Acquisition of NJOY

9 Months Ended

Sep. 30, 2024

Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]

Acquisition of NJOY

Acquisition of NJOY

On June 1, 2023, we acquired NJOY Holdings (“NJOY Transaction”), which provided us with full global ownership of NJOY’s e-vapor product portfolio, including NJOY ACE. The total consideration for the NJOY Transaction of approximately $2.9 billion consisted of approximately $2.75 billion in cash payments (net of cash acquired) plus the fair value of up to $500 million in additional cash payments contingent on receipt of U.S. Food and Drug Administration (“FDA”) authorizations with respect to NJOY’s menthol ($250 million), blueberry ($125 million) and watermelon ($125 million) pod products. The fair value of these contingent payments at December 31, 2023 and on the acquisition date was approximately $130 million, which was included in the total consideration.

In the second quarter of 2024, the FDA issued marketing granted orders for four NJOY menthol e-vapor products. As a result, we became obligated to make cash payments totaling $250 million under the acquisition agreement, which we made in July 2024. Additionally, we recorded a pre-tax charge of approximately $140 million for the change in the fair value of contingent payments for the nine months ended September 30, 2024. At September 30, 2024, the fair value of the remaining contingent payments, which relate to blueberry and watermelon pod products, was approximately $20 million.

Contingent payments related to the NJOY Transaction were recognized at their estimated fair value as of the acquisition date. Subsequent changes to the fair value of the liability resulting from contingent payments are recognized in earnings until the contingency is resolved. In determining the estimated fair value of contingent payments, we made certain judgments, estimates and assumptions, the most significant of which was the likelihood of certain potential regulatory outcomes. Contingent payments are classified in Level 3 of the fair value hierarchy.

Costs incurred for the NJOY Transaction are recognized as expenses in the period in which the costs are incurred and are included in our condensed consolidated statement of earnings as follows:

	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
(in millions)	2024		2023		2024		2023
Marketing, administration and research costs:
Change in fair value of contingent payments	$	140	$	—	$	—	$	—
Other costs (1)	47		54		44		13
Interest and other debt expense, net:
Financing fees	—		9		—		1
Total NJOY Transaction costs	$	187	$	63	$	44	$	14

(1) For the nine and three months ended September 30, 2024, substantially all of these costs were acquisition-related costs associated with patent infringement lawsuits related to the NJOY Transaction. For further discussion of the patent infringement lawsuits, see Note 14. Contingencies. For the nine months ended September 30, 2023, substantially all of these costs were acquisition-related costs, consisting primarily of transaction costs.

We funded the initial NJOY Transaction cash payments at closing through a combination of borrowings under a $2.0 billion term loan facility, the issuance of commercial paper and available cash. For further discussion regarding the term loan facility, see Note 12. Debt.

We accounted for this acquisition as a business combination. On June 1, 2024, we finalized our purchase price allocation for the NJOY Transaction. The amounts in the table below represent the final purchase price allocation to the assets acquired and

liabilities assumed in the NJOY Transaction, including measurement period adjustments made during the three months ended March 31, 2024.

(in millions)	Preliminary Purchase Price Allocation		Measurement Period Adjustments		Final Purchase Price Allocation
Cash and cash equivalents	$	22	$	—	$	22
Receivables	7		—		7
Inventories	19		—		19
Other assets	7		—		7
Property, plant and equipment	16		—		16
Other intangible assets:
Developed technology (amortizable)	1,000		—		1,000
Trademarks (amortizable)	230		(40)		190
Supplier agreements (amortizable)	180		(180)		—
Accounts payable	(7)		—		(7)
Accrued liabilities	(20)		—		(20)
Deferred income taxes	(167)		66		(101)
Total identifiable net assets	1,287		(154)		1,133
Total consideration	2,901		—		2,901
Goodwill	$	1,614	$	154	$	1,768

The excess of the total consideration over the identifiable net assets acquired in the NJOY Transaction primarily reflects the value of future growth opportunities in the e-vapor category. None of the goodwill or other intangible assets is deductible for tax purposes.

The significant assumptions used in determining the fair values of the identifiable intangible assets included volume growth rates, operating margins, the assessment of acquired technology life cycles and discount rates. We determined the fair values of the identifiable intangible assets using an income approach. The fair value measurements were primarily based on significant inputs that are not observable in the market, such as discounted cash flow analyses, and thus were classified in Level 3 of the fair value hierarchy. We amortize these intangible assets over a weighted-average period of approximately 18 years.