Altria Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. Altria’s principal businesses are U.S. cigarettes, cigars, oral tobacco and nicotine pouches, and wine. It also holds investments in ABI, JUUL and Cronos. Figures are in U.S. dollars.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net revenues, including excise taxes | $26.15 billion | $25.11 billion |
| Operating income | $10.87 billion | $10.33 billion |
| Net earnings (loss) attributable to Altria | $4.47 billion | $(1.29) billion |
| Reported diluted EPS | $2.40 | $(0.70) |
| Adjusted net earnings | $8.12 billion | $7.87 billion |
| Adjusted diluted EPS | $4.36 | $4.21 |
| Cash from operating activities | $8.39 billion | $7.84 billion |
| Cash and cash equivalents at year-end | $4.95 billion | $2.12 billion |
| Total debt at year-end | $29.5 billion | $28.0 billion |
Revenue rose 4.2%, operating income rose 5.3%, and adjusted EPS rose 3.6%. The reported earnings turnaround chiefly reflects the $8.6 billion JUUL impairment recorded in 2019; 2020 included a further $2.6 billion JUUL impairment. Adjusted measures exclude items management considers outside underlying operations and are not GAAP measures.
Fourth-quarter 2020 net revenues were $6.30 billion and net earnings attributable to Altria were $1.92 billion, or $1.03 per diluted share. Cash from operations increased year over year; capital expenditures were $231 million. Altria reported a working-capital deficit but said operating cash flow and access to credit and capital markets could fund its needs. Its $3.0 billion revolving credit facility was undrawn at year-end, and it was in compliance with covenants.
Segment adjusted operating companies income (OCI) margins were 56.4% for smokeable products (54.5% in 2019), 71.7% for oral tobacco products (71.7%), and 8.6% for wine (10.9%). State settlement and FDA user-fee charges were approximately $4.7 billion in 2020.
Business changes and comparisons
- Smokeable products: Segment revenue increased to $23.09 billion and adjusted OCI increased 10.2%. Cigarette shipments declined 0.4%; cigarette retail share declined to 49.2% from 49.8%. Higher pricing and lower costs more than offset lower volume and higher per-unit settlement charges. Cigar shipments increased 9.0%.
- Oral tobacco products: Segment revenue increased to $2.53 billion and adjusted OCI increased 7.3%. Shipments rose 1.2%, primarily reflecting on! pouch growth, while segment retail share fell to 49.8% from 52.5%. on! was available in approximately 78,000 stores by year-end.
- Wine: Revenue fell 10.9% to $614 million and shipments declined 12.0%. Ste. Michelle recorded $411 million in charges, including a $292 million inventory write-off, $100 million of estimated losses on future grape commitments and $19 million of disposal and other costs. Reported OCI was a loss of $360 million; adjusted OCI was $51 million.
- Investments: Altria’s 35% JUUL stake had a $1.7 billion carrying value after the 2020 impairment, versus $4.2 billion at the end of 2019. Following conversion to voting shares in November, Altria adopted fair-value accounting; the investment’s value is reassessed quarterly. The ABI investment’s fair value was $13.8 billion versus a $16.7 billion carrying value; Altria deemed the decline temporary and recorded no impairment. ABI reduced its 2019 dividend by half and skipped its 2020 interim dividend. Altria owned 43.5% of Cronos at year-end.
Outlook, commentary and principal risks
Management forecast 2021 adjusted diluted EPS of $4.49–$4.62, growth of 3%–6% over 2020 adjusted EPS, and an adjusted effective tax rate of 24.5%–25.5%. Guidance excludes estimated first-quarter debt-extinguishment charges of approximately $0.27 per share. Management cited uncertainty around the pandemic, employment and stimulus, consumer purchasing and product adoption, regulation and excise taxes, vaccine deployment, and alcohol-asset contributions. Planned investments include non-combustible product marketing, consumer engagement capabilities and research and development. Management did not provide a cigarette-industry volume forecast.
Altria said its tobacco operations had not experienced material pandemic-related impacts to date, though facilities had temporary suspensions early in 2020 and resumed operations with enhanced safety measures. COVID-19 adversely affected wine demand and ABI’s dividends and business. The wind-down of PMCC’s finance-lease portfolio was expected to be completed by the end of 2022.
- Regulatory and litigation exposure: The FTC challenged Altria’s JUUL investment and related agreements, seeking remedies that could include divestiture or rescission; the administrative trial was scheduled for June 2021. JUUL also faced extensive e-vapor litigation. FDA authorization, flavor restrictions, product standards, excise taxes and other tobacco rules could affect products, volumes and investment values. A patent case before the ITC sought to block IQOS imports.
- Litigation contingencies: The filing describes substantial tobacco and health litigation, including Engle progeny cases. Management generally said losses were not probable or could not be reasonably estimated, so no amounts were accrued for those matters except specified cases. The auditor identified litigation provisions and disclosures as a critical audit matter.
- Impairment and valuation risk: JUUL’s valuation uses significant unobservable assumptions. ABI’s fair value remained below carrying value, and further deterioration could require an impairment. The wine reset and consumer demand uncertainty may lead to additional charges.
After year-end, Altria issued $5.5 billion of notes and completed purchases of approximately $4.0 billion principal amount of debt tendered, plus redeemed $1.0 billion principal amount of 2022 notes. It estimated a one-time first-quarter 2021 pre-tax extinguishment charge of approximately $645 million. The board also authorized a new $2.0 billion share-repurchase program in January 2021. Dividends paid in 2020 were approximately $6.3 billion; the annualized dividend rate was $3.44 per share, with future payments subject to board discretion.
Investor facts to verify
- Whether 2021 adjusted EPS guidance is achieved, and how its exclusions compare with GAAP results.
- Developments in the FTC’s JUUL case, e-vapor litigation and FDA product authorization or flavor actions; confirm the latest JUUL fair value and assumptions.
- Whether ABI’s investment value recovers, whether Altria records an impairment, and how ABI’s dividends and post-year-end transactions affect Altria.
- Progress and cash consequences of Ste. Michelle’s inventory reduction, grape commitments and strategic reset.
- Debt maturities, refinancing costs, leverage and liquidity after the 2021 debt transactions, alongside settlement payments and dividend commitments.