Description of the Company When used in this Quarterly Report on Form 10-Q ("Form 10-Q"), the terms "Altria ," "we" and "our" refer toAltria Group, Inc. and its subsidiaries, unless the context requires otherwise. For a description ofAltria , see Background in Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Part I, Item 1. Financial Statements of this Form 10-Q ("Item 1"). For a detailed description ofAltria 's reportable segments, see Note 8. Segment Reporting to the condensed consolidated financial statements in Item 1 ("Note 8"). Executive Summary In this Management's Discussion and Analysis of Financial Condition and Results of Operations section,Altria refers to the following "adjusted" financial measures: adjusted operating companies income (loss) ("OCI"); adjusted OCI margins; adjusted net earnings attributable toAltria ; adjusted diluted earnings per share ("EPS") attributable toAltria ; 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. Except as noted in the 2021 Forecasted Results section below, whenAltria provides a non-GAAP measure in this Form 10-Q, it also provides a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure. OCI for the segments is defined as operating income before general corporate expenses and amortization of intangibles. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below. Ste. Michelle Transaction OnJuly 8, 2021 ,UST LLC ("UST") entered into a Share Purchase Agreement pursuant to which UST agreed to sell its subsidiary,International Wine & Spirits Ltd. ("IWS"), which includesSte. Michelle Wine Estates Ltd. ("Ste. Michelle"), in the Ste. Michelle Transaction (as defined in Wine Segment Business Environment). For further discussion, see Note 13. Subsequent Event to the condensed consolidated financial statements in Item 1 ("Note 13"). COVID-19 Pandemic The COVID-19 pandemic has led to adverse impacts on theU.S. and global economies and continues to create economic uncertainty even as COVID-19 vaccines have been and continue to be administered in 2021 and theU.S. and global economies have begun to operate with reduced restrictions on consumer movements and business operations. Although much uncertainty still surrounds the pandemic (including its duration, the impact of COVID-19 variants and ultimate overall impact onU.S and global economies,Altria and its subsidiaries' operations and those of its investees),Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic and continues to carefully evaluate potential outcomes and work to mitigate risks. Specifically,Altria remains focused on any potential impact to its liquidity, operations, supply and distribution chains and on economic conditions. In terms ofAltria 's liquidity, despite some volatility in commercial paper markets in 2020,Altria has not experienced a material adverse impact to its liquidity. As with so many other companies throughout theU.S. and globally,Altria 's operations have been affected by the COVID-19 pandemic. To date,Altria believes its tobacco businesses have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but continues to monitor these factors.Altria has implemented remote working for many employees and aligned with the social distancing protocols recommended by public health authorities for employees working atAltria facilities.Altria continues to believe that remote working due to the COVID-19 pandemic has had minimal impact on productivity. Also,Altria 's critical information technology systems have remained operational. AlthoughAltria 's tobacco businesses previously suspended operations temporarily at several of their manufacturing facilities inMarch 2020 , the businesses resumed operations at those facilities under enhanced safety protocols inApril 2020 and all manufacturing facilities are currently operational under enhanced safety protocols.Altria continues to monitor the risks associated with facility disruptions and workforce availability as a result of uncertainty related to the COVID-19 pandemic.Altria 's suppliers and those within its distribution chain are also subject to potential facility closures, remote working protocols and labor shortages. To date,Altria has not experienced any material disruptions to its supply chains or distribution systems, but is continuing to monitor these factors. The majority of retail stores in whichAltria 's tobacco products are sold, including convenience stores, were deemed to be essential businesses by authorities and remained open.Altria continues to monitor the risk that one or more suppliers, distributors or any other entities within its supply and distribution chain closes temporarily or permanently. 38
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Table of ContentsAltria believes that the COVID-19 pandemic has altered adult tobacco consumer behaviors and purchasing patterns. Many adult tobacco consumers have adopted stay-at-home practices, whichAltria believes have contributed to more tobacco usage occasions compared to pre-pandemic levels.Altria also believes that many adult tobacco consumers have had higher tobacco discretionary spending during the COVID-19 pandemic due to a variety of factors, including federal government stimulus payments and enhanced unemployment benefit payments, and lower non-tobacco discretionary spend due to their stay-at-home practices.Altria also estimates that, due to the COVID-19 pandemic, the number of adult tobacco consumers trips to the store to purchase tobacco products has decreased versus pre-pandemic levels, but the tobacco expenditures per trip have increased. AlthoughAltria 's tobacco businesses have not experienced a material adverse impact to date by the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic (including changes in COVID-19-related restrictions and guidelines) may impact adult tobacco consumers in the future.Altria continues to monitor the macroeconomic risks of the COVID-19 pandemic (including risks associated with the timing and extent of vaccine administration and the impact of COVID-19 variants), and their effect on adult tobacco consumers, including stay-at-home practices and disposable income, which may be further impacted by unemployment rates, fiscal stimulus and inflation.Altria also continues to monitor adult tobacco consumers' purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of smoke-free products.Altria has experienced adverse impacts to its alcohol assets due to the COVID-19 pandemic. In the wine business in 2020, Ste. Michelle's direct-to-consumer sales and on-premise wine sales in restaurants, bars and hospitality venues and on cruise lines were adversely impacted by disruptions arising from the COVID-19 pandemic. The adverse impacts in 2020 contributed to Ste. Michelle recording pre-tax inventory-related charges of$392 million in the first quarter of 2020 in connection with its strategic reset of the wine business. In the first half of 2021, Ste. Michelle's operations continued to be adversely impacted by disruptions arising from the COVID-19 pandemic. However, as theU.S. Center for Disease Control and Prevention relaxed COVID-19 guidelines and local government ordinances eased, Ste. Michelle restarted certain on-premise events and its on-premise wine sales improved compared to prior quarters. Ste. Michelle continues to monitor the impact of the COVID-19 pandemic associated risks to its business, results of operations, cash flows and financial position.Anheuser-Busch InBev SA /NV ("ABI") continues to be impacted by the COVID-19 pandemic. In 2020, these impacts included: (i) a 50% reduction to its final 2019 dividend and a decision to forgo its interim 2020 dividend; (ii) the withdrawal of its earnings guidance for 2020 due to uncertainty and volatility related to the impact of the COVID-19 pandemic; and (iii) a goodwill impairment charge related to itsAfrica businesses. However, ABI's performance in the first half of 2021 improved meaningfully versus the same period in 2020, including top-line growth in the second quarter of 2021 ahead of second quarter of 2019 pre-pandemic levels. The extreme market disruption and volatility associated with the COVID-19 pandemic resulted in a steep decline in ABI's stock price in the first half of 2020. While there has been significant recovery in ABI's stock price since the first half of 2020, including renewed momentum in the second quarter of 2021, ABI's stock price remains volatile as demonstrated by its recent decline inJuly 2021 . The fair value ofAltria 's investment in ABI continues to be below the carrying value.Altria believes that this decline is temporary and will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic on ABI's business and market valuation.Altria has considered the impact of the COVID-19 pandemic on the business ofJUUL Labs, Inc. ("JUUL"), including its sales, distribution, operations, supply chain and liquidity, in conducting its periodic impairment assessment and quantitative valuations. JUUL's operations were negatively impacted in 2020 by the COVID-19 pandemic due to stay-at-home practices and government-mandated restrictions. While the impact was considered inAltria 's quantitative valuations conducted in connection with the preparation of its financial statements for the six months endedJune 30, 2021 and during 2020,Altria does not believe the COVID-19 pandemic was a primary driver of the non-cash, pre-tax impairment charge recorded during 2020 or any quarterly changes in fair value recorded since the fourth quarter of 2020.Altria will continue to monitor the impact of the COVID-19 pandemic on JUUL's business inAltria 's quarterly quantitative valuations of JUUL.Altria has considered the impact of the COVID-19 pandemic on the business of Cronos Group Inc. ("Cronos"), including its sales, distribution, operations, supply chain and liquidity. During 2020 and the first half of 2021, Cronos has been impacted by the COVID-19 pandemic, due in part to government actions limiting access to retail stores inthe United States andCanada , including the recording in 2020 of an impairment charge on certain goodwill and intangible assets. However, the continued rollout of vaccines inthe United States andCanada has resulted in the removal of COVID-19 related restrictions in most ofthe United States and the gradual easing of COVID-19 restrictions inCanada at the end of the second quarter of 2021.Altria will continue to monitor its investment in Cronos, including the impact of the COVID-19 pandemic on Cronos's business and market valuation. 39
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Consolidated Results of Operations for the Six Months Ended
(in millions, except per share data) Net Earnings Diluted EPS For the six months ended June 30, 2020$ 3,495 $ 1.88 2020 Implementation and acquisition-related costs 306 0.16 2020 Tobacco and health litigation items 32 0.02 2020 ABI-related special items 139 0.07 2020 Cronos-related special items 1 - 2020 COVID-19 special items 37 0.02 2020 Tax items 51 0.03 Subtotal 2020 special items 566 0.30 2021 NPM Adjustment Items 24 0.01 2021 Implementation and acquisition-related costs (43) (0.02) 2021 Tobacco and health 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 Tax items (3) - Subtotal 2021 special items (696) (0.37) Fewer shares outstanding - 0.01 Change in tax rate (44) (0.02) Operations 252 0.13 For the six months ended June 30, 2021$ 3,573 $ 1.93 2021 Reported Net Earnings$ 3,573 $ 1.93 2020 Reported Net Earnings$ 3,495 $ 1.88 % Change 2.2 % 2.7 % 2021 Adjusted Net Earnings and Adjusted Diluted EPS$ 4,269 $ 2.30 2020 Adjusted Net Earnings and Adjusted Diluted EPS$ 4,061 $ 2.18 % Change 5.1 % 5.5 % For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings attributable toAltria and adjusted diluted EPS attributable toAltria , see the Consolidated Operating Results section below. ?Fewer Shares Outstanding: Fewer shares outstanding were due primarily to shares repurchased byAltria under its share repurchase program in 2021. ?Change in Tax Rate: The change in the tax rate (which excludes the impact of special items shown in the table above) was driven primarily by lower dividends from ABI. ?Operations: The increase of$252 million in operations (which excludes the impact of special items shown in the table above) was due primarily to higher OCI in all reportable segments. For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below. 40
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Consolidated Results of Operations for the Three Months Ended
(in millions, except per share data) Net Earnings Diluted EPS For the three months ended June 30, 2020$ 1,943 $ 1.04 2020 Implementation and acquisition-related costs 6 - 2020 Tobacco and health litigation items 13 0.01 2020 ABI-related special items 95 0.05 2020 Cronos-related special items (94) (0.05) 2020 COVID-19 special items 37 0.02 2020 Tax items 27 0.02 Subtotal 2020 special items 84 0.05 2021 Implementation and acquisition-related costs (6) - 2021 Tobacco and health 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 Tax items (9) - Subtotal 2021 special items (137) (0.07) Change in tax rate (17) (0.01) Operations 276 0.15 For the three months ended June 30, 2021$ 2,149 $ 1.16 2021 Reported Net Earnings$ 2,149 $ 1.16 2020 Reported Net Earnings$ 1,943 $ 1.04 % Change 10.6 % 11.5 % 2021 Adjusted Net Earnings and Adjusted Diluted EPS$ 2,286 $ 1.23 2020 Adjusted Net Earnings and Adjusted Diluted EPS$ 2,027 $ 1.09 % Change 12.8 % 12.8 % For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings attributable toAltria and adjusted diluted EPS attributable toAltria , see the Consolidated Operating Results section below. ?Change in Tax Rate: The change in the tax rate (which excludes the impact of special items shown in the table above) was driven primarily by lower dividends from ABI. ?Operations: The increase of$276 million in operations (which excludes the impact of special items shown in the table above) was due primarily to higher OCI in all reportable segments. For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below. 41
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Table of Contents 2021 Forecasted ResultsAltria narrows its guidance for 2021 full-year adjusted diluted EPS to be in a range of$4.56 to$4.62 , representing a growth rate of 4.5% to 6% over its 2020 full-year adjusted diluted EPS base of$4.36 , as shown in the first table below. This range includes the estimated impact of the recently announced Ste. Michelle Transaction (see Note 13), which is expected to close in the second half of 2021. While the 2021 full-year adjusted diluted EPS guidance accounts for a range of scenarios, the external environment remains dynamic.Altria will continue to monitor conditions related to (i) the economy (including unemployment rates and the impact of increased inflation), (ii) fiscal stimulus, (iii) adult tobacco consumer dynamics, including stay-at-home practices, disposable income, purchasing patterns and adoption of smoke-free products, (iv) regulatory and legislative (including excise tax) developments, (v) the timing and extent of COVID-19 vaccine administration and the impact of COVID-19 variants and (vi) expectations for adjusted earnings contributions from its alcohol assets.Altria 's 2021 full-year adjusted diluted EPS guidance range includes planned investments in support of its vision to responsibly lead the transition of adult smokers to a smoke-free future, such as (i) marketplace investments to expand the availability and awareness ofAltria 's smoke-free products, (ii) costs associated with building an industry-leading consumer engagement platform that enhances data collection and insights in support of adult tobacco consumer conversion to smoke-free products and (iii) increased smoke-free product research and development expense. This forecasted growth rate excludes the (income) expense items in the second table below.Altria continues to expect its 2021 full-year adjusted effective tax rate will be in a range of 24.5% to 25.5%.
Reconciliation of 2020 Reported Diluted EPS to 2020 Adjusted Diluted EPS 2020 Reported diluted EPS
$ 2.40
Asset impairment, exit, implementation and acquisition-related costs 0.18 Tobacco and health litigation items
0.03 Impairment of JUUL equity securities 1.40 JUUL changes in fair value (0.05) ABI-related special items 0.32 Cronos-related special items 0.03 COVID-19 special items 0.02 Tax items 0.03 2020 Adjusted diluted EPS$ 4.36
The following (income) expense items are excluded from
(Income) Expense Excluded from 2021 Forecasted Adjusted Diluted EPS NPM Adjustment Items
$ (0.01) Implementation and acquisition-related costs 0.02 Tobacco and health litigation items 0.02 JUUL changes in fair value 0.05 ABI-related special items (0.04) Cronos-related special items 0.06 Loss on early extinguishment of debt 0.27$ 0.37
Note: The amounts in the table above do not include the charge that
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Table of Contents provide a corresponding GAAP measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast. Non-GAAP Financial Measures WhileAltria reports its financial results in accordance with GAAP, its management also reviews certain financial results, including OCI, OCI margins, net earnings attributable toAltria and diluted EPS, on an adjusted basis, which excludes certain income and expense items that 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, COVID-19 special items, equity investment-related special items (including any changes in fair value of 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").Altria 's management does not view any of these special items to be part ofAltria '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 toAltria '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 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. Discussion and Analysis Critical Accounting Policies and EstimatesAltria 's critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"); there have been no material changes to these critical accounting policies and estimates, except as noted below. Investment in ABI AtJune 30, 2021 ,Altria 's investment in ABI consisted of 185 million restricted shares (the "Restricted Shares") and 12 million ordinary shares of ABI. The fair value ofAltria 's equity investment in ABI is based on (i) unadjusted quoted prices in active markets for ABI's ordinary shares and, atJune 30, 2021 , was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets, for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy.Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder were to foreclose on the Restricted Shares, the encumbered Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share. The fair value ofAltria 's equity investment in ABI atJune 30, 2021 andDecember 31, 2020 was$14.2 billion (carrying value of$17.2 billion ) and$13.8 billion (carrying value of$16.7 billion ), respectively, which was less than its carrying value by approximately 17% in both periods. AtJuly 26, 2021 , the fair value ofAltria 's investment had decreased to approximately$13.6 billion . InOctober 2019 , the fair value ofAltria 's equity investment in ABI declined below its carrying value and atJuly 26, 2021 has not recovered.Altria evaluated the factors related to the fair value decline, including the impact on the fair value of ABI's shares during the COVID-19 pandemic, which has negatively impacted ABI's business.Altria evaluated the duration and magnitude of the fair value decline atJune 30, 2021 , ABI's financial condition and near-term prospects, andAltria 's intent and ability to hold its investment in ABI until recovery.Altria concluded, both atJune 30, 2021 andDecember 31, 2020 , that the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, no impairment was recorded. This conclusion was based on the following factors: ?a history of significant recovery in ABI's stock price during 2019 and recoveries during the second half of 2020 (following the steep decline in the first half of 2020 associated with the impacts of the COVID-19 pandemic on its business) and renewed momentum in the second quarter of 2021, all of whichAltria believes indicate investor confidence in ABI's ability to implement its business strategies and deleveraging plans as well as its ability to recover from the impacts of the COVID-19 pandemic; 43
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Table of Contents ?the continued industry disruption and volatility associated with the COVID-19 pandemic, including the impact of COVID-19 variants, whichAltria believes is resulting in stock price performance for ABI that has continued intoJuly 2021 and is not reflective of actual underlying equity values; ?ABI's proactive actions to preserve financial flexibility and commitment to its long-term deleveraging initiative, including the following actions sinceDecember 31, 2019 : (i) ABI's 50% reduction to its final 2019 dividend and its decision to forgo its interim 2020 dividend; (ii) ABI's completion of the sale of itsAustralia subsidiary and of a minority stake in itsU.S. -based metal container operations; and (iii) ABI's continuation of its refinancing efforts through issuance and redemption activity, specifically front-end maturities into longer dated maturities and reduction in gross debt levels; ?ABI's global platform (world's largest brewer by volume and one of the world's top ten consumer products companies by revenue) with strong market positions in key markets, new product innovations, geographic diversification, experienced management team, strict financial discipline (cost management and efficiency) and expected earnings and history of performance; and ?the strategic plans implemented by ABI in response to the adverse impacts of the COVID-19 pandemic, including its ability to leverage learnings from recovering markets and respond quickly to the evolving environment to better position ABI for a robust recovery. This was evidenced by: ?ABI's performance in the second half of 2020, which represented improvement over the first half of 2020 and reinforced its confidence in the future potential of the beer category and its business; and ?ABI's performance in the first half of 2021, which improved meaningfully versus the same period in 2020, including top-line growth in the second quarter of 2021 ahead of second quarter of 2019 pre-pandemic levels. This is consistent with the performance and resilience of the category that ABI anticipated when it reported its 2020 earnings and provided its outlook for 2021. ABI continues to state that its 2021 outlook, which is subject to change as it continues to monitor for ongoing developments, reflects, among other factors, its current assessment of the scale and magnitude of the COVID-19 pandemic.Altria will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic and subsequent recovery on ABI's business and market valuation. IfAltria 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 onAltria 's consolidated financial position or earnings. For further discussion ofAltria 's investment in ABI, see Note 3. Investments inEquity Securities to the condensed consolidated financial statements in Item 1 ("Note 3"). 44
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