Attached files

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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 - ALTRIA GROUP, INC.exhibit321q32016.htm
EX-99.2 - TRIAL SCHEDULE FOR CERTAIN CASES - ALTRIA GROUP, INC.exhibit992q32016.htm
EX-99.1 - CERTAIN LITIGATION MATTERS - ALTRIA GROUP, INC.exhibit991q32016.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 - ALTRIA GROUP, INC.exhibit322q32016.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - ALTRIA GROUP, INC.exhibit312q32016.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - ALTRIA GROUP, INC.exhibit311q32016.htm
EX-12 - STATEMENTS REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - ALTRIA GROUP, INC.exhibit12computationofrati.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number 1-08940
Altria Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Virginia
 
13-3260245
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
6601 West Broad Street, Richmond, Virginia
 
23230
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (804) 274-2200 
 Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
  
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No   þ
At October 17, 2016, there were 1,950,270,736 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.





ALTRIA GROUP, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
  
 
  
Page No.
PART I -
  
FINANCIAL INFORMATION
  
 
 
 
 
 
Item 1.
  
Financial Statements (Unaudited)
  
 
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
Item 2.
  
  
 
 
 
 
 
Item 3.
  
  
 
 
 
 
Item 4.
  
  
 
 
 
 
PART II -
  
OTHER INFORMATION
  
 
 
 
 
 
Item 1.
  
  
 
 
 
 
Item 1A.
  
  
 
 
 
 
Item 2.
  
  
 
 
 
 
 
Item 5.
 
 
 
 
 
 
Item 6.
  
  
 
 
 
 
Signature
  
  


2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,298

 
$
2,369

Receivables
 
146

 
124

Inventories:
 

 

Leaf tobacco
 
844

 
957

Other raw materials
 
174

 
181

Work in process
 
410

 
444

Finished product
 
552

 
449

 
 
1,980

 
2,031

Deferred income taxes
 
1,188

 
1,175

Other current assets
 
791

 
387

Total current assets
 
6,403

 
6,086

Property, plant and equipment, at cost
 
4,820

 
4,877

Less accumulated depreciation
 
2,851

 
2,895

 
 
1,969

 
1,982

Goodwill
 
5,285

 
5,285

Other intangible assets, net
 
12,042

 
12,028

Investment in SABMiller
 
5,826

 
5,483

Finance assets, net
 
1,046

 
1,239

Other assets
 
363

 
360

Total Assets
 
$
32,934

 
$
32,463

 
See notes to condensed consolidated financial statements.



3




Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)
 
 
 
September 30, 2016
 
December 31, 2015
Liabilities
 
 
 
 
Current portion of long-term debt
 
$

 
$
4

Accounts payable
 
296

 
400

Accrued liabilities:
 

 

Marketing
 
797

 
695

Employment costs
 
216

 
198

Settlement charges
 
3,429

 
3,590

Other
 
964

 
1,081

Dividends payable
 
1,193

 
1,110

Total current liabilities
 
6,895

 
7,078

Long-term debt
 
13,878

 
12,843

Deferred income taxes
 
5,607

 
5,663

Accrued pension costs
 
863

 
1,277

Accrued postretirement health care costs
 
2,296

 
2,245

Other liabilities
 
412

 
447

Total liabilities
 
29,951

 
29,553

Contingencies (Note 11)
 

 

Redeemable noncontrolling interest
 
36

 
37

Stockholders’ Equity
 
 
 
 
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued)
 
935

 
935

Additional paid-in capital
 
5,864

 
5,813

Earnings reinvested in the business
 
27,816

 
27,257

Accumulated other comprehensive losses
 
(3,278
)
 
(3,280
)
Cost of repurchased stock
(854,558,381 shares at September 30, 2016 and
845,901,836 shares at December 31, 2015)
 
(28,393
)
 
(27,845
)
Total stockholders’ equity attributable to Altria Group, Inc.
 
2,944

 
2,880

Noncontrolling interests
 
3

 
(7
)
Total stockholders’ equity
 
2,947

 
2,873

Total Liabilities and Stockholders’ Equity
 
$
32,934

 
$
32,463

See notes to condensed consolidated financial statements.


4



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
Net revenues
 
$
19,492

 
$
19,116

Cost of sales
 
5,841

 
5,733

Excise taxes on products
 
4,888

 
4,991

Gross profit
 
8,763

 
8,392

Marketing, administration and research costs
 
1,871

 
1,951

Reduction of PMI tax-related receivable
 

 
41

Asset impairment and exit costs
 
123

 
4

Operating income
 
6,769

 
6,396

Interest and other debt expense, net
 
571

 
609

Loss on early extinguishment of debt
 
823

 
228

Earnings from equity investment in SABMiller
 
(564
)
 
(546
)
Gain on derivative financial instruments
 
(205
)
 

Earnings before income taxes
 
6,144

 
6,105

Provision for income taxes
 
2,178

 
2,110

Net earnings
 
3,966

 
3,995

Net earnings attributable to noncontrolling interests
 
(3
)
 
(1
)
Net earnings attributable to Altria Group, Inc.
 
$
3,963

 
$
3,994

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
2.02

 
$
2.03

Dividends declared
 
$
1.74

 
$
1.605

See notes to condensed consolidated financial statements.


5



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Three Months Ended September 30,
 
 
2016
 
2015
Net revenues
 
$
6,905

 
$
6,699

Cost of sales
 
2,043

 
1,932

Excise taxes on products
 
1,712

 
1,721

Gross profit
 
3,150

 
3,046

Marketing, administration and research costs
 
766

 
698

Reduction of PMI tax-related receivable
 

 
41

Asset impairment and exit costs
 
2

 

Operating income
 
2,382

 
2,307

Interest and other debt expense, net
 
179

 
205

Loss on early extinguishment of debt
 
823

 

Earnings from equity investment in SABMiller
 
(299
)
 
(187
)
Gain on derivative financial instruments
 
(48
)
 

Earnings before income taxes
 
1,727

 
2,289

Provision for income taxes
 
633

 
761

Net earnings
 
1,094

 
1,528

Net earnings attributable to noncontrolling interests
 
(1
)
 

Net earnings attributable to Altria Group, Inc.
 
$
1,093

 
$
1,528

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
0.56

 
$
0.78

Dividends declared
 
$
0.61

 
$
0.565

See notes to condensed consolidated financial statements.


6



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)

 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
Net earnings
 
$
3,966

 
$
3,995

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Currency translation adjustments
 
1

 
(3
)
Benefit plans
 
(116
)
 
121

SABMiller
 
117

 
(593
)
Other comprehensive earnings (losses), net of deferred income taxes
 
2

 
(475
)
 
 
 
 
 
Comprehensive earnings
 
3,968

 
3,520

Comprehensive earnings attributable to noncontrolling interests
 
(3
)
 
(1
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
3,965

 
$
3,519

See notes to condensed consolidated financial statements.


7



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)

 
 
For the Three Months Ended September 30,
 
 
2016
 
2015
Net earnings
 
$
1,094

 
$
1,528

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Currency translation adjustments
 

 
(2
)
Benefit plans
 
28

 
40

SABMiller
 
34

 
(317
)
Other comprehensive earnings (losses), net of deferred income taxes
 
62

 
(279
)
 
 
 
 
 
Comprehensive earnings
 
1,156

 
1,249

Comprehensive earnings attributable to noncontrolling interests
 
(1
)
 

Comprehensive earnings attributable to Altria Group, Inc.
 
$
1,155

 
$
1,249


See notes to condensed consolidated financial statements.



8



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Year Ended December 31, 2015 and
the Nine Months Ended September 30, 2016
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
Attributable to Altria Group, Inc.
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Earnings
Reinvested
in the
Business
 
Accumulated
Other
Comprehensive
Losses
 
Cost of
Repurchased
Stock
 
Non-controlling
Interests
 
Total
Stockholders’
Equity
Balances, December 31, 2014
 
$
935

 
$
5,735

 
$
26,277

 
$
(2,682
)
 
$
(27,251
)
 
$
(4
)
 
$
3,010

Net earnings (losses) (1)
 

 

 
5,241

 

 

 
(3
)
 
5,238

Other comprehensive losses, net of deferred income taxes
 

 

 

 
(598
)
 

 

 
(598
)
Stock award activity
 

 
78

 

 

 
(40
)
 

 
38

Cash dividends declared ($2.17 per share)
 

 

 
(4,261
)
 

 

 

 
(4,261
)
Repurchases of common stock
 

 

 

 

 
(554
)
 

 
(554
)
Balances, December 31, 2015
 
935

 
5,813

 
27,257

 
(3,280
)
 
(27,845
)
 
(7
)
 
2,873

Net earnings (1)
 

 

 
3,963

 

 

 

 
3,963

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
2

 

 

 
2

Stock award activity
 

 
61

 

 

 
(36
)
 

 
25

Cash dividends declared ($1.74 per share)
 

 

 
(3,404
)
 

 

 

 
(3,404
)
Repurchases of common stock
 

 

 

 

 
(512
)
 

 
(512
)
Other
 

 
(10
)
 

 

 

 
10

 

Balances, September 30, 2016
 
$
935

 
$
5,864

 
$
27,816

 
$
(3,278
)
 
$
(28,393
)
 
$
3

 
$
2,947


(1) 
Amounts attributable to noncontrolling interests for the nine months ended September 30, 2016 and for the year ended December 31, 2015 exclude net earnings of $3 million and $5 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section in the condensed consolidated balance sheets at September 30, 2016 and December 31, 2015.

See notes to condensed consolidated financial statements.




9



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
 
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
3,966

 
$
3,995

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
149

 
150

Deferred income tax benefit
 
(69
)
 
(1
)
Earnings from equity investment in SABMiller
 
(564
)
 
(546
)
Dividends from SABMiller
 
403

 
374

Gain on derivative financial instruments
 
(205
)
 

Asset impairment and exit costs, net of cash paid
 
71

 
2

Loss on early extinguishment of debt
 
823

 
228

Cash effects of changes:
 
 
 
 
Receivables
 
(21
)
 
9

Inventories
 
54

 
59

Accounts payable
 
(132
)
 
(102
)
Income taxes
 
(122
)
 
(6
)
Accrued liabilities and other current assets
 
(257
)
 
22

Accrued settlement charges
 
(161
)
 
(284
)
Pension plan contributions
 
(520
)
 
(23
)
Pension provisions and postretirement, net
 
(56
)
 
78

Other
 
141

 
135

Net cash provided by operating activities
 
3,500

 
4,090

Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
(128
)
 
(162
)
Proceeds from finance assets
 
207

 
255

Other
 
(44
)
 
2

Net cash provided by investing activities
 
35

 
95

Cash Provided by (Used in) Financing Activities
 
 
 
 
Long-term debt issued
 
1,976

 

Long-term debt repaid
 
(933
)
 
(1,793
)
Repurchases of common stock
 
(512
)
 
(518
)
Dividends paid on common stock
 
(3,321
)
 
(3,071
)
Premiums and fees related to early extinguishment of debt
 
(809
)
 
(226
)
Other
 
(7
)
 
9

Net cash used in financing activities
 
(3,606
)
 
(5,599
)
Cash and cash equivalents:
 
 
 
 
Decrease
 
(71
)
 
(1,414
)
Balance at beginning of period
 
2,369

 
3,321

Balance at end of period
 
$
2,298

 
$
1,907

See notes to condensed consolidated financial statements.


10

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Background and Basis of Presentation:

Background

At September 30, 2016, Altria Group, Inc.’s wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged predominantly in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; and UST LLC (“UST”), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), a wholly-owned subsidiary that is engaged in the manufacture and sale of innovative tobacco products, and Philip Morris Capital Corporation (“PMCC”), a wholly-owned subsidiary that maintains a portfolio of finance assets, substantially all of which are leveraged leases. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and consumer engagement services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc. and its subsidiaries. Altria Group, Inc.’s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At September 30, 2016, Altria Group, Inc.’s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.
        
At September 30, 2016, Altria Group, Inc. had an approximate 27% ownership of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounted for under the equity method of accounting. On October 10, 2016, Anheuser-Busch InBev SA/NV (“Legacy AB InBev”) completed its previously-announced business combination with SABMiller in a cash and stock transaction (the “Transaction”). A newly formed Belgian company, which retained the name Anheuser-Busch InBev SA/NV (“AB InBev”), has become the holding company for the combined SABMiller and Legacy AB InBev businesses. Upon completion of the Transaction, Altria Group, Inc. had a 9.6% ownership of AB InBev at October 10, 2016 based on AB InBev’s shares outstanding. Following completion of the Transaction, Altria Group, Inc. purchased 12,341,937 ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria Group, Inc.’s ownership to approximately 10.2% at October 24, 2016. For further discussion, see Note 4. Investment in SABMiller/AB InBev.

Dividends and Share Repurchases

During the third quarter of 2016, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved an 8.0% increase in the quarterly dividend rate to $0.61 per common share versus the previous rate of $0.565 per common share. The current annualized dividend rate is $2.44 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of the Board of Directors.

In July 2014, the Board of Directors authorized a $1.0 billion share repurchase program (the “July 2014 share repurchase program”). During the third quarter of 2015, Altria Group, Inc. completed the July 2014 share repurchase program, under which Altria Group, Inc. repurchased a total of 20.4 million shares of its common stock at an average price of $48.90 per share.

In July 2015, the Board of Directors authorized a $1.0 billion share repurchase program, of which approximately $453 million was remaining at September 30, 2016. In October 2016, the Board of Directors authorized a $2.0 billion expansion of this program from $1.0 billion to $3.0 billion. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.


11

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Altria Group, Inc.’s share repurchase activity was as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions, except per share data)
Total number of shares repurchased
 
8.1

 
10.0

 
2.6

 
1.2

Aggregate cost of shares repurchased
 
$
512

 
$
518

 
$
171

 
$
63

Average price per share of shares repurchased
 
$
63.28

 
$
51.47

 
$
66.23

 
$
50.39


Basis of Presentation

The interim condensed consolidated financial statements of Altria Group, Inc. are unaudited. It is the opinion of Altria Group, Inc.’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected in the interim condensed consolidated financial statements. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

On January 1, 2016, Altria Group, Inc. adopted Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as a deferred charge (an asset). As a result of the adoption, $79 million of debt issuance costs have been presented on Altria Group, Inc.’s condensed consolidated balance sheet at September 30, 2016 as a deduction from the carrying amount of long-term debt. In addition, $72 million of debt issuance costs were reclassified from other assets to long-term debt on Altria Group, Inc.’s condensed consolidated balance sheet at December 31, 2015.

For a description of recently issued accounting guidance that Altria Group, Inc. has not yet adopted, see Note 13. Recent Accounting Guidance Not Yet Adopted.
Note 2. Asset Impairment, Exit and Implementation Costs:

Productivity Initiative

In January 2016, Altria Group, Inc. announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness. The initiative reduces spending on certain selling, general and administrative infrastructure and implements a leaner organizational structure. As a result of this initiative, Altria Group, Inc. expects to incur total pre-tax restructuring charges of approximately $140 million, or $0.05 per share, substantially all of which are expected to be recorded in 2016 and result in cash expenditures. The charges consist of employee separation costs of approximately $120 million and other associated costs of approximately $20 million.


12

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Pre-tax restructuring charges for the nine and three months ended September 30, 2016 of $130 million, or $0.04 per share, and $6 million, respectively, recorded in connection with the productivity initiative consisted of the following:
 
For the Nine Months Ended September 30, 2016
 
For the Three Months Ended September 30, 2016
 
Asset Impairment and Exit Costs (1)
 
Implementation Costs
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs
 
Total
 
(in millions)
Smokeable products
$
99

 
$
6

 
$
105

 
$
1

 
$
3

 
$
4

Smokeless products
13

 
1

 
14

 

 
1

 
1

All other
6

 

 
6

 
1

 

 
1

General corporate
5

 

 
5

 

 

 

Total
$
123

 
$
7

 
$
130

 
$
2

 
$
4

 
$
6


(1) Includes termination and curtailment costs of $20 million. See Note 3. Benefit Plans.

The movement in the restructuring liabilities (excluding termination and curtailment costs), substantially all of which are severance liabilities, was as follows:
 
For the Nine Months Ended September 30, 2016
 
(in millions)
Charges
$
103

Cash spent
(52
)
Balances at September 30, 2016
$
51


Facilities Consolidation
On October 27, 2016, Altria Group, Inc. announced the consolidation of certain operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. Middleton will transfer its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia. USSTC will transfer its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Manufacturing Center site in Richmond, Virginia. Employees affected by the consolidation will be offered the opportunity to transfer into available positions; those who do not do so will be offered separation benefits. The consolidation is expected to be completed by the first quarter of 2018 and deliver approximately $50 million in annualized cost savings by the end of 2018.
As a result of this consolidation, Altria Group, Inc. expects to record total pre-tax charges of approximately $150 million, or $0.05 per share. Of this amount, Altria Group, Inc. expects to record pre-tax charges of approximately $60 million, or $0.02 per share, in the fourth quarter of 2016, $75 million in 2017 and the remainder in 2018. The estimated charges relate primarily to accelerated depreciation ($55 million), employee separation costs ($45 million) and other exit and implementation costs ($50 million). Approximately $90 million of the total pre-tax charges are expected to result in cash expenditures. These estimated charges do not reflect the non-cash impact that may result from pension settlement and curtailment accounting.

13

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 3. Benefit Plans:

Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. and its subsidiaries. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST’s subsidiaries and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide postretirement health care and other benefits to the majority of retired employees.

Components of Net Periodic Benefit Cost (Income)

Net periodic benefit cost (income) consisted of the following: 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
Pension
 
Postretirement
 
Pension
 
Postretirement
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Service cost
$
55

 
$
65

 
$
12

 
$
13

 
$
18

 
$
22

 
$
4

 
$
4

Interest cost
211

 
252

 
58

 
75

 
70

 
84

 
18

 
24

Expected return on plan assets
(416
)
 
(405
)
 

 

 
(139
)
 
(135
)
 

 

Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
130

 
175

 
19

 
33

 
43

 
58

 
3

 
10

Prior service cost (credit)
4

 
6

 
(29
)
 
(30
)
 
2

 
2

 
(10
)
 
(10
)
Termination and curtailment
20

 

 

 

 

 

 

 

Net periodic benefit cost (income)
$
4

 
$
93

 
$
60

 
$
91

 
$
(6
)
 
$
31

 
$
15

 
$
28


Termination and curtailment costs shown in the table above relate to the productivity initiative discussed in Note 2. Asset Impairment, Exit and Implementation Costs. In conjunction with the curtailment, in the first quarter of 2016 Altria Group, Inc. remeasured the pension benefit obligations, pension plan assets and postretirement benefit obligations of the impacted benefit plans. This remeasurement resulted in an increase to the liabilities for accrued pension costs and accrued postretirement health care costs of approximately $250 million and $70 million, respectively, and a corresponding increase to accumulated other comprehensive losses.
Employer Contributions

Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service regulations. In September 2016, Altria Group, Inc. made voluntary contributions totaling $500 million to its pension plans. Additional employer contributions of $20 million were made to the pension plans during the nine months ended September 30, 2016. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans during the remainder of 2016 of up to approximately $15 million, based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.
Note 4. Investment in SABMiller/AB InBev:

At September 30, 2016, Altria Group, Inc. had an approximate 27% ownership of SABMiller. Altria Group, Inc. accounted for its investment in SABMiller under the equity method of accounting.


14

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

AB InBev and SABMiller Business Combination

On October 10, 2016, Legacy AB InBev completed the Transaction, and AB InBev has become the holding company for the combined SABMiller and Legacy AB InBev businesses. Under the terms of the Transaction, SABMiller shareholders received 45 British pounds (“GBP”) in cash for each SABMiller share held, with a partial share alternative (“PSA”), which was subject to proration, available for approximately 41% of the SABMiller shares.

Pursuant to the terms and conditions of an Irrevocable Undertaking, previously delivered by Altria Group, Inc. in November 2015, Altria Group, Inc. voted its 430,000,000 SABMiller shares in favor of the Transaction and elected the PSA.
Upon completion of the Transaction and taking into account proration, Altria Group, Inc. received, in respect of its 430,000,000 SABMiller shares, (i) an interest that was converted into 185,115,417 restricted shares of AB InBev (the “Restricted Shares”), representing a 9.6% ownership of AB InBev at October 10, 2016 based on AB InBev’s shares outstanding, and (ii) approximately $4.8 billion in pre-tax cash as the cash component of the PSA. Additionally, Altria Group, Inc. received pre-tax cash proceeds of approximately $0.5 billion from exercising the derivative financial instruments (discussed below), which together with the pre-tax cash from the Transaction totaled approximately $5.3 billion in pre-tax cash. Following completion of the Transaction, Altria Group, Inc. purchased 12,341,937 ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria Group, Inc.’s ownership to approximately 10.2% at October 24, 2016.

The Restricted Shares:
are unlisted and not admitted to trading on any stock exchange;
are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021;
are convertible into ordinary shares of AB InBev on a one-for-one basis after the end of this five-year lock-up period;
rank equally with ordinary shares of AB InBev with regards to dividends and voting rights; and
have director nomination rights with respect to AB InBev.
As a result of the Transaction, Altria Group, Inc. expects to record a total estimated pre-tax gain in its reported earnings of approximately $13.7 billion, or $8.9 billion after-tax, which is based on the following:
the Legacy AB InBev share price and GBP-to-United States dollar (“USD”) exchange rate as of October 10, 2016;
the book value of Altria Group, Inc.’s investment in SABMiller at September 30, 2016; and
the impact of AB InBev’s expected divestitures of certain SABMiller assets and businesses in connection with Legacy AB InBev obtaining necessary regulatory clearances for the Transaction.
Substantially all of the gain will be recorded in the fourth quarter of 2016. Altria Group, Inc. expects that its gain on the Transaction will be deferred for United States corporate income tax purposes, except to the extent of the cash consideration received.
Altria Group, Inc. will account for its investment in AB InBev under the equity method of accounting because Altria Group, Inc. will have the ability to exercise significant influence over the operating and financial policies of AB InBev. This conclusion is based on the fact that Altria Group, Inc. will have active representation on AB InBev’s Board of Directors (“AB InBev Board”) and certain of its Committees. Through its AB InBev Board and Committee representation, Altria Group, Inc. will participate in AB InBev policy making processes. Altria Group, Inc. will report its share of AB InBev’s results using a one-quarter lag because AB InBev’s results will not be available in time to record them in the concurrent period.



15

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Derivative Financial Instruments

In November 2015 and August 2016, Altria Group, Inc. entered into a derivative financial instrument, each in the form of a put option (together the “options”) to hedge Altria Group, Inc.’s exposure to foreign currency exchange rate movements in the GBP to the USD, in relation to the pre-tax cash consideration that Altria Group, Inc. expected to receive under the PSA pursuant to the revised and final offer announced by Legacy AB InBev on July 26, 2016. The notional amounts of the November 2015 and August 2016 options were $2,467 million (1,625 million GBP) and $480 million (378 million GBP), respectively. The options did not qualify for hedge accounting; therefore, changes in the fair values of the options were recorded as gain on derivative financial instruments in Altria Group, Inc.’s consolidated statements of earnings in the periods in which the changes occurred. For the nine and three months ended September 30, 2016, Altria Group, Inc. recorded pre-tax gains of $205 million and $48 million, respectively, for the changes in the fair values of the options. Exercising the options in October 2016 resulted in approximately $0.5 billion in pre-tax cash proceeds. In the fourth quarter of 2016, Altria Group, Inc. will record a pre-tax gain of approximately $145 million for the changes in the fair values of the options.
  
The fair values of the options were determined using binomial option pricing models, which reflect the contractual terms of the options and other observable market-based inputs, and are classified in Level 2 of the fair value hierarchy. At September 30, 2016 and December 31, 2015, the fair values of the options totaling $360 million and $152 million, respectively, were recorded in other current assets on Altria Group, Inc.’s condensed consolidated balance sheets.
Note 5. Earnings Per Share:

Basic and diluted earnings per share (“EPS”) were calculated using the following:
 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Net earnings attributable to Altria Group, Inc.
 
$
3,963

 
$
3,994

 
$
1,093

 
$
1,528

Less: Distributed and undistributed earnings attributable to unvested restricted shares and restricted stock units
 
(6
)
 
(8
)
 
(1
)
 
(3
)
Earnings for basic and diluted EPS
 
$
3,957

 
$
3,986

 
$
1,092

 
$
1,525

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
1,954

 
1,962

 
1,952

 
1,958


16

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 6. Other Comprehensive Earnings/Losses:

The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:
 
 
For the Nine Months Ended September 30, 2016
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2015
 
$
(5
)
 
$
(2,010
)
 
$
(1,265
)
 
$
(3,280
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses) before reclassifications
 
1

 
(318
)
 
158

 
(159
)
Deferred income taxes
 

 
122

 
(56
)
 
66

Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
 
1

 
(196
)
 
102

 
(93
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
127

 
24

 
151

Deferred income taxes
 

 
(47
)
 
(9
)
 
(56
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
80

 
15

 
95

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
1

 
(116
)
 
117

(1) 
2

 
 
 
 
 
 
 
 
 
Balances, September 30, 2016
 
$
(4
)
 
$
(2,126
)
 
$
(1,148
)
 
$
(3,278
)

 
 
For the Three Months Ended September 30, 2016
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, June 30, 2016
 
$
(4
)
 
$
(2,154
)
 
$
(1,182
)
 
$
(3,340
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 

 

 
48

 
48

Deferred income taxes
 

 

 
(17
)
 
(17
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 

 
31

 
31

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
42

 
5

 
47

Deferred income taxes
 

 
(14
)
 
(2
)
 
(16
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
28

 
3

 
31

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 

 
28

 
34

(1) 
62

 
 
 
 
 
 
 
 
 
Balances, September 30, 2016
 
$
(4
)
 
$
(2,126
)
 
$
(1,148
)
 
$
(3,278
)


17

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
 
For the Nine Months Ended September 30, 2015
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2014
 
$
(2
)
 
$
(2,040
)
 
$
(640
)
 
$
(2,682
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 
(4
)
 

 
(927
)
 
(931
)
Deferred income taxes
 
1

 

 
324

 
325

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(3
)
 

 
(603
)
 
(606
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
198

 
14

 
212

Deferred income taxes
 

 
(77
)
 
(4
)
 
(81
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
121

 
10

 
131

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(3
)
 
121

 
(593
)
(1) 
(475
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2015
 
$
(5
)
 
$
(1,919
)
 
$
(1,233
)
 
$
(3,157
)

 
 
For the Three Months Ended September 30, 2015
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, June 30, 2015
 
$
(3
)
 
$
(1,959
)
 
$
(916
)
 
$
(2,878
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 
(3
)
 

 
(493
)
 
(496
)
Deferred income taxes
 
1

 

 
173

 
174

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(2
)
 

 
(320
)
 
(322
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
64

 
5

 
69

Deferred income taxes
 

 
(24
)
 
(2
)
 
(26
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
40

 
3

 
43

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(2
)
 
40

 
(317
)
(1) 
(279
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2015
 
$
(5
)
 
$
(1,919
)
 
$
(1,233
)
 
$
(3,157
)
(1) For the nine and three months ended September 30, 2016 and 2015, Altria Group, Inc.’s proportionate share of SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments.


18

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Benefit Plans: (1)
 
 
 
 
 
 
 
 
Net loss
 
$
162

 
$
222

 
$
50

 
$
72

Prior service cost/credit
 
(35
)
 
(24
)
 
(8
)
 
(8
)
 
 
127

 
198

 
42

 
64

 
 
 
 
 
 
 
 
 
SABMiller (2)
 
24

 
14

 
5

 
5

 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
151

 
$
212

 
$
47

 
$
69


(1) Amounts are included in net defined benefit plan costs. For further details, see Note 3. Benefit Plans.

(2) Amounts are included in earnings from equity investment in SABMiller.
Note 7. Segment Reporting:

The products of Altria Group, Inc.’s subsidiaries include smokeable tobacco products, consisting of cigarettes manufactured and sold by PM USA and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; smokeless tobacco products, substantially all of which are manufactured and sold by USSTC; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in all other.

Altria Group, Inc.’s chief operating decision maker 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. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.’s chief operating decision maker.

19

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Segment data were as follows: 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
17,398

 
$
17,235

 
$
6,147

 
$
6,040

Smokeless products
 
1,530

 
1,393

 
528

 
482

Wine
 
498

 
461

 
182

 
166

All other
 
66

 
27

 
48

 
11

Net revenues
 
$
19,492

 
$
19,116

 
$
6,905

 
$
6,699

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income (loss):
 
 
 
 
 
 
 
 
Smokeable products
 
$
5,955

 
$
5,831

 
$
2,086

 
$
2,121

Smokeless products
 
930

 
830

 
312

 
286

Wine
 
100

 
97

 
38

 
35

All other
 
(46
)
 
(139
)
 
8

 
(35
)
Amortization of intangibles
 
(15
)
 
(16
)
 
(5
)
 
(6
)
General corporate expenses
 
(150
)
 
(166
)
 
(57
)
 
(53
)
Reduction of PMI tax-related receivable
 

 
(41
)
 

 
(41
)
Corporate asset impairment and exit costs
 
(5
)
 

 

 

Operating income
 
6,769

 
6,396

 
2,382

 
2,307

Interest and other debt expense, net
 
(571
)
 
(609
)
 
(179
)
 
(205
)
Loss on early extinguishment of debt
 
(823
)
 
(228
)
 
(823
)
 

Earnings from equity investment in SABMiller
 
564

 
546

 
299

 
187

Gain on derivative financial instruments
 
205

 

 
48

 

Earnings before income taxes
 
$
6,144

 
$
6,105

 
$
1,727

 
$
2,289


The comparability of operating companies income for the reportable segments was affected by the following:

Non-Participating Manufacturer (“NPM”) Adjustment Items - Pre-tax expense (income) for NPM adjustment items was recorded in Altria Group, Inc.’s condensed consolidated statements of earnings as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Smokeable products segment
 
$
12

 
$
(126
)
 
$

 
$
(126
)
Interest and other debt expense, net
 
6

 

 

 

Total
 
$
18

 
$
(126
)
 
$

 
$
(126
)
NPM adjustment items result from the settlement of, and determinations made in connection with, disputes with certain states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (such settlements and determinations are referred to collectively as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 11. Contingencies). The amounts shown in the table above for the smokeable products segment were recorded by PM USA as increases (reductions) to cost of sales, which decreased (increased) operating companies income in the smokeable products segment.

20

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Tobacco and Health Litigation Items - Pre-tax charges related to certain tobacco and health litigation items were recorded in Altria Group, Inc.’s condensed consolidated statements of earnings as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Smokeable products segment
 
$
72

 
$
102

 
$
45

 
$
54

Interest and other debt expense, net
 
16

 
13

 

 
13

Total
 
$
88

 
$
115

 
$
45

 
$
67

During the third quarter of 2016, PM USA recorded a pre-tax charge related to the Miner case of $45 million in marketing, administration and research costs. During the first quarter of 2016, PM USA recorded pre-tax charges, primarily related to the Aspinall case, of $26 million in marketing, administration and research costs and $12 million in interest costs. For further discussion, see “Lights/Ultra Lights” Cases - State Trial Court Class Certifications in Note 11. Contingencies.
During the third quarter of 2015, PM USA recorded pre-tax charges of $54 million in marketing, administration and research costs related to tobacco and health judgments in six state Engle progeny lawsuits, as well as $13 million in interest costs related to those cases. During the first quarter of 2015, PM USA and certain other cigarette manufacturers reached an agreement to resolve approximately 415 pending federal Engle progeny cases. As a result of the agreement, during the first quarter of 2015, PM USA recorded a pre-tax provision of approximately $43 million in marketing, administration and research costs. For further discussion, see Smoking and Health Litigation in Note 11. Contingencies.
Asset Impairment, Exit and Implementation Costs - See Note 2. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.
Note 8. Finance Assets, net:

In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold.

At September 30, 2016, finance assets, net, of $1,046 million were comprised of investments in finance leases of $1,079 million, reduced by the allowance for losses of $33 million. At December 31, 2015, finance assets, net, of $1,239 million were comprised of investments in finance leases of $1,281 million, reduced by the allowance for losses of $42 million.

During the second quarter of 2016 and 2015, as a result of updated market value information, PMCC determined that the estimated unguaranteed residual values on certain aircraft should be reduced by $28 million and $35 million, respectively. These decreases in unguaranteed residual values resulted in a reduction to PMCC’s net revenues of $18 million and $29 million in the second quarter of 2016 and 2015, respectively.

PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. PMCC believes that, as of September 30, 2016, the allowance for losses of $33 million was adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may increase or decrease its allowance for losses if such conditions change in the future.
The activity in the allowance for losses on finance assets was as follows:
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
 
(in millions)
Balance at beginning of the year
 
$
42

 
$
42

Decrease to allowance
 
(9
)
 

Balance at September 30
 
$
33

 
$
42



21

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

All PMCC lessees were current on their lease payment obligations as of September 30, 2016.
The credit quality of PMCC’s investments in finance leases as assigned by Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at September 30, 2016 and December 31, 2015 was as follows:

 
 
September 30, 2016
 
December 31, 2015
 
 
(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
 
“AAA/Aaa” to “A-/A3”
 
$
217

 
$
212

“BBB+/Baa1” to “BBB-/Baa3”
 
528

 
702

“BB+/Ba1” and Lower
 
334

 
367

Total
 
$
1,079

 
$
1,281

Note 9. Debt:

At September 30, 2016 and December 31, 2015, Altria Group, Inc. had no short-term borrowings.

Long-term Debt

In September 2016, Altria Group, Inc. issued $0.5 billion aggregate principal amount of 2.625% senior unsecured long-term notes due 2026 and $1.5 billion aggregate principal amount of 3.875% senior unsecured long-term notes due 2046. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used to repurchase certain of its senior unsecured notes in connection with the 2016 debt tender offer described below and for other general corporate purposes, including voluntary contributions to Altria Group, Inc.’s pension plans.
The notes are Altria Group, Inc.’s senior unsecured obligations and rank equally in right of payment with all of Altria Group, Inc.’s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.

The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA. For further discussion, see Note 12. Condensed Consolidating Financial Information.

During the third quarter of 2016 and the first quarter of 2015, Altria Group, Inc. completed debt tender offers to purchase for cash certain of its senior unsecured notes in aggregate principal amounts of $933 million and $793 million, respectively. Details of these debt tender offers were as follows:
 
 
2016
 
2015
 
 
 
(in millions)
Notes Purchased
 
 
 
 
 
9.95% Notes due 2038
 
$
441

 
$

 
10.20% Notes due 2039
 
492

 

 
9.70% Notes due 2018
 

 
793

 
Total
 
$
933

 
$
793

 


22

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

As a result of the debt tender offers, Altria Group, Inc. recorded the following pre-tax losses on early extinguishment of debt:
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Premiums and fees
$
809

 
$
226

 
$
809

 
$

Write-off of unamortized debt discounts and debt issuance costs
14

 
2

 
14

 

Total
$
823

 
$
228

 
$
823

 
$


With respect to $2.5 billion aggregate principal amount of Altria Group, Inc.’s senior unsecured long-term notes issued in 2008 and 2009, the interest rate payable on each series of notes was subject to adjustment from time to time if the rating assigned to the notes of such series by Moody’s or Standard & Poor’s was downgraded (or subsequently upgraded) as and to the extent set forth in the terms of the notes. As a result of credit rating upgrades by both Moody’s and Standard & Poor’s in the first quarter of 2016, this interest rate adjustment provision terminated in accordance with its terms.
On January 1, 2016, Altria Group, Inc. adopted ASU No. 2015-03. For further discussion, see Note 1. Background and Basis of Presentation.

Altria Group, Inc.’s estimate of the fair value of its debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria Group, Inc.’s total long-term debt at September 30, 2016 and December 31, 2015, was $16.1 billion and $14.5 billion, respectively, as compared with its carrying value of $13.9 billion and $12.8 billion, respectively.

Note 10. Income Taxes:

The income tax rate of 35.4% for the nine months ended September 30, 2016 increased 0.8 percentage points from the nine months ended September 30, 2015. The income tax rate of 36.7% for the three months ended September 30, 2016 increased 3.5 percentage points from the three months ended September 30, 2015. The increases were due primarily to the following:

the reversal of $59 million of tax reserves and associated interest due primarily to the closure in August 2015 of the Internal Revenue Service audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”) that was recorded during the third quarter of 2015; and
the resolution of various Philip Morris International Inc. (“PMI”) tax matters in the third quarter of 2015;
partially offset by:
a $41 million reversal of foreign tax credits primarily associated with SABMiller dividends that was recorded during the third quarter of 2015.
Under a tax sharing agreement entered into in connection with the 2008 spin-off between Altria Group, Inc. and PMI, its former subsidiary, PMI is responsible for its pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns, and continued to include the pre-spin-off federal income tax reserves of PMI in its liability for uncertain tax positions. As of December 31, 2015, there were no remaining pre-spin-off tax reserves for PMI.

During the third quarter of 2015, net tax benefits of $41 million were recorded for PMI tax matters relating to the IRS 2007-2009 Audit. These net tax benefits were offset by a reduction of a PMI tax-related receivable, which was recorded as a decrease to operating income on Altria Group, Inc.’s condensed consolidated statement of earnings. Due to the offset, the PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the nine and three months ended September 30, 2015.

Altria Group, Inc. is subject to income taxation in many jurisdictions. Uncertain tax positions reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not

23

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

entirely within the control of Altria Group, Inc. At September 30, 2016, Altria Group, Inc.’s total unrecognized tax benefits were $184 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2016 was $82 million, along with $102 million affecting deferred taxes. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $140 million. At December 31, 2015, Altria Group, Inc.’s total unrecognized tax benefits were $158 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2015 was $76 million, along with $82 million affecting deferred taxes.

Note 11. Contingencies:

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors or distributors.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment.  As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although Altria Group, Inc. cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

Altria Group, Inc. and its subsidiaries record provisions in the condensed 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 elsewhere in this Note 11. Contingencies: (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 condensed consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.

Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.

24

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation

Types and Number of Cases

Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iv) class action suits alleging that the uses of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”); and (v) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and “Lights/Ultra Lights” cases are discussed below.

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA(1) and, in some instances, Altria Group, Inc. as of October 24, 2016, October 26, 2015 and October 27, 2014: