trademark exceeded its
carrying value of $3.9 billion by approximately 18%. Skoal continues to be
impacted by slowing category volumes and increased competitive activities due to
higher pricing and adult tobacco consumer movement among tobacco products,
including oral nicotine pouch products.
The estimated fair values of the indefinite-lived intangible assets within the
wine reporting unit substantially exceeded their carrying values, with the
exception of the Patz & Hall trademark, which at December 31, 2019, exceeded its
carrying value of $30 million by approximately 11%.
During 2018, Altria's quantitative annual impairment test of goodwill and
indefinite-lived intangible assets resulted in $54 million of impairment
charges. During 2017, Altria's quantitative annual impairment test of goodwill
and indefinite-lived intangible assets resulted in no impairment charges.
In 2019, Altria used an income approach to estimate the fair values of all of
its reporting units and indefinite-lived intangible assets. The income approach
reflects the discounting of expected future cash flows to their present value 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
expected future cash flows. The weighted-average discount rate used in
performing the valuations was approximately 10%.
In performing the 2019 discounted cash flow analysis, Altria made various
judgments, estimates and assumptions, the most significant of which were volume,
income, growth rates and discount rates. The analysis incorporated assumptions
used in Altria's long-term financial forecast, which is used by Altria's
management to evaluate business and financial performance, including allocating
resources and evaluating results relative to setting employee compensation
targets. The assumptions incorporated the highest and best use of Altria's
indefinite-lived intangible assets and also included perpetual growth rates for
periods beyond the long-term financial forecast. The perpetual growth rate used
in performing all of the valuations was 2%. Fair value calculations are
sensitive to changes in these estimates and assumptions, some of which relate to
broader macroeconomic conditions outside of Altria's control.
Although Altria's discounted cash flow analysis is based on assumptions that are
considered reasonable and based on the best available information at the time
that the discounted cash flow analysis is developed, there is significant
judgment used in determining future cash flows. The following factors have the
most potential to impact expected future cash flows and, therefore, Altria's
impairment conclusions: general economic conditions; federal, state and local
regulatory developments; category growth rates; consumer preferences; success of
planned product expansions; competitive activity; and income and tobacco-related
taxes. For further discussion of these factors, see Operating Results by
Business Segment - Tobacco Space - Business Environment below.
While Altria's management believes that the estimated fair values of each
reporting unit and indefinite-lived intangible asset are reasonable, actual
performance in the short-term or long-term could be significantly different from
forecasted performance, which could result in impairment charges in future
periods.


                                       18

--------------------------------------------------------------------------------

Table of Contents

For further discussion of goodwill and other intangible assets, see Note 4.
Investments in ABI and Cronos
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 their carrying value. If the carrying value of an
investment exceeds its fair value and the loss in value is other than temporary,
the investment is considered impaired and reduced to fair value, and the
impairment is recognized in the period identified. The factors used to make this
determination include the duration and magnitude of the fair value decline, the
financial condition and near-term prospects of the investee, and Altria's intent
and ability to hold its investment until recovery.
The fair value of Altria's equity investment in ABI at December 31, 2019 and
2018 was $16.1 billion (carrying value of $18.1 billion) and $13.1 billion
(carrying value of $17.7 billion), respectively, which was less than its
carrying value by 11% and 26%, respectively, at December 31, 2019 and 2018.
During 2019, the fair value increased and at September 30, 2019, the fair value
of Altria's equity investment in ABI exceeded its carrying value by 4%. In
October 2019, the fair value of Altria's equity investment in ABI declined below
its carrying value. At February 24, 2020, the fair value of Altria's equity
investment in ABI was approximately $13.7 billion (approximately 24% below its
carrying value). Altria concluded that the decline in fair value of its
investment in ABI below its carrying value is temporary and, therefore, no
impairment was recorded. This conclusion is based on: (i) the fair value of
Altria's equity investment in ABI having historically exceeded its carrying
value since October 2016, when Altria obtained its ownership interest in ABI,
with the exception of certain periods starting in September 2018; (ii) the
period of time that ABI shares have traded below Altria's carrying value
(although ABI shares began to trade below Altria's carrying value in September
2018, the fair value of ABI's shares have exceeded Altria's carrying value as
recently as September 30, 2019) and the magnitude by which the carrying value of
Altria's investment in ABI exceeds its fair value; (iii) ABI's global platform
(world's largest brewer by volume and one of the world's top five consumer
products companies by revenue) with strong market positions in key markets,
geographic diversification, experienced management team, financial condition,
expected earnings and history of performance; and (iv) Altria's ownership of
restricted shares being subject to a five-year lock-up (subject to limited
exceptions) ending October 10, 2021, which Altria believes provides sufficient
time to allow for an anticipated recovery in the fair value of its investment in
ABI.
If Altria were to conclude that the decline in fair value is other than
temporary, Altria would determine and recognize, in the period identified, the
impairment of its investment, which could result in a material adverse effect on
Altria's consolidated financial position or earnings.
The fair value of Altria's acquired common shares in Cronos at December 31, 2019
was $1.2 billion compared with its carrying value of $1.0 billion. At February
24, 2020, the fair value of Altria's acquired common shares in Cronos was
approximately $1.0 billion (which approximates its carrying value). Altria will
continue to assess the fair value of its acquired common shares in Cronos to
determine if any decline in fair value below its carrying value is other than
temporary.
For further discussion of Altria's investments in ABI and Cronos, see Note 7.
Investment in JUUL
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, and the impairment is recognized in the period
identified.
As part of the preparation of its financial statements for the periods ended
September 30, 2019 and December 31, 2019, Altria performed its respective
qualitative assessments of impairment indicators for its investment in JUUL and
determined that indicators of impairment existed.
At September 30, 2019, these indicators included recent significant adverse
changes in both the e-vapor regulatory environment and the industry in which
JUUL operates. At December 31, 2019, Altria determined that a significant
increase in the number and types of legal cases pending against JUUL in the
fourth quarter of 2019 and the expectation that this trend will continue
resulted in an additional indicator of impairment.
Given the existence of these impairment indicators, Altria performed
quantitative valuations of its investment in JUUL as of September 30, 2019 and
December 31, 2019 and recorded total pre-tax charges of $8.6 billion for the
year ended December 31, 2019, reported as impairment of JUUL equity securities
in its consolidated statement of earnings (losses). Of this amount, Altria
recorded pre-tax charges of $4.5 billion in the third quarter of 2019 and $4.1
billion in the fourth quarter of 2019. The third-quarter impairment charge was
due primarily to lower e-vapor sales volume assumptions in the U.S. and
international markets and a delay in achieving operating margin performance, as
compared to the assumptions at the time of the JUUL Transaction. The
fourth-quarter impairment charge results substantially from increased discount
rates applied to future cash flow projections, due to the significant risk
created by the increase in number and types of legal cases pending against JUUL
in the fourth quarter. Although Altria has not made any assumptions or drawn any
conclusions regarding the merits or likelihood of success of any of any of these
cases, litigation is subject to uncertainty, and it is possible that there could
be adverse developments in pending or future cases. While JUUL secured
approximately $720 million in financing in early February 2020, the uncertainty
has


                                       19

--------------------------------------------------------------------------------

Table of Contents

increased the risk that JUUL may not be able to obtain financing and/or fund
working capital requirements, financial obligations and international expansion
plans.
Altria used an income approach to estimate the fair value of its investment in
JUUL. The income approach reflects the discounting of future cash flows for the
U.S. and international markets at a rate of return that incorporates the
risk-free rate for the use of those funds, the expected rate of inflation and
the risks associated with realizing future cash flows. Future cash flows in the
U.S. were based on a range of scenarios that consider various potential
regulatory and market outcomes.
In determining the fair value of its investment in JUUL, Altria made various
judgments, estimates and assumptions, the most significant of which were sales
volume, operating margins, discount rates and perpetual growth rates. The
discount rates used in performing the valuations ranged from 13.5% to 16.5% at
September 30, 2019 and 19.5% to 23.0% at December 31, 2019. The perpetual growth
rates used in performing the valuations ranged from (0.5%) to 0.0% at both
September 30, 2019 and December 31, 2019. Additionally, Altria made significant
assumptions regarding the likelihood and extent of various potential regulatory
actions and the continued adverse public perception impacting the e-vapor
category and specifically JUUL, as well as expectations of the future state of
the e-vapor category. All significant inputs used in the valuation are
classified in Level 3 of the fair value hierarchy.
Although Altria's discounted cash flow analyses were based on assumptions that
Altria's management considered reasonable and are based on the best available
information at the time that the analyses were developed, there is significant
judgment used in determining future cash flows. Altria believes the following
factors have the most potential to impact projected future cash flows and,
therefore, Altria's valuation of JUUL: federal, state, local and international
regulatory developments; JUUL's execution of its strategy, including the success
of its planned international market expansions; category growth rates;
e-vapor-related litigation against JUUL; consumer preferences; and competitive
activity.
While Altria's management believes that the estimated fair value of its
investment in JUUL as of December 31, 2019 is appropriate, JUUL's actual
performance in the short term or long term could be significantly different from
forecasted performance due to changes in the factors noted above. One or more
such changes could result in additional impairment charges to Altria's
investment in JUUL in future periods.
For additional information on Altria's investment in JUUL and the impairment
indicators that Altria considered, see Note 7. Investments in Equity Securities
- Investment in JUUL.
?Marketing Costs: Altria's businesses promote their products with consumer
incentives, trade promotions and consumer engagement programs. These consumer
incentive and trade promotion activities, which include discounts, coupons,
rebates, in-store display incentives and volume-based incentives, do not create
a distinct deliverable and are, therefore, recorded as a reduction of revenues.
Consumer engagement program payments are made to third parties. Altria's
businesses expense these consumer engagement programs, which include event
marketing, as incurred and such expenses are included in marketing,
administration and research costs in Altria's consolidated statements of
earnings (losses). For interim reporting purposes, Altria's businesses charge
consumer engagement programs and certain consumer incentive expenses to
operations as a percentage of sales, based on estimated sales and related
expenses for the full year.
?Contingencies: As discussed in Note 19 and Item 3, legal proceedings covering a
wide range of matters are pending or threatened in various U.S. and foreign
jurisdictions against Altria and its subsidiaries, including PM USA and UST and
its subsidiaries, as well as their respective indemnitees and Altria's
investees. In 1998, PM USA and certain other U.S. tobacco product manufacturers
entered into the 1998 Master Settlement Agreement (the "MSA") with 46 states and
various other governments and jurisdictions to settle asserted and unasserted
health care cost recovery and other claims. PM USA and certain other U.S.
tobacco product manufacturers had previously entered into agreements to settle
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the "State Settlement Agreements"). PM USA's portion of ongoing
adjusted payments and legal fees is based on its relative share of the settling
manufacturers' domestic cigarette shipments, including roll-your-own cigarettes,
in the year preceding that in which the payment is due. In addition, PM USA,
Middleton, Nat Sherman and USSTC are subject to quarterly user fees imposed by
the FDA as a result of the FSPTCA. Payments under the State Settlement
Agreements and the FDA user fees are based on variable factors, such as volume,
operating income, market share and inflation, depending on the subject payment.
Altria's subsidiaries account for the cost of the State Settlement Agreements
and FDA user fees as a component of cost of sales. Altria's subsidiaries
recorded approximately $4.5 billion, $4.5 billion and $4.7 billion of charges to
cost of sales for the years ended December 31, 2019, 2018 and 2017,
respectively, in connection with the State Settlement Agreements and FDA user
fees.
Altria and its subsidiaries record provisions in the consolidated financial
statements for pending litigation when they determine that an unfavorable
outcome is probable and the amount of the loss can be reasonably estimated. At
the present time, while it is reasonably possible that an unfavorable outcome in
a case may occur, except to the extent discussed in Note 19 and Item 3: (i)
management has concluded that it is not probable that a loss has been incurred
in any of the pending tobacco-related cases; (ii) management is unable to
estimate the possible loss or range of loss that could result from an
unfavorable outcome in any of the pending tobacco-related cases; and (iii)
accordingly, management has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. Litigation defense costs
are expensed as incurred and included in marketing, administration and research
costs in the consolidated statements of earnings (losses).
?Employee Benefit Plans: Altria provides a range of benefits to certain
employees and retired employees, including pension, postretirement health care
and postemployment benefits. Altria records annual amounts relating to these
plans based on calculations specified


                                       20

--------------------------------------------------------------------------------

Table of Contents

by U.S. GAAP, which include various actuarial assumptions as to discount rates,
assumed rates of return on plan assets, mortality, compensation increases,
turnover rates and health care cost trend rates. Altria reviews its actuarial
assumptions on an annual basis and makes modifications to the assumptions based
on current rates and trends when it is deemed appropriate to do so. Any effect
of the modifications is generally amortized over future periods.
Altria recognizes the funded status of its defined benefit pension and other
postretirement plans on the consolidated balance sheet and records as a
component of other comprehensive earnings (losses), net of deferred income
taxes, the gains or losses and prior service costs or credits that have not been
recognized as components of net periodic benefit cost. The gains or losses and
prior service costs or credits recorded as components of other comprehensive
earnings (losses) are subsequently amortized into net periodic benefit cost in
future years.
Altria's discount rate assumptions for its pension and postretirement plans
obligations decreased to 3.4% at December 31, 2019 from 4.4% at December 31,
2018. Altria presently anticipates a decrease of approximately $36 million in
its 2020 pre-tax pension and postretirement expense versus 2019, excluding
amounts in each year related to settlement and curtailment. This anticipated
decrease is due primarily to (i) lower interest costs, driven by the impact of
lower discount rates; and (ii) lower amortization due to a change in the
recognition period, based on the culmination of pension population changes to
primarily inactive status following the plan's closure to new entrants in 2008.
This decrease is partially offset by lower expected return on assets due to a
change in asset allocation strategy. Assuming no change to the shape of the
yield curve, a 50 basis point decrease (increase) in Altria's discount rates
would increase (decrease) Altria's pension and postretirement expense by
approximately $15 million. Similarly, a 50 basis point decrease (increase) in
the expected return on plan assets would increase (decrease) Altria's pension
and postretirement expense by approximately $40 million.
For additional information see Note 17. Benefit Plans to the consolidated
financial statements in Item 8 ("Note 17").
?Income Taxes: Significant judgment is required in determining income tax
provisions and in evaluating tax positions. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities, using enacted tax rates in effect for the year
in which the differences are expected to reverse. Altria records a valuation
allowance when it is more-likely-than-not that some portion or all of a deferred
tax asset will not be realized.
Altria recognizes a benefit for uncertain tax positions when a tax position
taken or expected to be taken in a tax return is more-likely-than-not to be
sustained upon examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Altria recognizes accrued interest and
penalties associated with uncertain tax positions as part of the provision for
income taxes in its consolidated statements of earnings (losses).
Altria recognized income tax benefits and charges in the consolidated statements
of earnings (losses) during 2019, 2018 and 2017 as a result of various tax
events, including the impact of the Tax Reform Act.
The main provisions of the Tax Reform Act that impact Altria include: (i) a
reduction in the U.S. federal statutory corporate income tax rate from 35% to
21% effective January 1, 2018, and (ii) changes in the treatment of
foreign-source income, commonly referred to as a modified territorial tax
system.
The transition to a modified territorial tax system required Altria to record a
deemed repatriation tax and an associated tax basis benefit in 2017. The tax
impact related to the tax basis benefit and the deemed repatriation tax was
based on provisional estimates as of January 2018, substantially all of which
were related to Altria's share of ABI's accumulated earnings and associated
taxes. Altria recorded adjustments to the provisional estimates and completed
the accounting for the repatriation tax in 2018.
For additional information on income taxes, see Note 15.


                                       21

--------------------------------------------------------------------------------

Table of Contents

Consolidated Operating Results

                                               For the Years Ended December 31,
(in millions)                                    2019            2018         2017
Net Revenues:
Smokeable products                        $    21,996       $  22,297     $ 22,636
Smokeless products                              2,367           2,262        2,155
Wine                                              689             691          698
All other                                          58             114           87
Net revenues                              $    25,110       $  25,364     $ 25,576
Excise Taxes on Products:
Smokeable products                        $     5,166       $   5,585     $  5,927
Smokeless products                                127             131          132
Wine                                               21              21           23
Excise taxes on products                  $     5,314       $   5,737     $  6,082
Operating Income:
Operating companies income (loss):
Smokeable products                        $     9,009       $   8,408     $  8,426
Smokeless products                              1,580           1,431        1,306
Wine                                               (3 )            50          146
All other                                         (16 )          (421 )        (51 )
Amortization of intangibles                       (44 )           (38 )        (21 )
General corporate expenses                       (199 )          (315 )       (213 )
Corporate asset impairment and exit costs          (1 )             -            -
Operating income                          $    10,326       $   9,115     $  9,593


As discussed further in Note 16. Segment Reporting to the consolidated financial
statements in Item 8 ("Note 16"), the CODM reviews operating companies income to
evaluate the performance of, and allocate resources to, the segments. Operating
companies income for the segments is defined as operating income before general
corporate expenses and amortization of intangibles. Management believes it is
appropriate to disclose this measure to help investors analyze the business
performance and trends of the various business segments.
The following events that occurred during 2019, 2018 and 2017 affected the
comparability of statement of earnings (losses) amounts.
?Asset Impairment, Exit, Implementation and Acquisition-Related Costs: Pre-tax
asset impairment, exit, implementation and acquisition-related costs were $331
million, $538 million and $89 million for the years ended December 31, 2019,
2018 and 2017, respectively.
For the year ended December 31, 2019, Altria recorded pre-tax
acquisition-related costs of $115 million. These costs were primarily for the
write-off of debt issuance costs related to Altria's short-term borrowings under
the term loan agreement that Altria entered into in connection with its
investments in Cronos and JUUL.
In December 2018, Altria:
?      refocused its innovative product efforts, which included Nu Mark's

discontinuation of production and distribution of all e-vapor products;

? implemented a cost reduction program (which included workforce reductions

and third-party spending reductions across the businesses) that delivered

$600 million in annualized cost savings in 2019, exceeding the targeted

$575 million annualized cost savings; and

? incurred $85 million of pre-tax acquisition-related costs, consisting

       primarily of advisory fees, substantially all of which were recorded in
       marketing, administration and research costs.


In October 2016, Altria announced the consolidation of certain of its operating
companies' manufacturing facilities to streamline operations and achieve greater
efficiencies. The consolidation was completed in the first quarter of 2018 and
delivered Altria's goal of approximately $50 million in annualized cost savings
as of December 31, 2018.
In January 2016, Altria announced a productivity initiative designed to maintain
its operating companies' leadership and cost competitiveness. The initiative,
which reduced spending on certain selling, general and administrative
infrastructure and implemented a leaner organizational structure, delivered
Altria's goal of approximately $300 million in annualized productivity savings
as of December 31, 2017.


                                       22

--------------------------------------------------------------------------------

Table of Contents

For further discussion on asset impairment, exit and implementation costs,
including a breakdown of these costs by segment, see Note 5. Asset Impairment,
Exit and Implementation Costs to the consolidated financial statements in Item
8.
?Gain/loss on ABI/SABMiller Business Combination: For the years ended December
31, 2018 and 2017, Altria recorded a pre-tax loss of $33 million and a pre-tax
gain of $445 million, respectively, related to ABI's divestitures of certain
SABMiller assets and businesses in connection with ABI obtaining necessary
regulatory clearances for the ABI Transaction.
?NPM Adjustment Items: For a discussion of NPM Adjustment Items and a breakdown
of these items by segment, see Health Care Cost Recovery Litigation - NPM
Adjustment Disputes in Note 19 and NPM Adjustment Items in Note 16,
respectively.
?Tobacco and Health Litigation Items: For a discussion of tobacco and health
litigation items and a breakdown of these costs by segment, see Note 19 and
Tobacco and Health Litigation Items in Note 16, respectively.
?Settlement for Lump Sum Pension Payments: In the third quarter of 2017, Altria
made a voluntary, limited-time offer to former employees with vested benefits in
the Altria Retirement Plan who had not commenced receiving benefit payments and
who met certain other conditions. Eligible participants were offered the
opportunity to make a one-time election to receive their pension benefit as a
single lump sum payment or as a monthly annuity. As a result of the 2017 lump
sum distributions, a one-time pre-tax settlement charge of $81 million was
recorded in 2017 in net periodic benefit (income) cost, excluding service cost,
in Altria's consolidated statement of earnings (losses). For further discussion,
see Note 17.
?Impairment of JUUL Equity Securities: For the year ended December 31, 2019,
Altria recorded pre-tax impairment charges of $8,600 million reported as
impairment of JUUL equity securities in its consolidated statement of earnings
(losses). A full tax valuation allowance was recorded in 2019 attributable to
the tax benefit associated with the impairment charges. For further discussion,
see Note 7 and Note 15.
?ABI-Related Special Items: Altria's earnings from its equity investment in ABI
for the year ended December 31, 2019 included net pre-tax income of $354
million, consisting primarily of a gain related to the completion in September
2019 of ABI's initial public offering of a minority stake of its Asia Pacific
subsidiary, Budweiser Brewing Company APAC Limited, and Altria's share of ABI's
mark-to-market gains on ABI's derivative financial instruments used to hedge
certain share commitments.
Altria's earnings from its equity investment in ABI for the year ended December
31, 2018 included net pre-tax income of $85 million, consisting primarily of
Altria's share of ABI's estimated effect of the Tax Reform Act and gains related
to ABI's merger and acquisition activities, partially offset by Altria's share
of ABI's mark-to-market losses on ABI's derivative financial instruments used to
hedge certain share commitments.
Altria's earnings from its equity investment in ABI for the year ended December
31, 2017 included net pre-tax charges of $160 million, consisting primarily of
Altria's share of ABI's Brazilian tax item and Altria's share of ABI's
mark-to-market losses on ABI's derivative financial instruments used to hedge
certain share commitments.
?Cronos-Related Special Items: For the year ended December 31, 2019, Altria
recorded net pre-tax losses of $928 million consisting of the following:
(in millions)                                           2019

Loss on Cronos-related financial instruments(1) $ 1,442 Earnings from Equity Investments(2)

                      (514 )

Total Cronos-related special items - (Income) Expense $ 928

(1) Of this amount, $1,411 million represents the changes in fair value related
to the warrant and certain anti-dilution protections (the "Fixed-price
Preemptive Rights") acquired in the Cronos transaction.
(2) Substantially all of these amounts represent Altria's share of Cronos's
changes in fair value of Cronos's derivative financial instruments associated
with the issuance of additional shares.
For further discussion, see Note 7 and Note 8. Financial Instruments to the
consolidated financial statements in Item 8.
?Tax Items: Tax items for the year ended December 31, 2019 included net tax
benefits of $99 million, due primarily to tax benefits of $105 million for
adjustments as a result of amended returns and tax benefits of $100 million for
the reversal of tax accruals no longer required, partially offset by tax expense
of $84 million for a tax basis adjustment to Altria's equity investment in ABI
and $38 million for a valuation allowance on foreign tax credits not realizable.
Tax items for the year ended December 31, 2018 included tax expense of $188
million related to the Tax Reform Act as follows: (i) tax expense of $140
million resulting from a partial reversal of the tax basis benefit associated
with the deemed repatriation tax recorded in 2017; (ii) tax expense of $34
million for a valuation allowance on foreign tax credit carryforwards that are
not realizable as a result of updates to the provisional estimates recorded in
2017; and (iii) tax expense of $14 million for an adjustment to the provisional
estimates for the repatriation tax recorded in 2017.


                                       23

--------------------------------------------------------------------------------

Table of Contents

Tax items for the year ended December 31, 2017 included net tax benefits of
$3,367 million related to the Tax Reform Act recorded in the fourth quarter of
2017 as follows: (i) a tax benefit of $3,017 million to re-measure Altria and
its consolidated subsidiaries' net deferred tax liabilities based on the new
U.S. federal statutory rate; and (ii) a net tax benefit of $763 million for a
tax basis adjustment associated with the deemed repatriation tax, partially
offset by tax expense of $413 million for the deemed repatriation tax.
Additional tax items for 2017 included tax benefits for the release of a
valuation allowance related to deferred income tax assets for foreign tax credit
carryforwards; and tax benefits related primarily to the effective settlement in
2017 of the Internal Revenue Service ("IRS") audit of Altria and its
consolidated subsidiaries' 2010-2013 tax years ("IRS 2010-2013 Audit"),
partially offset by tax expense for tax reserves related to the calculation of
certain foreign tax credits.
For further discussion, see Note 15.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, decreased $254
million (1.0%), due primarily to lower net revenues in the smokeable products
segment, partially offset by higher net revenues in the smokeless products
segment.
Cost of sales decreased $288 million (3.9%), due primarily to lower shipment
volume in the smokeable products segment and lower costs as a result of Altria's
decision in 2018 to refocus its innovative product efforts, partially offset by
favorable NPM Adjustment Items in 2018 and higher per unit settlement costs.
Excise taxes on products decreased $423 million (7.4%), due primarily to lower
smokeable products shipment volume.
Marketing, administration and research costs decreased $530 million (19.2%), due
primarily to lower spending as a result of the cost reduction program and
Altria's decision in 2018 to refocus its innovative product efforts,
acquisition-related costs to effect the investment in JUUL in 2018 and lower
tobacco and health litigation items.
Operating income increased $1,211 million (13.3%), due primarily to higher
operating results from the smokeable and smokeless products segments (which
included lower spending as a result of the cost reduction program) and lower
spending as a result of Altria's decision in 2018 to refocus its innovative
product efforts (which included lower asset impairment, exit and implementation
costs) and acquisition-related costs to effect the investment in JUUL in 2018.
Interest and other debt expense, net, increased $615 million (92.5%), due
primarily to higher interest costs and debt issuance costs for borrowings
associated with the Cronos and JUUL transactions.
Earnings from Altria's equity investments, which increased $835 million (93.8%),
were positively impacted by special items related to Altria's equity investments
in Cronos and ABI.
Altria's income tax rate increased 244.1 percentage points to 269.5%, due
primarily to a valuation allowance on a deferred tax asset recorded in 2019
attributable to Altria's impairment of its investment in JUUL equity securities.
For further discussion, see Note 15.
Net losses attributable to Altria of $1,293 million as compared with 2018 net
earnings attributable to Altria of $6,963 million changed by $8,256 million
(100.0%+), due primarily to the 2019 impairment of JUUL equity securities, 2019
loss on Cronos-related financial instruments and higher interest and other debt
expense, net, partially offset by higher operating income, higher earnings from
Altria's equity investments in Cronos and ABI and favorable tax items. Diluted
and basic net losses per share attributable to Altria of $0.70, each decreased
by 100.0%+, due to lower net earnings attributable to Altria, partially offset
by fewer shares outstanding.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers, decreased $212
million (0.8%), due primarily to lower net revenues in the smokeable products
segment, partially offset by higher net revenues in the smokeless products
segment.
Cost of sales decreased $158 million (2.1%), due primarily to lower shipment
volume in the smokeable products segment and higher NPM Adjustment Items,
partially offset by higher costs in the smokeable products segment and higher
implementation costs.
Excise taxes on products decreased $345 million (5.7%), due primarily to lower
smokeable products segment shipment volume.
Marketing, administration and research costs increased $418 million (17.9%), due
primarily to higher costs in the smokeable products segment and the wine
segment, acquisition-related costs to effect the investment in JUUL and higher
investment spending in the innovative tobacco products businesses.
Operating income decreased $478 million (5.0%), due primarily to lower operating
results from the innovative tobacco products businesses (which included asset
impairment, exit and implementation costs) and wine segment, and
acquisition-related costs to effect the investment in JUUL, partially offset by
higher operating results from the smokeless products segment.
Earnings from Altria's equity investment in ABI, which increased $358 million
(67.3%), were positively impacted by ABI special items.
Altria's effective income tax rate increased 29.5 percentage points to an
effective income tax provision rate of 25.4%, substantially all of which was due
to the Tax Reform Act. For further discussion, see Note 15.


                                       24

--------------------------------------------------------------------------------

Table of Contents

Net earnings attributable to Altria of $6,963 million decreased $3,259 million
(31.9%), due primarily to a higher effective income tax rate, lower operating
income and a 2017 gain on the ABI Transaction, partially offset by higher
earnings from Altria's equity investment in ABI. Basic and diluted EPS
attributable to Altria of $3.69 and $3.68, respectively, decreased by 30.5% and
30.7%, respectively, due to lower net earnings attributable to Altria, partially
offset by fewer shares outstanding.


Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The U.S. tobacco industry faces a number of business and legal challenges that
have adversely affected and may adversely affect the business and sales volume
of Altria's tobacco subsidiaries and investees and Altria's consolidated results
of operations, cash flows or financial position. These challenges, some of which
are discussed in more detail below in Note 19, Item 1A and Item 3, include:
? pending and threatened litigation and bonding requirements;

? restrictions and requirements imposed by the FSPTCA, and restrictions and

requirements (and related enforcement actions) that have been, and in the

       future will be, imposed by the FDA;


?      actual and proposed excise tax increases, as well as changes in tax
       structures and tax stamping requirements;

? bans and restrictions on tobacco use imposed by governmental entities and

private establishments and employers;

? other federal, state and local government actions, including:

?         restrictions on the sale of certain tobacco products, the sale of
          tobacco products by certain retail establishments, the sale of certain
          tobacco products with certain characterizing flavors and the sale of
          tobacco products in certain package sizes;

? additional restrictions on the advertising and promotion of tobacco products;

? other actual and proposed tobacco product legislation and regulation; and

? governmental investigations;

? the diminishing prevalence of cigarette smoking;

? increased efforts by tobacco control advocates and other private sector

       entities (including retail establishments) to further restrict the
       availability and use of tobacco products;

? changes in adult tobacco consumer purchase behavior, which is influenced

by various factors such as economic conditions, excise taxes and price gap

relationships, may result in adult tobacco consumers switching to discount

products or other lower-priced tobacco products;

? the highly competitive nature of the tobacco categories in which Altria's

tobacco subsidiaries operate, including competitive disadvantages related

to cigarette price increases attributable to the settlement of certain

litigation;

? illicit trade in tobacco products; and

? potential adverse changes in prices, availability and quality of tobacco,

other raw materials and components.

In addition to and in connection with the foregoing, evolving adult tobacco
consumer preferences pose challenges for Altria's tobacco subsidiaries. Altria's
tobacco subsidiaries believe that a significant number of adult tobacco
consumers switch among tobacco categories, use multiple forms of tobacco
products and try innovative tobacco products, such as e-vapor products and oral
nicotine pouches. In fact, a growing number of adult smokers are converting from
cigarettes to exclusive use of non-combustible tobacco product alternatives. The
e-vapor category has experienced significant growth in recent years, and the
number of adults who exclusively use e-vapor products also has increased which,
along with growth in oral nicotine pouches, has negatively impacted consumption
levels and sales volume of cigarettes and smokeless tobacco.(1) Continued growth
in the e-vapor category may be negatively impacted by legislative and regulatory
activities discussed below. Based on the accelerated adult smoker movement
across categories and the federal government raising the legal age to purchase
tobacco products to 21, as discussed below under Federal, State and Local
Legislation to Increase the Legal Age to Purchase Tobacco Products, Altria
expects the U.S. adjusted cigarette industry volume for 2020 to decline by 4% -
6%. Due to the expected continued volatility across tobacco categories, Altria
is no longer providing a multi-year forecast for U.S. cigarette industry volume
decline. Altria and its tobacco subsidiaries believe the innovative tobacco
product categories will continue to be dynamic as adult tobacco consumers
explore a variety of tobacco product options and as the regulatory environment
for these innovative tobacco products evolves.
___________________________
(1) "Smokeless tobacco," as used in this section of this Annual Report on Form
10-K, refers to smokeless tobacco products first regulated by the FDA in 2009.
It excludes oral nicotine pouches, which were first regulated by the FDA in
2016.


                                       25

--------------------------------------------------------------------------------

Table of Contents

Altria and its tobacco subsidiaries work to meet these evolving adult tobacco
consumer preferences over time by developing, manufacturing, marketing and
distributing products both within and outside the U.S. through innovation and
adjacency growth strategies (including, where appropriate, arrangements with, or
investments in, third parties).
FSPTCA and FDA Regulation
?The Regulatory Framework: The FSPTCA expressly establishes certain restrictions
and prohibitions on our tobacco businesses and authorizes or requires further
FDA action. Under the FSPTCA, the FDA has broad authority to (1) regulate the
design, manufacture, packaging, advertising, promotion, sale and distribution of
tobacco products; (2) require disclosures of related information; and (3)
enforce the FSPTCA and related regulations. The FSPTCA applies to cigarettes,
cigarette tobacco and smokeless tobacco products, and as of 2016, Other Tobacco
Products. See FDA Regulatory Actions - Deeming Regulations below.
Among other measures, the FSPTCA or its implementing regulations:
?      imposes restrictions on the advertising, promotion, sale and distribution

of tobacco products, including at retail;

? bans descriptors such as "light," "mild" or "low" or similar descriptors

when used as descriptors of modified risk unless expressly authorized by

the FDA;

? requires extensive product disclosures to the FDA and may require public

       disclosures;


?      prohibits any express or implied claims that a tobacco product is or may

be less harmful than other tobacco products without FDA authorization;

? imposes reporting obligations relating to contraband activity and grants

the FDA authority to impose recordkeeping and other obligations to address

illicit trade in tobacco products;

? changes the language of the cigarette and smokeless tobacco product health

warnings, enlarges their size and requires the development by the FDA of

       graphic warnings for cigarettes, establishes warning requirements for
       Other Tobacco Products and gives the FDA the authority to require new

warnings for any type of tobacco products (see FDA Regulatory Actions -

       Graphic Warnings below);


?      authorizes the FDA to adopt product regulations and related actions,

including imposing tobacco product standards that are appropriate for the

protection of the public health and imposing manufacturing standards for

tobacco products (see FDA's Comprehensive Regulatory Plan for Tobacco and

       Nicotine Regulation and FDA Regulatory Actions - Potential Product
       Standards below);


?      establishes pre-market review pathways for new and modified tobacco

products for the FDA to follow (see Pre-Market Review Pathways Including

Substantial Equivalence below); and

? equips the FDA with a variety of investigatory and enforcement tools,

including the authority to inspect tobacco product manufacturing and other

facilities.

?Pre-Market Review Pathways for Tobacco Products, Including Substantial
Equivalence: The FSPTCA permits the sale of tobacco products that were
commercially marketed as of February 15, 2007, and for which no modifications
have been made to the products since that date ("Grandfathered Products"). For
new and modified tobacco products, however, the FSPTCA imposes restrictions on
marketing, requiring FDA review and authorization before marketing a new or
modified product. Specifically, cigarettes, cigarette tobacco and smokeless
tobacco products modified or first introduced into the market after March 22,
2011, and Other Tobacco Products modified or first introduced into the market
after August 8, 2016, are subject to new tobacco product application and
pre-market review and authorization requirements unless a manufacturer can
demonstrate they are "substantially equivalent" to products commercially
marketed as of February 15, 2007. The FDA could deny any such new tobacco
product application or determine lack of substantial equivalence, thereby
preventing the distribution and sale of any product affected by such denial. A
manufacturer is permitted, however, to introduce Grandfathered Products into the
marketplace.
For cigarettes, cigarette tobacco and smokeless tobacco products modified or
first introduced into the market between February 15, 2007 and March 22, 2011
("Provisional Products") for which a manufacturer submitted substantial
equivalence reports, the FDA may determine that such products are not
"substantially equivalent" to products commercially marketed as of February 15,
2007. In such cases, the FDA could require the removal of such products from the
marketplace (see FDA Regulatory Actions - Substantial Equivalence and Other New
Product Processes/Pathways - Cigarettes and Smokeless Tobacco Products below).
Similarly, the FDA could determine that Other Tobacco Products modified or first
introduced into the market between February 15, 2007 and August 8, 2016 for
which a manufacturer submits substantial equivalence reports, are not
"substantially equivalent" to products commercially marketed as of February 15,
2007, or reject a new tobacco product application submitted by a manufacturer,
both of which could require the removal of such products from the marketplace
(see FDA's Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation,
and FDA Regulatory Actions - Substantial Equivalence and Other New Product
Processes/Pathways - Other Tobacco Products below).
Modifications to currently marketed products, including modifications that
result from, for example, changes to the quantity of tobacco product(s) in a
package, a manufacturer being unable to acquire ingredients or a supplier being
unable to maintain the consistency


                                       26

--------------------------------------------------------------------------------

Table of Contents

required in ingredients, can trigger the FDA's pre-market review process
described above. As noted, adverse determinations by the FDA during that process
could restrict a manufacturer's ability to continue marketing such products.
?FDA's Comprehensive Regulatory Plan for Tobacco and Nicotine Regulation: In
July 2017, the FDA announced a comprehensive plan for tobacco and nicotine
regulation designed to strike a balance between regulation and encouraging the
development of innovative tobacco products that may be less risky than
cigarettes. Since then, the FDA has issued additional information about its
comprehensive plan in response to concerns associated with the rise in the use
of e-vapor products by youth, and the potential youth appeal of flavored tobacco
products. The FDA said it is monitoring youth tobacco usage rates, particularly
e-vapor product use, and exercised its regulatory authority by implementing
measures designed to decrease youth tobacco use, including the removal of
certain e-vapor products from the market (see FDA Regulatory Actions - Underage
Access and Use of Certain Tobacco Products below).
Major components of the FDA's comprehensive plan include the following:
?      issuing advance notices of proposed rulemaking ("ANPRM") relating to
       potential product standards for nicotine in cigarettes, flavors in all
       tobacco products (including menthol in cigarettes and characterizing

flavors in all cigars); and, for e-vapor products, protection against

known public health risks such as concerns about youth exposure to liquid

nicotine;

? taking actions to restrict youth access to e-vapor products;

? establishing content requirements for "new tobacco product" and "modified

risk tobacco product" applications;

? reconsidering the FDA review processes of substantial equivalence reports

for Provisional Products and establishing review processes for e-vapor new

       product applications; and


?      revisiting the timelines (previously extended by the FDA) to submit
       applications for Other Tobacco Products.


See FDA Regulatory Actions below for further discussion.
?Rulemaking and Guidance: The provisions of the FSPTCA that require the FDA to
take action through rulemaking generally involve consideration of public comment
and, for some issues, scientific review. As required by the FSPTCA, the FDA has
established a tobacco product scientific advisory committee (the "TPSAC"), which
consists of voting and non-voting members, to provide advice, reports,
information and recommendations to the FDA on certain scientific and health
issues relating to tobacco products. TPSAC votes are considered by the FDA, but
are not binding. From time to time, the FDA issues guidance, which may be issued
in draft or final form, and generally involves public comment. Altria's tobacco
subsidiaries participate actively in processes established by the FDA to develop
and implement the FSPTCA's regulatory framework, including submission of
comments to various FDA proposals and participation in public hearings and
engagement sessions.
The implementation of the FSPTCA and related regulations and guidance also may
have an impact on enforcement efforts by U.S. states, territories and localities
of their laws and regulations as well as of the State Settlement Agreements
discussed below (see State Settlement Agreements below).  Such enforcement
efforts may adversely affect the ability of Altria's tobacco subsidiaries and
investees to market and sell regulated tobacco products in those states,
territories and localities.
?Impact on Our Business; Compliance Costs and User Fees: Regulations imposed and
other regulatory actions taken by the FDA under the FSPTCA could have a material
adverse effect on the business, consolidated results of operations, cash flows
or financial position of Altria and its tobacco subsidiaries in a number of
different ways. For example, actions by the FDA could:
? impact the consumer acceptability of tobacco products;

? delay, discontinue or prevent the sale or distribution of existing, new or

modified tobacco products;

? limit adult tobacco consumer choices;

? impose restrictions on communications with adult tobacco consumers;

? create a competitive advantage or disadvantage for certain tobacco companies;

? impose additional manufacturing, labeling or packaging requirements;

? impose additional restrictions at retail;

? result in increased illicit trade in tobacco products; or

? otherwise significantly increase the cost of doing business.

The failure to comply with FDA regulatory requirements, even inadvertently, and
FDA enforcement actions also could have a material adverse effect on the
business, consolidated results of operations, cash flows or financial position
of Altria and its tobacco subsidiaries, including adversely affecting the value
of Altria's investment in JUUL.
The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco,
cigar and pipe tobacco manufacturers and importers to pay for the cost of
regulation and other matters. The FSPTCA does not impose user fees on e-vapor or
oral nicotine pouch manufacturers. The cost of the FDA user fee is
allocated first among tobacco product categories subject to FDA regulation and
then among manufacturers and importers within each respective category based on
their relative market shares, all as prescribed by the


                                       27

--------------------------------------------------------------------------------

Table of Contents

statute and FDA regulations. Payments for user fees are adjusted for several
factors, including inflation, market share and industry volume. For a discussion
of the impact of the FDA user fee payments on Altria, see Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations - Payments Under State
Settlement Agreements and FDA Regulation below. In addition, compliance with the
FSPTCA's regulatory requirements has resulted and will continue to result in
additional costs for Altria's tobacco businesses. The amount of additional
compliance and related costs has not been material in any given quarter or year
to date period but could become material, either individually or in the
aggregate, to one or more of Altria's tobacco subsidiaries.
?Investigation and Enforcement: The FDA has a number of investigatory and
enforcement tools available to it, including document requests and other
required information submissions, facility inspections, examinations and
investigations, injunction proceedings, monetary penalties, product withdrawal
and recall orders, and product seizures. The use of any of these investigatory
or enforcement tools by the FDA could result in significant costs or otherwise
have a material adverse effect on the business, consolidated results of
operations, cash flows or financial position of Altria and its tobacco
subsidiaries, including adversely affecting the value of Altria's investment in
JUUL.
?Final Tobacco Marketing Rule: As required by the FSPTCA, the FDA re-promulgated
in March 2010 a wide range of advertising and promotion restrictions in
substantially the same form as regulations that were previously adopted in 1996
(but never imposed on tobacco manufacturers due to a United States Supreme Court
ruling) (the "Final Tobacco Marketing Rule"). The May 2016 amendments to the
Final Tobacco Marketing Rule apply certain provisions to certain "covered
tobacco products," which include cigars, e-vapor products containing nicotine or
other tobacco derivatives, pipe tobacco and oral nicotine pouches, but do not
include any component or part that is not made or derived from tobacco. The
Final Tobacco Marketing Rule as so amended:
?      bans the use of color and graphics in cigarette and smokeless tobacco

product labeling and advertising;

? prohibits the sale of cigarettes, smokeless tobacco and covered tobacco

       products to persons under the age of 18;


?      restricts the use of non-tobacco trade and brand names on cigarettes and
       smokeless tobacco products;


?      requires the sale of cigarettes and smokeless tobacco in direct,
       face-to-face transactions;


?      prohibits sampling of cigarettes and covered tobacco products and
       prohibits sampling of smokeless tobacco products except in qualified
       adult-only facilities;

? prohibits the sale or distribution of items such as hats and tee shirts

       with cigarette or smokeless tobacco brands or logos; and


?      prohibits cigarettes and smokeless tobacco brand name sponsorship of any
       athletic, musical, artistic or other social or cultural event, or any
       entry or team in any event.


Subject to certain limitations arising from legal challenges, the Final Tobacco
Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco
products and in August 2016 for covered tobacco products. At the time of the
re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an
ANPRM regarding the so-called "1000 foot rule," which would establish
restrictions on the placement of outdoor tobacco advertising in relation to
schools and playgrounds.
?FDA Regulatory Actions
?   Graphic Warnings: In June 2011, as required by the FSPTCA, the FDA issued its

final rule to modify the required warnings that appear on cigarette packages

and in cigarette advertisements. The FSPTCA specifies nine new textual

warning statements to be accompanied by color graphics depicting the negative

health consequences of smoking. The graphic health warnings will (i) be

located beneath the cellophane, and comprise the top 50% of the front and

rear panels of cigarette packages and (ii) occupy 20% of a cigarette

advertisement and be located at the top of the advertisement. After a legal

challenge to the rule, the FDA announced its plans to propose a new graphic

warnings rule in the future.

In March 2019, in a case filed by the American Academy of Pediatrics and other
plaintiffs, a federal district court in Massachusetts ordered the FDA to propose
a new rule relating to graphic health warnings by August 2019, and to submit the
final version of the rule for publication by March 2020. In May 2019, the FDA
appealed the district court's order to the United States Court of Appeals for
the First Circuit. Currently, the appeal is stayed pending the FDA's timely
issuance of a final rule on graphic health warnings. In August 2019, the FDA
proposed a new graphic warnings rule, which was subject to public comment. PM
USA and Nat Sherman filed comments with the FDA. As of February 21, 2020, the
FDA has not issued a final rule.
?Substantial Equivalence and Other New Product Processes/Pathways
?      Cigarettes and Smokeless Tobacco Products: In general, in order to

continue marketing Provisional Products, manufacturers of such products

were required to send to the FDA reports demonstrating substantial

equivalence by March 22, 2011 for the FDA to determine if such tobacco

products are "substantially equivalent" to products commercially available

as of February 15, 2007. Most cigarette and smokeless tobacco products

currently marketed by PM USA and USSTC are Provisional Products, as are

some of the products currently marketed by Nat Sherman. Altria's

subsidiaries submitted timely substantial equivalence reports for these

Provisional Products and can continue marketing these products unless the

       FDA makes a determination that a specific Provisional Product is not
       substantially equivalent. If the FDA ultimately makes such a
       determination, it could




                                       28

--------------------------------------------------------------------------------

Table of Contents

require the removal of such products from the marketplace, leaving Altria's
cigarette and smokeless tobacco subsidiaries with the option of marketing other
products that have received FDA pre-market authorization or Grandfathered
Products.
The FDA has communicated that it will not review a certain subset of Provisional
Product substantial equivalence reports and that the products that are the
subject of those reports can generally continue to be legally marketed without
further FDA review. PM USA and USSTC have Provisional Products included in this
subset of products, but also have a number of Provisional Products that will
continue to be subject to the substantial equivalence review process. In
addition, PM USA and USSTC have submitted, and continue to submit, substantial
equivalence reports on products proposed to be marketed after March 22, 2011
("Non-Provisional Products").
PM USA and USSTC have received substantial equivalence determinations on certain
Provisional and Non-Provisional Products. The Provisional Products that were
found to be not substantially equivalent (certain smokeless tobacco products)
had been discontinued for business reasons prior to the FDA's determinations;
therefore, the determinations did not impact business results.
While Altria's cigarette and smokeless tobacco subsidiaries believe all of their
current products meet the statutory requirements of the FSPTCA, they cannot
predict whether, when or how the FDA ultimately will apply its guidance to their
various respective substantial equivalence reports or seek to enforce the law
and regulations. Should Altria's cigarette and smokeless tobacco subsidiaries
receive unfavorable determinations on any substantial equivalence reports
currently pending with the FDA, they believe they have the ability to replace
most of their respective product volumes that could be impacted by these
determinations with other products that have received FDA pre-market
authorization or with Grandfathered Products.
?      Other Tobacco Products: In 2016, the FDA said that it would permit
       manufacturers to continue marketing Other Tobacco Products modified or
       introduced into the market for the first time between February 15, 2007

and August 8, 2016, until the FDA rendered decisions on the applicable

substantial equivalence reports and new tobacco product applications. A

number of cigars were on the market as of February 15, 2007, including

certain cigars manufactured by Middleton. Therefore, in addition to being

able to file new tobacco product applications, certain cigar

manufacturers, including Middleton, can file substantial equivalence

reports with the FDA for products that were on the market as of August 8,

2016. Few if any e-vapor products or oral nicotine pouches, however, were

on the market as of February 15, 2007. Therefore manufacturers of these

products may not be able to file substantial equivalence reports with the

FDA on e-vapor products or oral nicotine pouches that were on the market

as of August 8, 2016. In such cases, manufacturers, including JUUL and

Helix, have to file new tobacco product applications that, among other

things, demonstrate that the marketing of the products would be

appropriate for the protection of the public health.

Previously, the deadlines to file all substantial equivalence reports and new
tobacco product applications for combustible Other Tobacco Products, such as
cigars and pipe tobacco, and for non-combustible Other Tobacco Products, such as
e-vapor products and oral nicotine pouches, were at various points in 2018. The
FDA extended these deadlines to August 8, 2021 for combustible Other Tobacco
Products and August 8, 2022 for non-combustible Other Tobacco Products through
guidance rather than by providing notice and allowing for public comment. In May
2019, in a lawsuit filed by the American Academy of Pediatrics, among other
plaintiffs, a federal court in Maryland found that the FDA's failure to engage
in the notice and comment process violated the Administrative Procedures Act. In
July 2019, the court ordered that: (1) the FDA require that for Other Tobacco
Products on the market as of August 8, 2016, applications must be filed with the
FDA by May 12, 2020; (2) at the FDA's discretion, Other Tobacco Products for
which applications are not timely filed will be subject to FDA enforcement
action; (3) applications for Other Tobacco Products that are timely filed can
remain on the market during FDA review without being subject to FDA enforcement
action for up to one year from the date of the application; and (4) on a
case-by-case basis, the FDA can exempt Other Tobacco Products from filing
requirements for good cause. The court's ruling did not, however, prevent the
FDA from taking enforcement action against Other Tobacco Products prior to the
May 12, 2020 filing deadline. The FDA and other parties appealed the court's
ruling to the United States Court of Appeals for the Fourth Circuit. If JUUL is
unable to meet the May 12, 2020 filing deadline or if JUUL's new tobacco product
applications are timely filed but subsequently denied, it could adversely affect
the value of Altria's investment in JUUL and have a material adverse effect on
Altria's consolidated financial position or earnings.
Manufacturers of cigars and oral nicotine pouches also must file substantial
equivalence reports or new tobacco product applications by the May 12, 2020
filing deadline in order for their products to remain on the market. Middleton
has received market authorizations from the FDA that cover a significant portion
of its cigar product volume and has filed substantial equivalence reports with
the FDA that cover nearly all of its remaining cigar product volume. Middleton
continues to prepare and file substantial equivalence reports with the FDA and
plans to submit all required filings by the May 12, 2020 filing deadline. Helix
plans to file all required new tobacco product applications for its oral
nicotine pouches by the May 12, 2020 filing deadline.
Failure of Other Tobacco Product manufacturers, including Middleton, Helix and
JUUL, to meet the May 12, 2020 filing deadline for currently marketed products
or to ultimately obtain market authorization from the FDA following proper
submission, could result in Other Tobacco Products being removed from the
market.


                                       29

--------------------------------------------------------------------------------

Table of Contents

In January 2020, in an effort to address youth usage of certain Other Tobacco
Products, the FDA issued final guidance (the "January 2020 Final Guidance") in
which it stated that certain cartridge-based, flavored e-vapor products (other
than tobacco and menthol flavors) would be prioritized for FDA enforcement
action beginning early February 2020; effectively requiring the removal of these
products from the market unless these products receive FDA market authorization.
E-vapor product manufacturers may still, however, file new tobacco product
applications for these products. In its January 2020 Final Guidance, independent
of the above-mentioned federal court order, the FDA adopted the May 12, 2020
filing deadline and stated that after that deadline, it would prioritize its
enforcement against any e-vapor product (in any format or flavor) offered for
sale but for which either no new tobacco product application has been filed or
for which an application was timely filed but for which the FDA issued a
negative decision. See FDA Regulation - Underage Access and Use of Certain
Tobacco Products below for further discussion. The effect of this guidance is to
restrict the sale of certain flavored cartridge-based e-vapor products including
those manufactured by JUUL, but permit the continued sale (subject to the
exceptions discussed above) of other flavored e-vapor products, including
flavored disposable e-vapor products. If these other flavored e-vapor products
are sold in higher volumes than JUUL's e-vapor products, it could adversely
affect the value of Altria's investment in JUUL and have a material adverse
effect on Altria's consolidated financial position or earnings.
?      All Tobacco Products: In March 2019, the FDA issued a proposed rule that

would, if finalized, require that all substantial equivalence reports

filed after the effective date of the final rule meet certain content and

format requirements. Such requirements would not apply to substantial

equivalence reports for Provisional Products or to any substantial

equivalence report submitted to the FDA before this proposed rule becomes

final. Various products marketed by Altria's tobacco subsidiaries may fall

within the scope of this proposed rule if finalized.

In September 2019, the FDA issued a proposed rule in which it set forth
requirements for content, format and FDA's procedures for reviewing new tobacco
product applications. PM USA, Nat Sherman, Middleton, USSTC and Helix filed
comments with the FDA. As of February 21, 2020, no final rule has issued.
It is not possible to predict how long reviews by the FDA of substantial
equivalence reports or new tobacco product applications for any tobacco product
will take. A "not substantially equivalent" determination or denial of a new
tobacco product application on one or more products could have a material
adverse impact on the business, consolidated results of operations, cash flows
or financial position of Altria and its tobacco subsidiaries, including
adversely affecting the value of Altria's investment in JUUL.
?   Deeming Regulations: As discussed above under FSPTCA and FDA Regulation - The

Regulatory Framework, in 2016, the FDA issued final regulations for all Other

Tobacco Products, imposing the FSPTCA regulatory framework on the cigar

products manufactured, marketed and sold by Middleton and Nat Sherman. At the

same time the FDA issued its final deeming regulations, it also amended the

Final Tobacco Marketing Rule as described above in FSPTCA and FDA Regulation

- Final Tobacco Marketing Rule.

Among the FSPTCA requirements that apply to Other Tobacco Products is a ban on
descriptors, including "mild," when used as descriptors of modified risk unless
expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by
Middleton, the Department of Justice, on behalf of the FDA, informed Middleton
that at present, the FDA does not intend to bring an enforcement action against
Middleton for the use of the term "mild" in the trademark "Black & Mild."
Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were
to change its position at some later date, Middleton would have the opportunity
to make a submission to the FDA and ultimately, if necessary, to bring another
lawsuit.
?   Underage Access and Use of Certain Tobacco Products: The FDA announced in

September 2018 that it is using its regulatory authority to address underage

access and use of e-vapor products. Altria engaged with the FDA on this topic

in 2018 before discontinuing its Nu Mark e-vapor business and also after

acquiring a 35% economic interest in JUUL in December 2018. Altria reaffirmed

to the FDA its ongoing and long-standing investment in underage tobacco use

prevention efforts. For example, during 2019, Altria advocated raising the

minimum legal age to purchase all tobacco products to 21 at the federal and

state levels to further address underage tobacco use, which is now federal

law. See Federal, State and Local Legislation to Increase the Legal Age to

Purchase Tobacco Products below for further discussion.

In March 2019, the FDA issued draft guidance (the "March 2019 Draft Guidance")
further reflecting, among other things, its concerns about youth e-vapor use.
The FDA finalized this guidance in the form of the January 2020 Final Guidance
discussed above, which revises the FDA's compliance policy and states that the
FDA intends to prioritize enforcement action against:
?         cartridge-based, flavored e-vapor products (other than tobacco and
          menthol flavors) unless such products have received market
          authorization from the FDA; and

? all e-vapor products (in any format or flavor):

?            for which a manufacturer has failed or is failing to take 

adequate

             measures to prevent access by those under the age of 21

(referred to

             in the FDA guidance as "minors");


?            that are targeted to minors and the marketing for which is likely to
             promote use of such products by minors; or




                                       30

--------------------------------------------------------------------------------

Table of Contents

?            offered for sale after the May 12, 2020 filing deadline and for
             which the manufacturer has either not submitted a pre-market
             application or for which an application was timely filed but a
             negative decision on the application was issued by the FDA.


The January 2020 Final Guidance became effective in early February 2020. FDA
enforcement action could result in tobacco products that are subject to such
action being removed from the market unless and until these products receive
pre-market authorization from the FDA. JUUL ceased its sales of all of its
cartridge-based, flavored e-vapor products (other than tobacco and menthol) in
2019. If FDA enforcement action is taken against currently marketed JUUL e-vapor
products, and a significant number of those products are removed from the market
or if the FDA does not ultimately allow for the reintroduction of flavors other
than tobacco and menthol, it could adversely affect the value of Altria's
investment in JUUL and have a material adverse effect on Altria's consolidated
financial position or earnings.
? Potential Product Standards

? Nicotine in cigarettes and potentially other combustible tobacco products: In

March 2018, the FDA issued an ANPRM through which it sought comments on the

potential public health benefits and any possible adverse effects of lowering

nicotine in combustible cigarettes to non-addictive or minimally addictive

levels through achievable product standards. Specifically, the FDA sought

comments on the consequences of such a product standard, including (i)

smokers compensating by smoking more cigarettes to obtain the same level of

nicotine as with their current product and (ii) the illicit trade of

cigarettes containing nicotine at levels higher than a non-addictive

threshold that may be established by the FDA. The FDA also sought comments on

whether a nicotine product standard should apply to other combustible tobacco

products, including cigars.

This ANPRM process may ultimately lead to the FDA's development of product
standards for nicotine in combustible tobacco products such as cigarettes and
cigars. If such regulations were to become final and upheld in the courts, it
could have a material adverse effect on the business, consolidated results of
operations, cash flows or financial position of Altria and its tobacco
subsidiaries.
?   Flavors in tobacco products: In March 2018, the FDA issued an ANPRM seeking

comments on the role that flavors (including menthol) in tobacco products

play in attracting youth and may play in helping some smokers switch to

potentially less harmful forms of nicotine delivery. The FDA previously

released its preliminary scientific evaluation on menthol, which states "that

menthol cigarettes pose a public health risk above that seen with non-menthol

cigarettes." The FDA's evaluation followed an earlier report to the FDA from

TPSAC on the impact of the use of menthol in cigarettes on the public health

and included a recommendation that the "[r]emoval of menthol cigarettes from

the marketplace would benefit public health in the United States" and an

observation that any ban on menthol cigarettes could lead to an increase in

contraband cigarettes and other potential unintended consequences. As

discussed above under FDA's Comprehensive Regulatory Plan for Tobacco and

Nicotine Regulation, the FDA indicated that it is considering proposing

rulemaking for a product standard that would seek to ban menthol in

combustible tobacco products, including cigarettes and cigars, and that it

intends to propose a product standard that would ban characterizing flavors

in all cigars. While the FDA has yet to define "characterizing flavors" with

respect to cigars, most of Middleton's cigar products contain added flavors

and may be subject to any action by the FDA to ban flavors in cigars. No

future action can be taken by the FDA to ban characterizing flavors in all

cigars or regulate the manufacture, marketing or sale of menthol cigarettes

(including a possible ban) until the completion of a full rulemaking process.

In the March 2019 Draft Guidance, noted above under FDA Regulatory Action -
Underage Access and Use of Certain Tobacco Products, the FDA also announced its
intention to prioritize enforcement action against flavored cigars (other than
tobacco flavor) that either are not Grandfathered Products or have not received
market authorization from the FDA to remain on the market. In the January 2020
Final Guidance, the FDA declined to take enforcement action against such cigars
before the May 12, 2020 filing deadline. Instead, the FDA reiterated its
intention to issue a proposed rule for a product standard banning all cigars
with characterizing flavors. In its March 2019 Draft Guidance, the FDA indicated
that such a rule would include Grandfathered Products and cigars that have
received market authorization from the FDA.
Altria's tobacco subsidiaries submitted public comments in response to the ANPRM
regarding flavors in tobacco products and to the March 2019 Draft Guidance. Any
proposed rules ultimately may lead to the FDA banning characterizing flavors in
not only cigars, but in all tobacco products including oral nicotine pouches. If
these regulations become final and are upheld in the courts, it could have a
material adverse effect on the business, consolidated results of operations,
cash flows or financial position of Altria and its tobacco subsidiaries,
including adversely affecting the value of Altria's investment in JUUL.
?   NNN in Smokeless Tobacco: In January 2017, the FDA proposed a product

standard for N-nitrosonornicotine ("NNN") levels in finished smokeless

tobacco products. If the proposed rule, in present form, were to become

final and upheld in the courts, it could have a material adverse effect on

the business, consolidated results of operations, cash flows or financial

position of Altria and USSTC.

? Good Manufacturing Practices: The FSPTCA requires that the FDA promulgate

good manufacturing practice regulations (referred to by the FDA as

"Requirements for Tobacco Product Manufacturing Practice") for tobacco

product manufacturers, but does not specify a timeframe for such regulations.

                                       31

--------------------------------------------------------------------------------

Table of Contents

Excise Taxes
Tobacco products are subject to substantial excise taxes in the U.S. Significant
increases in tobacco-related taxes or fees have been proposed or enacted
(including with respect to e-vapor products) and are likely to continue to be
proposed or enacted at the federal, state and local levels within the U.S.
Federal, state and local cigarette excise taxes have increased substantially
over the past two decades, far outpacing the rate of inflation. Between the end
of 1998 and February 21, 2020, the weighted-average state cigarette excise tax
increased from $0.36 to $1.82 per pack. As of February 21, 2020, no state has
increased cigarette excise taxes in 2020, but various increases are under
consideration or have been proposed.
A majority of states currently tax smokeless tobacco products using an ad
valorem method, which is calculated as a percentage of the price of the product,
typically the wholesale price. This ad valorem method results in more tax being
paid on premium products than is paid on lower-priced products of equal weight.
Altria's subsidiaries support legislation to convert ad valorem taxes on
smokeless tobacco to a weight-based methodology because, unlike the ad valorem
tax, a weight-based tax subjects cans of equal weight to the same tax. As of
February 21, 2020, the federal government, 23 states, Puerto Rico, Philadelphia,
Pennsylvania and Cook County, Illinois have adopted a weight-based tax
methodology for smokeless tobacco.
Tax increases are expected to continue to have an adverse impact on sales of
cigarettes and smokeless tobacco products of Altria's tobacco subsidiaries
through lower consumption levels and the potential shift in adult consumer
purchases from the premium to the non-premium or discount segments, or to
counterfeit and contraband products. Such shifts may have an adverse impact on
the sales volume and reported share performance of cigarettes and smokeless
tobacco products of Altria's tobacco subsidiaries.
An increasing number of states and localities also are imposing excise taxes on
e-vapor and oral nicotine pouches. As of February 21, 2020, 21 states, the
District of Columbia, Puerto Rico and a number of cities and counties tax
e-vapor products. These taxes are calculated in varying ways and may differ
based on the e-vapor product form. Similarly, nine states and the District of
Columbia tax oral nicotine pouches.
International Treaty on Tobacco Control
The World Health Organization's Framework Convention on Tobacco Control (the
"FCTC") entered into force in February 2005. As of February 21, 2020, 180
countries, as well as the European Community, have become parties to the FCTC.
While the U.S. is a signatory of the FCTC, it is not currently a party to the
agreement, as the agreement has not been submitted to, or ratified by, the
United States Senate. The FCTC is the first international public health treaty
and its objective is to establish a global agenda for tobacco regulation with
the purpose of reducing initiation of tobacco use and encouraging cessation. The
treaty recommends (and in certain instances, requires) signatory nations to
enact legislation that would address various tobacco-related issues.
There are a number of proposals currently under consideration by the governing
body of the FCTC, some of which call for substantial restrictions on the
manufacture, marketing, distribution and sale of tobacco products. It is not
possible to predict the outcome of these proposals or the impact of any FCTC
actions on legislation or regulation in the U.S., either indirectly or as a
result of the U.S. becoming a party to the FCTC, or whether or how these actions
might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 19, during 1997 and 1998, PM USA and other major domestic
tobacco product manufacturers entered into the State Settlement Agreements.
These settlements require participating manufacturers to make substantial annual
payments, which are adjusted for several factors, including inflation, operating
income, market share and industry volume. For a discussion of the impact of the
State Settlement Agreements on Altria, see Off-Balance Sheet Arrangements and
Aggregate Contractual Obligations - Payments Under State Settlement Agreements
and FDA Regulation below and Note 19. The State Settlement Agreements also place
numerous requirements and restrictions on participating manufacturers' business
operations, including prohibitions and restrictions on the advertising and
marketing of cigarettes and smokeless tobacco products. Among these are
prohibitions of outdoor and transit brand advertising, payments for product
placement and free sampling (except in adult-only facilities). Restrictions are
also placed on the use of brand name sponsorships and brand name non-tobacco
products. The State Settlement Agreements also place prohibitions on targeting
youth and the use of cartoon characters. In addition, the State Settlement
Agreements require companies to affirm corporate principles directed at reducing
underage use of cigarettes; impose requirements regarding lobbying activities;
mandate public disclosure of certain industry documents; limit the industry's
ability to challenge certain tobacco control and underage use laws; and provide
for the dissolution of certain tobacco-related organizations and place
restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement
Agreement (the "STMSA") with the attorneys general of various states and U.S.
territories to resolve the remaining health care cost reimbursement cases
initiated against USSTC. The STMSA required USSTC to adopt various marketing and
advertising restrictions. USSTC is the only smokeless tobacco manufacturer to
sign the STMSA.


                                       32

--------------------------------------------------------------------------------

Table of Contents

Other International, Federal, State and Local Regulation and Governmental and
Private Activity
?International, Federal, State and Local Regulation: A number of states and
localities have enacted or proposed legislation that imposes restrictions on
tobacco products (including e-vapor and other innovative tobacco products), such
as legislation that (1) prohibits the sale of tobacco product categories, such
as e-vapor, and/or the sale of tobacco products with certain characterizing
flavors, such as menthol cigarettes, (2) requires the disclosure of health
information separate from or in addition to federally mandated health warnings
and (3) restricts commercial speech or imposes additional restrictions on the
marketing or sale of tobacco products (including proposals to ban all tobacco
product sales). The legislation varies in terms of the type of tobacco products,
the conditions under which such products are or would be restricted or
prohibited, and exceptions to the restrictions or prohibitions. For example, a
number of proposals involving characterizing flavors would prohibit smokeless
tobacco products with characterizing flavors without providing an exception for
mint- or wintergreen-flavored products. As of February 21, 2020, 23 states and
the District of Columbia have proposed legislation to ban flavors in one or more
tobacco products, including e-vapor products, oral nicotine pouches and
cigarettes and two states, Massachusetts and New Jersey, have passed such
legislation. Additionally, Massachusetts has passed legislation capping the
amount of nicotine in e-vapor products. Similar legislation has been proposed in
six other states.
In addition to legislation, some state governors have imposed restrictions on
tobacco products through executive action. For example, in response to reports
of lung injuries and deaths related to e-vapor product use, the governors of
eight states exercised executive action to temporarily prohibit either the sale
of all e-vapor products or e-vapor products with flavors other than tobacco.
Some of those executive actions have been challenged in the courts. Similar
executive action and/or proposed legislation is being considered in 12
additional states. Restrictions on e-vapor products also have been instituted or
proposed internationally. For example, in September 2019, India instituted a ban
on e-vapor products.
Altria's tobacco subsidiaries have challenged and will continue to challenge
certain state and local legislation and other governmental action, including
through litigation. It is possible, however, that legislation, regulation or
other governmental action could be enacted or implemented that could have a
material adverse impact on the business and volume of our tobacco subsidiaries
and investees, and the consolidated results of operations, cash flows or
financial position of Altria and its tobacco subsidiaries, including adversely
affecting the value of Altria's investment in JUUL.
?Federal, State and Local Legislation to Increase the Legal Age to Purchase
Tobacco Products: After a number of states and localities proposed and enacted
legislation to increase the minimum age to purchase all tobacco products,
including e-vapor products, in December 2019, the federal government passed
legislation increasing the minimum age to purchase all tobacco products,
including e-vapor products, to 21 nationwide. Although an increase in the
minimum age to purchase tobacco products may have a negative impact on sales
volume of our tobacco businesses, as discussed above under Underage Access and
Use of Certain Tobacco Products, Altria supported raising the minimum legal age
to purchase all tobacco products to 21 at the federal and state levels,
reflecting its longstanding commitment to combat underage tobacco use.
?Health Effects of Tobacco Products, Including E-vapor Products: Reports with
respect to the health effects of smoking have been publicized for many years,
including various reports by the U.S. Surgeon General. More recently, there have
been public health advisories concerning vaping-related lung injuries and
deaths. Altria and its tobacco subsidiaries believe that the public should be
guided by the messages of the U.S. Surgeon General and public health authorities
worldwide in making decisions concerning the use of tobacco products.
Most jurisdictions within the U.S. have restricted smoking in public places and
some have restricted vaping in public places. Some public health groups have
called for, and various jurisdictions have adopted or proposed, bans on smoking
and vaping in outdoor places, in private apartments and in cars transporting
children. It is not possible to predict the results of ongoing scientific
research or the types of future scientific research into the health risks of
tobacco exposure and the impact of such research on regulation.
?Other Legislation or Governmental Initiatives: In addition to the actions
discussed above, other regulatory initiatives affecting the tobacco industry
have been adopted or are being considered at the federal level and in a number
of state and local jurisdictions. For example, in recent years, legislation has
been introduced or enacted at the state or local level to subject tobacco
products to various reporting requirements and performance standards; establish
educational campaigns relating to tobacco consumption or tobacco control
programs or provide additional funding for governmental tobacco control
activities; restrict the sale of tobacco products in certain retail
establishments and the sale of tobacco products in certain package sizes;
require tax stamping of smokeless tobacco products; require the use of state tax
stamps using data encryption technology; and further restrict the sale,
marketing and advertising of cigarettes and Other Tobacco Products. Such
legislation may be subject to constitutional or other challenges on various
grounds, which may or may not be successful.
It is not possible to predict what, if any, additional legislation, regulation
or other governmental action will be enacted or implemented (and, if challenged,
upheld) relating to the manufacturing, design, packaging, marketing,
advertising, sale or use of tobacco products, or the tobacco industry generally.
It is possible, however, that legislation, regulation or other governmental
action could be enacted or implemented that could have a material adverse impact
on the business and volume of our tobacco subsidiaries and investees, and the
consolidated results of operations, cash flows or financial position of Altria
and its tobacco subsidiaries, including adversely affecting the value of
Altria's investment in JUUL.


                                       33

--------------------------------------------------------------------------------

Table of Contents

?Governmental Investigations: From time to time, Altria, its subsidiaries and
investees are subject to governmental investigations on a range of matters. For
example, (i) the FTC issued a Civil Investigative Demand to Altria while
conducting its antitrust review of Altria's investment in JUUL seeking
information regarding, among other things, Altria's role in the resignation of
JUUL's former chief executive officer and the hiring by JUUL of any current or
former Altria director, executive or employee and (ii) the SEC has commenced an
investigation relating to Altria's disclosures and controls in connection with
the JUUL investment. Additionally, JUUL is currently under investigation by
various federal and state agencies, including the FDA and the FTC, and state
attorneys general. Such investigations vary in scope but at least some appear to
include JUUL's marketing practices, particularly as such practices relate to
youth.
Private Sector Activity
An increasing number of retailers, including national chains, have discontinued
or are in the process of discontinuing the sale of e-vapor products. Reasons for
the discontinuation include reported illnesses related to e-vapor product use
and the uncertain regulatory environment. It is possible that this private
sector activity could adversely affect the value of Altria's investment in JUUL
and have a material adverse effect on Altria's consolidated financial position
or earnings.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on the businesses
of Altria, its tobacco subsidiaries and investees. Illicit trade can take many
forms, including the sale of counterfeit tobacco products; the sale of tobacco
products in the U.S. that are intended for sale outside the country; the sale of
untaxed tobacco products over the Internet and by other means designed to avoid
the collection of applicable taxes; and diversion into one taxing jurisdiction
of tobacco products intended for sale in another. Counterfeit tobacco products,
for example, are manufactured by unknown third parties in unregulated
environments. Counterfeit versions of our tobacco subsidiaries' and investees'
products can negatively affect adult tobacco consumer experiences with and
opinions of those brands. Illicit trade in tobacco products also harms
law-abiding wholesalers and retailers by depriving them of lawful sales and
undermines the significant investment Altria's tobacco subsidiaries and
investees have made in legitimate distribution channels. Moreover, illicit trade
in tobacco products results in federal, state and local governments losing tax
revenues. Losses in tax revenues can cause such governments to take various
actions, including increasing excise taxes; imposing legislative or regulatory
requirements that may adversely impact Altria's consolidated results of
operations and cash flows, including adversely affecting the value of Altria's
investment in JUUL, and the businesses of its tobacco subsidiaries and
investees; or asserting claims against manufacturers of tobacco products or
members of the trade channels through which such tobacco products are
distributed and sold.
Altria's tobacco subsidiaries communicate with wholesale and retail trade
members regarding illicit trade in tobacco products and how they can help
prevent such activities; enforce wholesale and retail trade programs and
policies that address illicit trade in tobacco products and, when necessary,
litigate to protect their trademarks.
Price, Availability and Quality of Tobacco, Other Raw Materials and Component
Parts
Shifts in crops (such as those driven by economic conditions and adverse weather
patterns), government restrictions and mandated prices, economic trade
sanctions, import duties and tariffs, geopolitical instability and production
control programs may increase or decrease the cost or reduce the supply or
quality of tobacco, other raw materials or component parts used to manufacture
our companies' products. Any significant change in the price, quality or
availability of tobacco, other raw materials or component parts used to
manufacture our products could restrict our subsidiaries' ability to continue
marketing existing products or impact adult consumer product acceptability and
adversely affect our subsidiaries' profitability and businesses.
With respect to tobacco, as with other agricultural commodities, the price of
tobacco leaf can be influenced by economic conditions and imbalances in supply
and demand, and crop quality and availability can be influenced by variations in
weather patterns, including those caused by climate change. Tobacco production
in certain countries is subject to a variety of controls, including government
mandated prices and production control programs.  Changes in the patterns of
demand for agricultural products and the cost of tobacco production could impact
tobacco leaf prices and tobacco supply. Certain types of tobacco are only
available in limited geographies, including geographies experiencing political
instability, and loss of their availability could impair our subsidiaries'
ability to continue marketing existing products or impact adult tobacco consumer
product acceptability.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are subject to many
influences that can impact the timing of sales to customers, including the
timing of holidays and other annual or special events, the timing of promotions,
customer incentive programs and customer inventory programs, as well as the
actual or speculated timing of pricing actions and tax-driven price increases.



                                       34

--------------------------------------------------------------------------------

Table of Contents

Operating Results
The following table summarizes operating results for the smokeable and smokeless
products segments:
                                                   For the Years Ended December 31,
                                             Net Revenues                      Operating Companies Income
(in millions)                        2019         2018         2017            2019            2018        2017
Smokeable products               $ 21,996     $ 22,297     $ 22,636     $     9,009         $ 8,408     $ 8,426
Smokeless products                  2,367        2,262        2,155           1,580           1,431       1,306
Total smokeable and smokeless
products                         $ 24,363     $ 24,559     $ 24,791     $    10,589         $ 9,839     $ 9,732


Smokeable Products Segment
The following table summarizes the smokeable products segment shipment volume
performance:
                                      Shipment Volume
                              For the Years Ended December 31,
(sticks in millions)           2019                2018       2017
Cigarettes:
   Marlboro                  88,473              94,770     99,974
   Other premium              4,869               5,552      5,967
   Discount                   8,457               9,469     10,665
Total cigarettes            101,799             109,791    116,606
Cigars:
   Black & Mild               1,641               1,590      1,527
   Other                         10                  11         15
Total cigars                  1,651               1,601      1,542
Total smokeable products    103,450             111,392    118,148


Cigarettes shipment volume includes Marlboro; Other premium brands, such as
Virginia Slims, Parliament and Benson & Hedges and Nat's; and Discount brands,
which include L&M, Basic and Chesterfield. Cigarettes volume includes units sold
as well as promotional units, but excludes units sold for distribution to Puerto
Rico, and units sold in U.S. Territories, to overseas military and by Philip
Morris Duty Free Inc., none of which, individually or in the aggregate, is
material to the smokeable products segment.
The following table summarizes cigarettes retail share performance:
                               Retail Share
                     For the Years Ended December 31,
                     2019           2018           2017
Cigarettes:
   Marlboro          43.1 %         43.2 %         43.5 %
   Other premium      2.4            2.6            2.7
   Discount           4.2            4.4            4.6
Total cigarettes     49.7 %         50.2 %         50.8 %


Retail share results for cigarettes are based on data from IRI/Management
Science Associate Inc., a tracking service that uses a sample of stores and
certain wholesale shipments to project market share and depict share trends.
This service tracks sales in the food, drug, mass merchandisers, convenience,
military, dollar store and club trade classes. For other trade classes selling
cigarettes, retail share is based on shipments from wholesalers to retailers
through the Store Tracking Analytical Reporting System ("STARS"). This service
is not designed to capture sales through other channels, including the internet,
direct mail and some illicitly tax-advantaged outlets. It is IRI's standard
practice to periodically refresh its services, which could restate retail share
results that were previously released in this service.
For a discussion of volume trends and factors that impact volume and retail
share performance, see Tobacco Space - Business Environment above.
PM USA and Middleton executed the following pricing and promotional allowance
actions during 2019, 2018 and 2017:
?Effective October 20, 2019, PM USA increased the list price on all of its
cigarette brands by $0.08 per pack.


                                       35

--------------------------------------------------------------------------------

Table of Contents

?Effective August 4, 2019, Middleton increased various list prices across
substantially all of its cigar brands resulting in a weighted-average increase
of approximately $0.04 per five-pack.
?Effective June 16, 2019, PM USA increased the list price on all of its
cigarette brands by $0.06 per pack, except for L&M, which had no list price
change.
?Effective February 24, 2019, PM USA increased the list price on Marlboro and
L&M by $0.11 per pack and Parliament and Virginia Slims by $0.16 per pack. In
addition, PM USA increased the list price on all of its other cigarette brands
by $0.31 per pack.
?Effective September 23, 2018, PM USA increased the list price on Marlboro and
L&M by $0.10 per pack and Parliament and Virginia Slims by $0.15 per pack. In
addition, PM USA increased the list price on all of its other cigarette brands
by $0.50 per pack.
?Effective May 6, 2018, Middleton increased various list prices across
substantially all of its cigar brands resulting in a weighted-average increase
of approximately $0.11 per five-pack.
?Effective March 25, 2018, PM USA increased the list price on all of its
cigarette brands by $0.09 per pack.
?Effective September 24, 2017, PM USA increased the list price on all of its
cigarette brands by $0.10 per pack.
?Effective May 21, 2017, Middleton increased various list prices across
substantially all of its cigar brands resulting in a weighted-average increase
of approximately $0.10 per five-pack.
?Effective March 19, 2017, PM USA increased the list price on Parliament by
$0.12 per pack.  In addition, PM USA increased the list price on all of its
other cigarette brands by $0.08 per pack.
In addition:
?Effective February 16, 2020, PM USA increased the list price on all of its
cigarette brands by $0.08 per pack.
?Effective January 12, 2020, Middleton increased various list prices across
substantially all of its cigar brands resulting in a weighted-average increase
of approximately $0.08 per five-pack.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, decreased $301
million (1.3%), due primarily to lower shipment volume ($1,780 million),
partially offset by higher pricing ($1,497 million), which includes lower
promotional investments.
Operating companies income increased $601 million (7.1%), due primarily to
higher pricing, which includes lower promotional investments, and lower costs
($420 million), partially offset by lower shipment volume ($996 million), 2018
NPM Adjustment Items ($145 million), and higher per unit settlement charges.
Marketing, administration and research costs for the smokeable products segment
include PM USA's cost of administering and litigating product liability claims.
Litigation defense costs are influenced by a number of factors, including the
number and types of cases filed, the number of cases tried annually, the results
of trials and appeals, the development of the law controlling relevant legal
issues, and litigation strategy and tactics. For further discussion on these
matters, see Note 19 and Item 3. For the years ended December 31, 2019, 2018 and
2017, product liability defense costs for PM USA were $151 million, $179 million
and $179 million, respectively. The factors that have influenced past product
liability defense costs are expected to continue to influence future costs. PM
USA does not expect future product liability defense costs to be significantly
different from product liability defense costs incurred in the last few years.
The smokeable products segment's reported domestic cigarettes shipment volume
decreased 7.3%, driven primarily by the industry's rate of decline, retail share
losses, trade inventory movements and other factors. When adjusted for trade
inventory movements and other factors, the smokeable products segment's domestic
cigarettes shipment volume decreased by an estimated 7%. When adjusted for trade
inventory movements and other factors, total domestic cigarette industry volumes
declined by an estimated 5.5%.
Shipments of premium cigarettes accounted for 91.7% of smokeable products'
reported domestic cigarettes shipment volume for 2019, versus 91.4% for 2018.
Total cigarettes industry discount category retail share was 24.2% in 2019, an
increase of 0.4 percentage points versus 2018.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers, decreased $339
million (1.5%), due primarily to lower shipment volume ($1,438 million),
partially offset by higher pricing ($1,104 million), which includes lower
promotional investments.
Operating companies income was essentially unchanged as lower shipment volume
($779 million), higher costs ($343 million, which includes investments in
strategic initiatives, higher asset impairment, exit and implementation costs
and higher tobacco and health litigation items) and higher per unit settlement
charges, were offset by higher pricing ($1,092 million), which includes lower
promotional investments, and higher NPM Adjustment Items ($140 million).
The smokeable products segment's reported domestic cigarettes shipment volume
decreased 5.8%, driven primarily by the industry's rate of decline, retail share
losses and trade inventory movements, partially offset by one extra shipping
day. When adjusted for trade inventory


                                       36

--------------------------------------------------------------------------------

Table of Contents

movements and one extra shipping day, the smokeable products segment's domestic
cigarettes shipment volume decreased an estimated 5.5%. Total domestic cigarette
industry volumes declined by an estimated 4.5%.
Shipments of premium cigarettes accounted for 91.4% of smokeable products'
reported domestic cigarettes shipment volume for 2018, versus 90.9% for 2017.
PM USA stabilized Marlboro retail share in 2018 at a full-year share of 43.2
share points, unchanged compared to Marlboro's share in the fourth quarter of
2017.
Smokeless Products Segment
The following table summarizes smokeless products segment shipment volume
performance:
                                           Shipment Volume
                                   For the Years Ended December 31,
(cans and packs in millions)       2019                    2018     2017
Copenhagen                        522.2                   531.7    531.6
Skoal                             217.8                   231.1    241.9
Copenhagen and Skoal              740.0                   762.8    773.5
Other                              67.0                    69.8     67.8
Total smokeless products          807.0                   832.6    841.3


Smokeless products shipment volume includes cans and packs sold, as well as
promotional units, but excludes international volume and oral nicotine pouch
volume, which are currently not material to the smokeless products segment. New
types of smokeless products, as well as new packaging configurations of existing
smokeless products, may or may not be equivalent to existing MST products on a
can-for-can basis. To calculate volumes of cans and packs shipped, one pack of
snus, irrespective of the number of pouches in the pack, is assumed to be
equivalent to one can of MST.
The following table summarizes smokeless products segment retail share
performance (excluding international and oral nicotine pouch volume):
                                       Retail Share
                             For the Years Ended December 31,
                             2019           2018           2017
Copenhagen                   34.8 %         34.5 %         34.0 %
Skoal                        15.6           16.2           16.7
Copenhagen and Skoal         50.4           50.7           50.7
Other                         3.5            3.3            3.2
Total smokeless products     53.9 %         54.0 %         53.9 %


Retail share results for smokeless products are based on data from IRI InfoScan,
a tracking service that uses a sample of stores to project market share and
depict share trends.  This service tracks sales in the food, drug, mass
merchandisers, convenience, military, dollar store and club trade classes on the
number of cans and packs sold.  Smokeless products is defined by IRI as moist
smokeless and spit-free tobacco products. New types of smokeless products, as
well as new packaging configurations of existing smokeless products, may or may
not be equivalent to existing MST products on a can-for-can basis. For example,
one pack of snus, irrespective of the number of pouches in the pack, is assumed
to be equivalent to one can of MST. Because this service represents retail share
performance only in key trade channels, it should not be considered a precise
measurement of actual retail share.  It is IRI's standard practice to
periodically refresh its InfoScan services, which could restate retail share
results that were previously released in this service.
For a discussion of volume trends and factors that impact volume and retail
share performance, see Tobacco Space - Business Environment above.
USSTC executed the following pricing actions during 2019, 2018 and 2017:
?Effective October 22, 2019, USSTC increased the list price on its Skoal X-TRA
products and select Copenhagen products by $0.09 per can. USSTC also increased
the list price on its Husky and Red Seal brands and the balance of its
Copenhagen and Skoal products by $0.04 per can.
?Effective July 23, 2019, USSTC increased the list price on its Skoal X-TRA
products and select Copenhagen products by $0.08 per can. USSTC also increased
the list price on its Husky and Red Seal brands and the balance of its
Copenhagen and Skoal products by $0.03 per can.
?Effective April 30, 2019, USSTC increased the list price on its Skoal X-TRA
products and select Copenhagen products by $0.17 per can.  USSTC also increased
the list price on its Husky and Red Seal brands and its Copenhagen and Skoal
popular price products by $0.12 per can.  In addition, USSTC increased the list
price on the balance of its Copenhagen and Skoal products by $0.07 per can.


                                       37

--------------------------------------------------------------------------------

Table of Contents

?Effective November 20, 2018, USSTC increased the list price on its Skoal X-TRA
products and select Copenhagen products by $0.17 per can. USSTC also increased
the list price on its Husky brand and on the balance of its Copenhagen and Skoal
products by $0.07 per can. In addition, USSTC decreased the price on its Red
Seal brand by $0.08 per can.
?Effective June 5, 2018, USSTC increased the list price on all its brands by
$0.07 per can.
?Effective September 26, 2017, USSTC increased the list price on Copenhagen and
Skoal popular price products by $0.12 per can. In addition, USSTC increased the
list price on all its brands, except for Copenhagen and Skoal popular price
products, by $0.07 per can.
?Effective April 25, 2017, USSTC increased the list price on all its brands by
$0.07 per can.
In addition, effective February 18, 2020, USSTC increased the list price on its
Skoal X-TRA products by $0.56 per can. USSTC also increased the list price on
its Skoal Blend products by $0.16 cents per can and increased the list price on
its Husky, Red Seal and Copenhagen brands and the balance of its Skoal products
by $0.07 per can.
2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, increased $105
million (4.6%), due primarily to higher pricing ($197 million), which includes
lower promotional investments, partially offset by lower shipment volume ($98
million). Operating companies income increased $149 million (10.4%), due
primarily to higher pricing, which includes lower promotional investments, and
lower costs, partially offset by lower shipment volume ($87 million).
The smokeless products segment's reported domestic shipment volume declined
3.1%, driven primarily by the industry's rate of decline, calendar differences,
retail share losses and other factors, partially offset by trade inventory
movements. When adjusted for trade inventory movements and calendar differences,
the smokeless products segment's domestic shipment volume declined an estimated
3%.
The smokeless products category industry volume declined an estimated 1% over
the six months ended December 31, 2019.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers, increased $107
million (5.0%), due primarily to higher pricing ($138 million), which includes
lower promotional investments, partially offset by lower shipment volume.
Operating companies income increased $125 million (9.6%), due primarily to
higher pricing ($138 million), which includes lower promotional investments, and
lower asset impairment, exit and implementation costs ($33 million), partially
offset by lower shipment volume and higher costs (including investments in
strategic investments).
The smokeless products segment's reported domestic shipment volume decreased
1.0%, driven primarily by the industry's rate of decline. When adjusted for
trade inventory movements and calendar differences, the smokeless products
segment's domestic shipment volume declined an estimated 1%.
The smokeless products category industry volume declined an estimated 1.5% over
the six months ended December 31, 2018.


Wine Segment
Business Environment
Ste. Michelle is a leading producer of Washington state wines, primarily Chateau
Ste. Michelle and 14 Hands, and owns wineries in or distributes wines from
several other domestic and foreign wine regions. Ste. Michelle holds an 85%
ownership interest in Michelle-Antinori, LLC, which owns Stag's Leap Wine
Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley, Patz
& Hall in Sonoma and Erath in Oregon. In addition, Ste. Michelle imports and
markets Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte
in the United States. Key elements of Ste. Michelle's strategy are expanded
domestic distribution of its wines, especially in certain account categories
such as restaurants, wholesale clubs, supermarkets, wine shops and mass
merchandisers, and a focus on improving product mix to higher-priced, premium
products. Ste. Michelle works to meet evolving adult consumer preferences over
time by developing, marketing and distributing products through innovation.
Ste. Michelle's business is subject to significant competition, including
competition from many larger, well-established domestic and international
companies, as well as from many smaller wine producers. Wine segment competition
is primarily based on quality, price, consumer and trade wine tastings,
competitive wine judging, third-party acclaim and advertising. Substantially all
of Ste. Michelle's sales occur in the United States through state-licensed
distributors. Ste. Michelle also sells to domestic consumers through retail and
e-commerce channels and exports wines to international distributors.
Adult consumer preferences among alcohol categories and within the wine category
can shift due to a variety of factors, including changes in taste preferences,
demographics or social trends, and changes in leisure, dining and beverage
consumption patterns. Evolving adult consumer preferences pose challenges to the
wine category, which has seen slowing volume growth in the premium wine category
and increases in inventory levels.


                                       38

--------------------------------------------------------------------------------

Table of Contents

Federal, state and local governmental agencies regulate the beverage alcohol
industry through various means, including licensing requirements, pricing rules,
labeling and advertising restrictions, and distribution and production policies.
Further regulatory restrictions or additional excise or other taxes on the
manufacture and sale of alcoholic beverages could have an adverse effect on Ste.
Michelle's wine business.

Operating Results
The following table summarizes operating results for the wine segment:
                                                           For the Years Ended December 31,
(in millions)                                              2019                2018          2017
Net revenues                                        $       689         $       691     $     698
Operating companies income (loss)                   $        (3 )       $   

50 $ 146

2019 Compared with 2018
Net revenues, which include excise taxes billed to customers, were essentially
unchanged as higher promotional investments were mostly offset by higher
shipment volume and favorable premium mix. Operating companies income decreased
$53 million (100.0%+), due primarily to the 2019 impairment of the wine segment
goodwill ($74 million), higher costs and higher promotional investments,
partially offset by the 2018 impairment of the Columbia Crest trademark ($54
million).
For 2019, Ste. Michelle's reported wine shipment volume of 8,294 thousand cases
increased 0.6%.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers, decreased $7
million (1.0%), due primarily to lower shipment volume, partially offset by
favorable premium mix.
Operating companies income decreased $96 million (65.8%), due primarily to the
impairment of the Columbia Crest trademark ($54 million), higher costs and lower
shipment volume, partially offset by favorable premium mix.
For 2018, Ste. Michelle's reported wine shipment volume of 8,246 thousand cases
decreased 3.3%.

Financial Review
Net Cash Provided by/Used in Operating Activities
During 2019, net cash provided by operating activities was $7.8 billion compared
with $8.4 billion during 2018. This decrease was due primarily to the following:
? lower payments of settlement charges in 2018;

? lower dividends received from ABI; and

? higher payments of interest on long-term debt in 2019;

partially offset by:
?      lower costs as a result of the cost reduction program announced in

December 2018, net of cash paid under this program in 2019; and

? lower federal income tax payments in 2019.

During 2018, net cash provided by operating activities was $8.4 billion compared
with $4.9 billion during 2017. This increase was due primarily to lower payments
of settlement charges and income taxes in 2018.
Altria had a working capital deficit at December 31, 2019 and 2018. Altria's
management believes that Altria has the ability to fund working capital deficits
with cash provided by operating activities and/or short-term borrowings under
its commercial paper program and borrowings through its access to credit and
capital markets.
Net Cash Provided by/Used in Investing Activities
During 2019, net cash used in investing activities was $2.4 billion compared
with $13.0 billion during 2018. This decrease was due primarily to the
following:
? Altria's $12.8 billion investment in JUUL in 2018;


partially offset by:
? Altria's $1.9 billion investment in Cronos in 2019; and

? Helix's acquisition of the Burger Group in 2019.

                                       39

--------------------------------------------------------------------------------

Table of Contents

During 2018, net cash used in investing activities was $13.0 billion compared
with $0.5 billion during 2017. This increase was due primarily to Altria's $12.8
billion investment in JUUL in 2018.
Capital expenditures for 2019 increased 3.4% to $246 million. Capital
expenditures for 2020 are expected to be in the range of $225 million to $275
million, and are expected to be funded from operating cash flows.
Net Cash Provided by/Used in Financing Activities
During 2019, net cash used in financing activities was $4.7 billion compared
with net cash provided by financing activities of $4.7 billion during 2018. This
change was due primarily to the following:
? proceeds of $12.8 billion from short-term borrowings in 2018;

? repayments of $12.8 billion of short-term borrowings in 2019;

? higher dividends paid during 2019; and

? higher repayments of long-term debt at maturity in 2019;

partially offset by: ? proceeds of $16.3 billion from the issuance of long-term senior unsecured

notes during 2019; and

? lower repurchases of common stock during 2019.

During 2018, net cash provided by financing activities was $4.7 billion compared
with net cash used in financing activities of $7.8 billion during 2017. This
change was due primarily to the following:
?      $12.8 billion of short-term borrowings used to finance Altria's investment

in JUUL in 2018; and

? lower repurchases of common stock during 2018;

partially offset by:
? higher dividends paid during 2018; and


?      $0.9 billion repayment of Altria senior unsecured notes at scheduled
       maturity in 2018.


Debt and Liquidity
Credit Ratings - Altria's cost and terms of financing and its access to
commercial paper markets may be impacted by applicable credit ratings. The
impact of credit ratings on the cost of borrowings under Altria's credit
agreement is discussed in Note 9. See the discussion in Item 1A regarding the
potential adverse impact of certain events on Altria's credit ratings.
At December 31, 2019, the credit ratings and outlook for Altria's indebtedness
by major credit rating agencies were:
                                           Short-term Debt   Long-term Debt 

Outlook

Moody's Investor Service, Inc. ("Moody's")             P-2               A3 

Negative

Standard & Poor's Ratings Services                     A-2              BBB         Stable
("Standard & Poor's")
Fitch Ratings Ltd. ("Fitch")                            F2              BBB         Stable


Credit Lines - From time to time, Altria has short-term borrowing needs to meet
its working capital requirements and generally uses its commercial paper program
to meet those needs. At December 31, 2019 and 2018, Altria had no short-term
borrowings under its commercial paper program.
In December 2018, Altria entered into a senior unsecured term loan agreement
(the "Term Loan Agreement") in connection with its investments in JUUL and
Cronos. At December 31, 2018, Altria had aggregate short-term borrowings under
the Term Loan Agreement of $12.8 billion at an interest rate of approximately
3.5%. Borrowings under the Term Loan Agreement were set to mature on December
19, 2019. In February 2019, Altria repaid all of the outstanding $12.8 billion
of short-term borrowings under the Term Loan Agreement with net proceeds from
the issuance of long-term senior unsecured notes. Upon such repayment, the Term
Loan Agreement terminated in accordance with its terms. For further discussion,
see the Debt section below.
At December 31, 2019, Altria had in place a senior unsecured 5-year revolving
credit agreement (the "Credit Agreement"). The Credit Agreement, which is used
for general corporate purposes, provides for borrowings up to an aggregate
principal amount of $3.0 billion. The Credit Agreement expires on August 1, 2023
and includes an option, subject to certain conditions, for Altria to extend the
Credit Agreement for two additional one-year periods. At December 31, 2019 and
2018, Altria had no borrowings under the Credit Agreement. At December 31, 2019,
credit available to Altria under the Credit Agreement was $3.0 billion.
At December 31, 2019, Altria was in compliance with its covenants associated
with the Credit Agreement. Altria expects to continue to meet its covenants
associated with the Credit Agreement. For further discussion, see Note 9.
Any commercial paper issued by Altria and borrowings under the Credit Agreement
are guaranteed by PM USA as further discussed in Note 20. Condensed
Consolidating Financial Information to the consolidated financial statements in
Item 8 ("Note 20").
Financial Market Environment - Altria believes it has adequate liquidity and
access to financial resources to meet its anticipated obligations and ongoing
business needs in the foreseeable future. Altria monitors the credit quality of
its bank group and is not aware of any potential


                                       40

--------------------------------------------------------------------------------

Table of Contents

non-performing credit provider in that group. Altria believes the lenders in its
bank group will be willing and able to advance funds in accordance with their
legal obligations. See Item 1A for the risk factor relating to disruption and
uncertainty in the credit and capital markets.
Debt - At December 31, 2019 and 2018, Altria's total debt was $28.0 billion and
$25.7 billion, respectively. The increase in debt was due to Altria's February
2019 issuance of long-term senior unsecured notes, partially offset by the
repayment in full in February 2019 of $12.8 billion of short-term borrowings
under the Term Loan Agreement and the repayment in full of $1.1 billion of
long-term senior unsecured notes at scheduled maturity in August 2019.
All of Altria's long-term debt outstanding at December 31, 2019 and 2018 was
fixed-rate debt. The weighted-average coupon interest rate on total long-term
debt was approximately 4.2% and 4.6% at December 31, 2019 and 2018,
respectively.
In February 2019, Altria issued USD and Euro denominated long-term senior
unsecured notes in the aggregate principal amounts of $11.5 billion and €4.25
billion, respectively. Altria immediately converted the proceeds of the Euro
denominated notes into USD of $4.8 billion. The net proceeds from the Euro notes
and a portion of the net proceeds from the USD notes were used to repay in full
the $12.8 billion of short-term borrowings under the Term Loan Agreement. The
remaining net proceeds from the USD notes were used to finance Altria's
investment in Cronos in the first quarter of 2019 and for other general
corporate purposes. Altria designated its Euro denominated notes as a net
investment hedge of its investment in ABI.
In January 2020, Altria repaid in full at maturity notes in the aggregate
principal amount of $1.0 billion.
For further details on short-term borrowings and long-term debt, see Note 9 and
Note 10, respectively.
In October 2017, Altria filed a registration statement on Form S-3 with the SEC,
under which Altria may offer debt securities or warrants to purchase debt
securities from time to time over a three-year period from the date of filing.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria has no off-balance sheet arrangements, including special purpose
entities, other than guarantees and contractual obligations that are discussed
below.
Guarantees and Other Similar Matters - As discussed in Note 19, Altria and
certain of its subsidiaries had unused letters of credit obtained in the
ordinary course of business, guarantees (including third-party guarantees) and a
redeemable noncontrolling interest outstanding at December 31, 2019. From time
to time, subsidiaries of Altria also issue lines of credit to affiliated
entities. In addition, as discussed in Note 20, PM USA has issued guarantees
relating to Altria's obligations under its outstanding debt securities,
borrowings under its Credit Agreement and amounts outstanding under
its commercial paper program. These items have not had, and are not expected to
have, a significant impact on Altria's liquidity. For further discussion
regarding Altria's liquidity, see the Debt and Liquidity section above.


                                       41

--------------------------------------------------------------------------------

Table of Contents

Aggregate Contractual Obligations - The following table summarizes Altria's contractual obligations at December 31, 2019:

                                                                 Payments Due
                                                                                                     2025 and
(in millions)                       Total          2020       2021 - 2022       2023 - 2024        Thereafter
Long-term debt (1)              $  28,275     $   1,000     $       4,400     $       4,152     $      18,723
Interest on borrowings (2)         17,923         1,194             2,182             1,909            12,638
Operating leases (3)                  196            53                72                28                43
Purchase obligations: (4)
Inventory and production costs      4,038         1,039             1,343               761               895
Other                                 886           585               247                54                 -
                                    4,924         1,624             1,590               815               895
Other long-term liabilities (5)     1,944            81               180               198             1,485
                                $  53,262     $   3,952     $       8,424     $       7,102     $      33,784


(1) Amounts represent the expected cash payments of Altria's long-term debt.
(2) Amounts represent the expected cash payments of Altria's interest expense on
its long-term debt. Interest on Altria's long-term debt, which was all
fixed-rate debt at December 31, 2019, is presented using the stated coupon
interest rate. Amounts exclude the amortization of debt discounts and debt
issuance costs, the amortization of loan fees and fees for lines of credit that
would be included in interest and other debt expense, net in the consolidated
statements of earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable
operating leases.
(4) Purchase obligations for inventory and production costs (such as raw
materials, indirect materials and services, contract manufacturing, packaging,
storage and distribution) are commitments for projected needs to be used in the
normal course of business. Other purchase obligations include commitments for
marketing, capital expenditures, information technology and professional
services. Arrangements are considered purchase obligations if a contract
specifies all significant terms, including fixed or minimum quantities to be
purchased, a pricing structure and approximate timing of the transaction. Most
arrangements are cancelable without a significant penalty, and with short notice
(usually 30 days). Any amounts reflected on the consolidated balance sheet as
accounts payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities primarily consist of accrued postretirement
health care costs and certain accrued pension costs. The amounts included in the
table above for accrued pension costs consist of the actuarially determined
anticipated minimum funding requirements for each year from 2020 through 2024.
Contributions beyond 2024 cannot be reasonably estimated and, therefore, are not
included in the table above. In addition, the following long-term liabilities
included on the consolidated balance sheet are excluded from the table above:
accrued postemployment costs, income taxes and tax contingencies, and other
accruals. Altria is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee payments, and payments for
FDA user fees, as discussed below and in Note 19, are excluded from the table
above, as the payments are subject to adjustment for several factors, including
inflation, operating income, market share and industry volume. Litigation escrow
deposits, as discussed below and in Note 19, are also excluded from the table
above since these deposits will be returned to PM USA should it prevail on
appeal.
Payments Under State Settlement Agreements and FDA Regulation - As discussed
previously and in Note 19, PM USA and Nat Sherman have entered into State
Settlement Agreements with the states and territories of the United States that
call for certain payments. In addition, PM USA, Middleton, Nat Sherman and USSTC
are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA.
Altria's subsidiaries recorded approximately $4.5 billion, $4.5 billion and $4.7
billion of charges to cost of sales for each of the years ended December 31,
2019, 2018 and 2017, respectively, in connection with the State Settlement
Agreements and FDA user fees. For further discussion of the resolutions of
certain disputes with states and territories related to the NPM Adjustment
provision under the MSA, see Health Care Cost Recovery Litigation - NPM
Adjustment Disputes in Note 19.
Based on current agreements, 2019 market share and estimated annual industry
volume decline rates, the estimated amounts that Altria's subsidiaries may
charge to cost of sales for payments related to State Settlement Agreements and
FDA user fees approximate $4.5 billion in 2020 and $4.4 billion each year
thereafter. These amounts exclude the potential impact of the NPM Adjustment
provision applicable under the MSA and the revised NPM Adjustment provisions
applicable under the resolutions of the NPM Adjustment disputes.
The estimated amounts due under the State Settlement Agreements charged to cost
of sales in each year would generally be paid in the following year. The amounts
charged to cost of sales for FDA user fees are generally paid in the quarter in
which the fees are incurred. As previously stated, the payments due under the
terms of the State Settlement Agreements and FDA user fees are subject to
adjustment for several factors, including volume, operating income, inflation
and certain contingent events and, in general, are allocated based on each
manufacturer's market share. The future payment amounts discussed above are
estimates, and actual payment amounts will differ to the extent underlying
assumptions differ from actual future results.
Litigation-Related Deposits and Payments - With respect to certain adverse
verdicts currently on appeal, to obtain stays of judgments pending appeals, as
of December 31, 2019, PM USA had posted appeal bonds totaling $43 million, which
have been collateralized with restricted cash that are included in assets on the
consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse outcome or
settlement of litigation could have a material adverse effect on the financial
position, cash flows or results of operations of PM USA, UST or Altria in a
particular fiscal quarter or fiscal year, as more fully


                                       42

--------------------------------------------------------------------------------

Table of Contents

disclosed in Note 19, Item 3 and Item 1A, management expects cash flow from
operations, together with Altria's access to capital markets, to provide
sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 12. Stock Plans to the consolidated financial statements in
Item 8, during 2019 Altria granted an aggregate of 0.7 million restricted stock
units and 0.2 million performance stock units to eligible employees.
At December 31, 2019, the number of shares to be issued upon vesting of
restricted stock units and performance stock units was not significant.
Dividends paid in 2019 and 2018 were approximately $6.1 billion and $5.4
billion, respectively, an increase of 12.1%, reflecting a higher dividend rate,
partially offset by fewer shares outstanding as a result of shares repurchased
by Altria under its share repurchase programs.
During the third quarter of 2019, the Board of Directors approved a 5% increase
in the quarterly dividend rate to $0.84 per share of Altria common stock versus
the previous rate of $0.80 per share. Altria expects to continue to maintain a
dividend payout ratio target of approximately 80% of its adjusted diluted EPS.
The current annualized dividend rate is $3.36 per share. Future dividend
payments remain subject to the discretion of the Board of Directors.
For a discussion of Altria's share repurchase programs, see Note 11. Capital
Stock to the consolidated financial statements in Item 8 and Part II, Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities of this Annual Report on Form 10-K.
New Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of issued accounting guidance applicable to, but not
yet adopted by, Altria.
Contingencies
See Note 19 and Item 3 for a discussion of contingencies.

© Edgar Online, source Glimpses