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ALTRIA GROUP, INC.

(MO)
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ALTRIA GROUP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/28/2022 | 07:14am EDT

When used in this Quarterly Report on Form 10-Q ("Form 10-Q"), the terms "Altria," "we," "us" and "our" refer to either (i) Altria Group, Inc. and its consolidated subsidiaries or (ii) Altria Group, Inc. only and not its consolidated subsidiaries, as appropriate in the context.


In this Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") section, we refer to the following "adjusted" financial
measures: adjusted operating companies income (loss) ("OCI"); adjusted OCI
margins; adjusted net earnings attributable to Altria; adjusted diluted earnings
per share attributable to Altria; and adjusted effective tax rates. These
adjusted financial measures are not required by, or calculated in accordance
with, United States generally accepted accounting principles ("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 GAAP. For a further
description of these non-GAAP financial measures, see the Non-GAAP Financial
Measures section below.

Executive Summary

Our Business

We have a leading portfolio of tobacco products for U.S. tobacco consumers age
21+. Our Vision by 2030 is to responsibly lead the transition of adult smokers
to a smoke-free future ("Vision"). We are Moving Beyond Smoking™, leading the
way in moving adult smokers away from cigarettes by taking action to transition
millions to potentially less harmful choices - believing it is a substantial
opportunity for adult tobacco consumers, our businesses and society.

Our wholly owned subsidiaries include leading manufacturers of both combustible
and smoke-free products. In combustibles, we own Philip Morris USA Inc. ("PM
USA"), the most profitable U.S. cigarette manufacturer, and John Middleton Co.
("Middleton"), a leading U.S. cigar manufacturer.

Our smoke-free portfolio includes ownership of U.S. Smokeless Tobacco Company
LLC ("USSTC"), the leading global moist smokeless tobacco ("MST") manufacturer,
and Helix Innovations LLC ("Helix"), a rapidly growing manufacturer of oral
nicotine pouches. We also enhance our smoke-free product portfolio with
exclusive U.S. commercialization rights to the IQOS Tobacco Heating System and
Marlboro HeatSticks, and an equity investment in JUUL Labs, Inc. ("JUUL").

In addition, we own equity investments in Anheuser-Busch InBev SA/NV ("ABI"),
the world's largest brewer, and Cronos Group Inc. ("Cronos"), a leading Canadian
cannabinoid company.

The brand portfolios of our tobacco operating companies include Marlboro, Black & Mild, Copenhagen, Skoal and on!. Trademarks and service marks related to Altria referenced in this Form 10-Q are the property of Altria or our subsidiaries or are used with permission.

Trends and Developments


In this MD&A section, we discuss factors that have impacted our business as of
the date of this Form 10-Q. In addition, we are aware of certain trends and
developments that could, individually or in the aggregate, have a material
impact on our business, including the value of our equity investments, in the
future. In this Trends and Developments section, we focus on the potential

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effects on our business resulting from the recent rise in the rate of inflation,
the continuing effects of the COVID-19 pandemic, the Russian invasion of Ukraine
and recent regulatory actions.

We continue to monitor the evolving macroeconomic and geopolitical landscape.
High rates of inflation continued in the second quarter of 2022, driven by
increasing global energy, commodity and food prices, which were further
exacerbated by other factors, including supply and demand imbalances, labor
shortages and the Russian invasion of Ukraine. High inflation, high gas prices,
rising interest rates, the COVID-19 pandemic and the end of federal government
stimulus could impact our business by negatively impacting adult tobacco
consumers' disposable income and future purchasing behavior. We expect
fluctuations in discount product share for cigarettes and MST products as price
sensitive adult tobacco consumers react to their economic conditions. We
continue to monitor the effect of these dynamics on adult tobacco consumers and
their purchasing behaviors, including overall tobacco product expenditures, mix
between premium and discount brand purchases and adoption of smoke-free
products. Increases in inflation also have a direct and adverse impact on our
Master Settlement Agreement ("MSA") expense and other direct and indirect costs.
We expect inflation to continue at increased levels in 2022, and the extent of
any effects on adult tobacco consumer purchasing behavior depends in part on the
magnitude and duration of such increase. See Operating Results by Business
Segment - Tobacco Space - Business Environment for additional information on
evolving trends in the tobacco industry and the impacts to our business from
increased inflation.

Volatility in domestic and global economies and disruptions in the supply and
distribution chains continued in the second quarter of 2022, resulting from
several factors, including the on-going impacts of the COVID-19 pandemic and the
Russian invasion of Ukraine. While our operating companies focus on the
manufacture and sale of tobacco products in the United States and have little
direct exposure to Russia and Ukraine, we have experienced negative effects on
the cost and availability of certain raw materials and component parts for our
products. We continue to work to mitigate the potential negative impacts of
these macroeconomic and geopolitical dynamics on our businesses through, among
other actions, proactive engagement with current and potential suppliers and
distributors, the development of alternative sourcing strategies, long-term
supply contracts, evolution of our safety, health and environmental protocols at
our facilities and prudent oversight of our liquidity. See Operating Results by
Business Segment - Tobacco Space - Business Environment for additional
information on the supply chain and other impacts of the macroeconomic and
geopolitical environment on our business.

Tobacco companies are subject to broad and evolving regulatory and legislative
frameworks that could have a material impact on our business. For example, the
U.S. Food and Drug Administration ("FDA") has stated its intention to issue
proposed product standards regarding menthol in cigarettes and characterizing
flavors in cigars in the near future and, in June 2022, the Biden Administration
published plans for future potential regulatory actions that include the FDA's
plans to develop a proposed product standard that would establish a maximum
nicotine level for cigarettes and certain other combusted tobacco products. See
Operating Results by Business Segment - Tobacco Space - Business Environment for
additional information on the nature, scope and potential impacts of regulatory
and legislative developments.

In June 2022, the FDA issued marketing denial orders ("MDOs") to JUUL ordering
all of JUUL's products currently marketed in the United States off the market.
In July 2022, the FDA administratively stayed the MDOs on a temporary basis,
citing its determination that there are scientific issues unique to the JUUL
pre-market tobacco applications ("PMTA") that warrant additional agency review.
This administrative stay temporarily suspends the MDOs and JUUL's products
currently remain on the market. See Operating Results by Business Segment -
Tobacco Space - Business Environment - FSPTCA and FDA Regulation - FDA
Regulatory Actions - Electronic Nicotine Delivery System Products for additional
information regarding the MDOs. We considered, among other factors, the impact
of the FDA's actions in conducting our quarterly quantitative valuation of our
investment in JUUL at June 30, 2022. As a result, we recorded a non-cash,
pre-tax unrealized loss of $1.2 billion for the three months ended June 30,
2022. We will continue to monitor developments with the FDA's additional review,
among other factors, in our quarterly quantitative valuations of JUUL.

ABI's business also continues to be impacted by macroeconomic and geopolitical
factors. ABI has been impacted by supply chain constraints across certain
markets, foreign exchange rate fluctuations, inflation and commodity cost
headwinds. ABI has a joint venture with exposure to Russia and Ukraine, which it
fully impaired in the first quarter of 2022 and has announced plans to sell.
Additionally, the macroeconomic and geopolitical factors have contributed to
significant changes in certain foreign exchange rates, including the Euro to
U.S. dollar exchange rate, resulting in the fair value of our investment in ABI
declining below its carrying value by $1.1 billion at June 30, 2022, which we
concluded was temporary.

See Note 3. Investments in Equity Securities to our condensed consolidated financial statements in Part I, Item 1. Financial Statements of this Form 10-Q ("Item 1") and Critical Accounting Policies and Estimates for additional information on our equity investments.

We continue to monitor the increased risk of cyber attacks as a result of the Russian invasion of Ukraine. We have implemented heightened cybersecurity monitoring of our systems and those of our critical suppliers designed to address the evolving threat landscape.

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While the reduction in the fair value of our equity investment in JUUL has had a
material adverse effect on our financial results, to date, we have not
experienced any material adverse effects on our business or our ability to
achieve our Vision as a result of the trends and developments discussed above.
As the trends and developments discussed above evolve and new ones emerge, we
will continue to evaluate the potential impacts on our business and our Vision.

Consolidated Results of Operations for the Six Months Ended June 30, 2022

The changes in net earnings attributable to Altria and diluted earnings per share ("EPS") attributable to Altria for the six months ended June 30, 2022, from the six months ended June 30, 2021, were due primarily to the following:


(in millions, except per share data)                                  Net Earnings           Diluted EPS
For the six months ended June 30, 2021                               $      3,573          $       1.93
2021 NPM Adjustment Items                                                     (24)                (0.01)

2021 Asset impairment, exit, implementation, acquisition and disposition-related costs

                                                      43                  0.02
2021 Tobacco and health and certain other litigation items                     33                  0.02
2021 JUUL changes in fair value                                               100                  0.05
2021 ABI-related special items                                                (71)                (0.04)
2021 Cronos-related special items                                             116                  0.06
2021 Loss on early extinguishment of debt                                     496                  0.27
2021 Income tax items                                                           3                     -
Subtotal 2021 special items                                                   696                  0.37
2022 NPM Adjustment Items                                                      45                  0.02

2022 Asset impairment, exit, implementation, acquisition and disposition-related costs

                                                      (7)                    -
2022 Tobacco and health and certain other litigation items                    (44)                (0.02)
2022 JUUL changes in fair value                                            (1,255)                (0.70)
2022 ABI-related special items                                                (42)                (0.02)
2022 Cronos-related special items                                            (167)                (0.09)
2022 Income tax items                                                          (9)                    -
Subtotal 2022 special items                                                (1,479)                (0.81)
Fewer shares outstanding                                                        -                  0.05
Change in tax rate                                                             (1)                    -
Operations                                                                     61                  0.03
For the six months ended June 30, 2022                               $      

2,850 $ 1.57


2022 Reported Net Earnings                                           $      2,850          $       1.57
2021 Reported Net Earnings                                           $      3,573          $       1.93
% Change                                                                    (20.2) %              (18.7) %

2022 Adjusted Net Earnings and Adjusted Diluted EPS                  $      4,329          $       2.38
2021 Adjusted Net Earnings and Adjusted Diluted EPS                  $      4,269          $       2.30
% Change                                                                      1.4  %                3.5  %


For a discussion of special items and other business drivers affecting the
comparability of statements of earnings amounts and reconciliations of adjusted
earnings attributable to Altria and adjusted diluted EPS attributable to Altria,
see the Consolidated Operating Results section below.

?Fewer Shares Outstanding: Fewer shares outstanding were due to shares we repurchased under our share repurchase program.

?Operations: The increase of $61 million in operations (which excludes the impact of special items shown in the table above) was due primarily to higher OCI and lower interest and other debt expense, net.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.

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Consolidated Results of Operations for the Three Months Ended June 30, 2022

The changes in net earnings attributable to Altria and diluted EPS attributable
to Altria for the three months ended June 30, 2022, from the three months ended
June 30, 2021, were due primarily to the following:

(in millions, except per share data)                                  Net Earnings           Diluted EPS
For the three months ended June 30, 2021                             $      

2,149 $ 1.16

2021 Asset impairment, exit, implementation, acquisition and disposition-related costs

                                                       6                     -
2021 Tobacco and health and certain other litigation items                      7                     -
2021 JUUL changes in fair value                                              (100)                (0.05)
2021 ABI-related special items                                                 29                  0.02
2021 Cronos-related special items                                             186                  0.10
2021 Income tax items                                                           9                     -
Subtotal 2021 special items                                                   137                  0.07

2022 Asset impairment, exit, implementation, acquisition and disposition-related costs

                                                      (2)                    -
2022 Tobacco and health and certain other litigation items                    (35)                (0.02)
2022 JUUL changes in fair value                                            (1,155)                (0.64)
2022 ABI-related special items                                                (89)                (0.05)
2022 Cronos-related special items                                            (106)                (0.06)
2022 Income tax items                                                          (4)                    -
Subtotal 2022 special items                                                (1,391)                (0.77)
Fewer shares outstanding                                                        -                  0.03
Change in tax rate                                                              3                     -
Operations                                                                     (7)                    -
For the three months ended June 30, 2022                             $      

891 $ 0.49


2022 Reported Net Earnings                                           $        891          $       0.49
2021 Reported Net Earnings                                           $      2,149          $       1.16
% Change                                                                    (58.5) %              (57.8) %

2022 Adjusted Net Earnings and Adjusted Diluted EPS                  $      2,282          $       1.26
2021 Adjusted Net Earnings and Adjusted Diluted EPS                  $      2,286          $       1.23
% Change                                                                     (0.2) %                2.4  %


For a discussion of special items and other business drivers affecting the
comparability of statements of earnings amounts and reconciliations of adjusted
earnings attributable to Altria and adjusted diluted EPS attributable to Altria,
see the Consolidated Operating Results section below.

?Fewer Shares Outstanding: Fewer shares outstanding were due to shares we repurchased under our share repurchase program.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.

2022 Forecasted Results


We expect our 2022 full-year adjusted diluted EPS to be in a range of $4.79 to
$4.93, representing a growth rate of 4% to 7% over our 2021 full-year adjusted
diluted EPS of $4.61, as shown in the first table below. While the 2022
full-year adjusted diluted EPS guidance accounts for a range of scenarios, the
external environment remains dynamic. We will continue to monitor conditions
related to (i) the economy, including the impact of increased inflation, rising
interest rates and global supply chain disruptions, (ii) the impact of current
and future COVID-19 variants and mitigation strategies, (iii) adult tobacco
consumer dynamics, including tobacco usage occasions, available disposable
income, purchasing patterns and adoption of smoke-free products, (iv) regulatory
and legislative developments and (v) the impacts of the Russian invasion of
Ukraine.

Our 2022 full-year adjusted diluted EPS guidance range includes planned
investments in support of our Vision, such as (i) enhancement of our digital
consumer engagement system, (ii) increased smoke-free product research,
development and regulatory preparation expenses and (iii) marketplace activities
in support of our smoke-free products. The guidance range also includes
anticipated inflationary increases in MSA expenses and direct and indirect
materials costs and our current expectation that PM USA will not have access to
the IQOS system in 2022.

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               Reconciliation of 2021 Reported Diluted EPS to 2021 Adjusted Diluted EPS
2021 Reported diluted EPS                                                                $      1.34
NPM Adjustment Items                                                                           (0.03)

Asset impairment, exit, implementation, acquisition and disposition-related costs

               0.05
Tobacco and health and certain other litigation items                                           0.07
ABI-related special items                                                                       2.66
Cronos-related special items                                                                    0.25
Loss on early extinguishment of debt                                                            0.27
2021 Adjusted diluted EPS                                                                $      4.61

The following (income) expense items are excluded from our 2022 forecasted adjusted diluted EPS growth rate:

(Income) Expense Excluded from 2022 Forecasted Adjusted Diluted EPS NPM Adjustment Items

                                           $ (0.02)

Tobacco and health and certain other litigation items             0.02
JUUL changes in fair value                                        0.70
ABI-related special items                                         0.02
Cronos-related special items                                      0.09

                                                               $  0.81

For a discussion of certain income and expense items excluded from the forecasted results above, see the Consolidated Operating Results section below.


Our full-year adjusted diluted EPS forecast excludes the impact of certain
income and expense items, including those items noted in the Non-GAAP Financial
Measures section below, that our management believes are not part of underlying
operations. Our management cannot estimate on a forward-looking basis the impact
of these items on our reported diluted EPS because these items, which could be
significant, may be unusual or infrequent, are difficult to predict and may be
highly variable. As a result, we do not provide a corresponding GAAP measure
for, or reconciliation to, our adjusted diluted EPS forecast.

Non-GAAP Financial Measures


While we report our financial results in accordance with GAAP, our management
reviews OCI, which is defined as operating income before general corporate
expenses and amortization of intangibles, to evaluate the performance of, and
allocate resources to, our segments. Our management also reviews certain
financial results, including OCI, OCI margins, net earnings attributable to
Altria and diluted EPS, on an adjusted basis, which excludes certain income and
expense items that our management believes are not part of underlying
operations. These items may include, for example, loss on early extinguishment
of debt, restructuring charges, asset impairment charges, acquisition-related
and disposition-related costs, equity investment-related special items
(including any changes in fair value of our equity investment recorded using the
fair value option and any changes in the fair value of related warrants and
preemptive rights), certain income tax items, charges associated with tobacco
and health and certain other litigation items, and resolutions of certain
non-participating manufacturer ("NPM") adjustment disputes under the MSA (such
dispute resolutions are referred to as "NPM Adjustment Items"). Our management
does not view any of these special items to be part of our 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. Our management
also reviews income tax rates on an adjusted basis. Our adjusted effective tax
rate may exclude certain income tax items from our reported effective tax rate.

Our 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. Our management uses
adjusted financial measures and regularly provides these to our chief operating
decision maker ("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 required by, or calculated in accordance with 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 GAAP. Except as noted in the 2022 Forecasted Results
section above, when we provide a non-GAAP measure in this Form 10-Q, we also
provide a reconciliation of that non-GAAP financial measure to the most directly
comparable GAAP financial measure.
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Discussion and Analysis

Critical Accounting Policies and Estimates

Investment in ABI


At June 30, 2022, our equity investment in ABI consisted of 185 million
restricted shares of ABI (the "Restricted Shares") and 12 million ordinary
shares of ABI. The fair value of our equity investment in ABI is based on: (i)
unadjusted quoted prices in active markets for ABI's ordinary shares and was
classified in Level 1 of the fair value hierarchy and (ii) observable inputs
other than Level 1 prices, such as quoted prices for similar assets for the
Restricted Shares, and was classified in Level 2 of the fair value hierarchy. We
can convert the Restricted Shares to ordinary shares at our discretion.
Therefore, the fair value of each Restricted Share is based on the value of an
ordinary share.

The fair value of our equity investment in ABI at December 31, 2021 and March
31, 2022 was $11.9 billion for both periods, which exceeded its carrying value
of $11.1 billion and $11.3 billion by approximately 7% and 5%, respectively. In
the second quarter of 2022, the fair value of our equity investment in ABI
declined and at June 30, 2022 was below its carrying value by $1.1 billion or
approximately 9%. Accounting guidance requires the evaluation of the following
factors when determining if the decline in fair value is other than temporary:
(i) the duration and magnitude of the fair value decline; (ii) the financial
condition and near-term prospects of the investee; and (iii) the investor's
intent and ability to hold its equity investment until full recovery to its
carrying value in the near-term. In preparing our financial statements for the
period ended June 30, 2022, we evaluated these factors, including the
macroeconomic and geopolitical factors that have resulted in significant changes
in certain foreign exchange rates. We determined that the primary driver of the
decline in fair value below the carrying value, which began during the second
quarter of 2022, was the significant changes in foreign exchange rates,
including the Euro to U.S. dollar exchange rate, and not a decline in ABI's
Euro-based share price. From the time that we recorded the non-cash pre-tax
impairment charge of $6.2 billion in the third quarter of 2021, ABI's Euro-based
share price has increased 5% as of June 30, 2022. Additionally, ABI has
delivered consistent business and earnings performance over the past several
quarters demonstrating its ability to continue to execute its strategies and
navigate challenges. We concluded at June 30, 2022 that the decline in fair
value of our equity investment in ABI below its carrying value was temporary
and, therefore, no impairment was recorded. We continue to have confidence in
ABI's (i) long-term strategies, (ii) premium global brands, (iii) experienced
management team and (iv) capability to successfully navigate its near-term
challenges. At July 25, 2022, the fair value of our equity investment in ABI was
below its carrying value by $0.9 billion or approximately 8%.

We will continue to monitor our equity investment in ABI. If we were to conclude
that the decline in fair value was other than temporary, we would determine and
recognize, in the period identified, the impairment of our equity investment,
which could result in a material adverse effect on our consolidated financial
position or earnings.

Investment in JUUL

At June 30, 2022, the estimated fair value of our investment in JUUL was $450 million, as compared with $1.6 billion at March 31, 2022.


In June 2022, the FDA issued MDOs to JUUL ordering all of JUUL's products
currently marketed in the United States off the market. In July 2022, the FDA
administratively stayed the MDOs on a temporary basis, citing its determination
that there are scientific issues unique to the JUUL PMTAs that warrant
additional review. This administrative stay temporarily suspends the MDOs and
JUUL's products currently remain on the market.

The decrease in the estimated fair value of our investment in JUUL at June 30,
2022 was primarily driven by (i) a decrease in the likelihood of a favorable
outcome from the FDA for JUUL's products, which are currently marketed in the
United States that have received MDOs and are now under additional
administrative review, (ii) a decrease in the likelihood of JUUL maintaining
adequate liquidity to fund projected cash needs, which could result in JUUL
seeking protection under bankruptcy or other insolvency law, and (iii)
projections of higher operating expenses resulting in lower long-term operating
margins.

We use an income approach to estimate the fair value of our investment in JUUL.
The income approach reflects the discounting of future cash flows for the United
States and international markets at a rate of return that incorporates the
risk-free rate for the use of those funds, the expected rate of inflation and
the risks associated with realizing future cash flows.

In determining the fair value of our investment in JUUL in the second quarter of
2022, we made certain judgments, estimates and assumptions, the most significant
of which were likelihood of certain potential regulatory and liquidity outcomes,
sales volume, operating margins, discount rates and perpetual growth rates. All
significant inputs used in the valuation are classified in Level 3 of the fair
value hierarchy. Additionally, in determining these significant assumptions, we
made judgments regarding the: (i) likelihood of certain potential regulatory
actions impacting the e-vapor category and specifically whether the FDA will
ultimately authorize JUUL's products, which have received MDOs and are now under
additional administrative review; (ii) likelihood of JUUL maintaining adequate
liquidity to fund projected cash needs, the absence of which could result in
JUUL seeking protection under bankruptcy or other insolvency law; (iii) risk
created by the number and types of legal cases

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pending against JUUL; (iv) expectations for the future state of the e-vapor
category, including competitive dynamics; and (v) timing of international
expansion plans. Due to these uncertainties, our future cash flow projections of
JUUL are based on a range of scenarios that consider certain potential
regulatory, liquidity and market outcomes.

Although our discounted cash flow analyses were based on assumptions that our
management considered reasonable and were based on the best available
information at the time that the analyses were developed, there is significant
judgment used in determining future cash flows. If the following factors, in
isolation, significantly deviate from current expectations, we believe that they
have the potential to materially impact our significant assumptions of the
likelihood of certain potential regulatory and liquidity outcomes, sales volume,
operating margins, discount rates and perpetual growth rates, thus potentially
materially decrease our valuation of our investment in JUUL:

?unfavorable regulatory and legislative developments at the international,
federal, state and local levels such as (i) final determination by the FDA on
the JUUL MDOs, which are now under additional administrative review (which could
result in the removal of products from the U.S. market) or (ii) FDA denying
future tobacco product applications for JUUL's flavored e-vapor products, which
are currently not permitted in the market without FDA authorization;

?JUUL's inability to maintain adequate liquidity necessary to fund projected
cash needs, the absence of which could result in JUUL seeking protection under
bankruptcy or other insolvency law;

?a successful challenge by the U.S. Federal Trade Commission ("FTC") in its administrative complaint against Altria and JUUL, discussed further in Note 11. Contingencies to our condensed consolidated financial statements in Item 1 ("Note 11");

?unfavorable financial and market performance, including substantial changes in competitive dynamics; and

?delay in timing of international expansion plans.


If the following factors, in isolation, significantly deviate from current
expectations, we believe that they have the potential to materially impact our
significant assumptions of the likelihood of certain potential regulatory and
liquidity outcomes, sales volume, operating margins, discount rates and
perpetual growth rates, thus potentially materially increase our valuation of
our investment in JUUL:

?favorable regulatory and legislative developments at the international,
federal, state and local levels such as FDA authorization of (i) existing JUUL
products that have received MDOs from the FDA and that are now under additional
administrative review or (ii) future tobacco product applications for JUUL's
flavored e-vapor products, which are currently not permitted in the market
without FDA authorization;

?JUUL's ability to maintain adequate financing to fund projected cash needs;

?favorable developments related to litigation; and

?favorable financial and market performance, including substantial changes in competitive dynamics.


While our management believes that the recorded value of our investment in JUUL
at June 30, 2022 represents our best estimate of the fair value of the
investment, 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. Additionally, the value of our investment in JUUL could be
significantly impacted by changes in the discount rate, which could be caused by
numerous factors, including changes in market inputs, as well as risks specific
to JUUL, including the outcome of the FDA's additional review of the JUUL PMTAs
that have received MDOs and favorable or unfavorable developments related to
JUUL's liquidity and litigation environment.

Investment in Cronos


The fair value of our equity method investment in Cronos is based on unadjusted
quoted prices in active markets for Cronos's common shares and was classified in
Level 1 of the fair value hierarchy. The fair value and carrying value of our
equity method investment in Cronos at December 31, 2021 was $617 million.

At March 31, 2022, the fair value of our equity method investment in Cronos
exceeded its carrying value by $55 million or approximately 10%. In the second
quarter of 2022, the fair value of our equity method investment in Cronos
declined below its carrying value and had not recovered as of June 30, 2022.
Accounting guidance requires the evaluation of the following factors when
determining if the decline in fair value is other than temporary: (i) the
duration and magnitude of the fair value decline; (ii) the financial condition
and near-term prospects of the investee; and (iii) the investor's intent and
ability to hold its equity method investment until full recovery to its carrying
value in the near-term. In preparing our financial statements for the period
ended June 30, 2022, we evaluated these factors and determined that there was
not sufficient evidence to conclude that the impairment was temporary. As a
result, we recorded a non-cash, pre-tax impairment charge of $107 million for
the six and three months ended June 30, 2022, which was recorded in (income)
losses from equity investments in our condensed consolidated statement of
earnings. The impairment charge reflects the difference between the fair value
of our equity method investment in Cronos using Cronos's share price and the
Canadian dollar to U.S. dollar exchange rate at June 30, 2022 and the

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carrying value of our equity method investment in Cronos at June 30, 2022. At
June 30, 2022, prior to recording the impairment charge, the fair value of our
equity method investment in Cronos was less than its carrying value by
approximately 20%. After recording the impairment charge, the fair value and
carrying value of our equity method investment in Cronos at June 30, 2022 were
both $437 million. We will continue to assess the fair value of our equity
method investment in Cronos to determine if any decline in fair value below its
carrying value is other than temporary.

For further discussion of our investments in ABI, JUUL and Cronos, see Note 3. Investments in Equity Securities to our condensed consolidated financial statements in Item 1 ("Note 3").

© Edgar Online, source Glimpses

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