Attached files

file filename
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - ALTRIA GROUP, INC.exhibit311q32017.htm
EX-99.2 - TRIAL SCHEDULE FOR CERTAIN CASES - ALTRIA GROUP, INC.exhibit992q32017.htm
EX-99.1 - CERTAIN LITIGATION MATTERS - ALTRIA GROUP, INC.exhibit991q32017.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 - ALTRIA GROUP, INC.exhibit322q32017.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 - ALTRIA GROUP, INC.exhibit321q32017.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - ALTRIA GROUP, INC.exhibit312q32017.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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
  
¨
 
 
 
 
Emerging growth company
  
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 16, 2017, there were 1,908,189,678 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 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, 2017
 
December 31, 2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,582

 
$
4,569

Receivables
 
148

 
151

Inventories:
 

 

Leaf tobacco
 
784

 
892

Other raw materials
 
180

 
164

Work in process
 
432

 
512

Finished product
 
591

 
483

 
 
1,987

 
2,051

Other current assets
 
439

 
489

Total current assets
 
5,156

 
7,260

Property, plant and equipment, at cost
 
4,846

 
4,835

Less accumulated depreciation
 
2,939

 
2,877

 
 
1,907

 
1,958

Goodwill
 
5,307

 
5,285

Other intangible assets, net
 
12,196

 
12,036

Investment in AB InBev
 
18,213

 
17,852

Finance assets, net
 
901

 
1,028

Other assets
 
480

 
513

Total Assets
 
$
44,160

 
$
45,932

 
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, 2017
 
December 31, 2016
Liabilities
 
 
 
 
Accounts payable
 
$
270

 
$
425

Accrued liabilities:
 

 

Marketing
 
759

 
747

Employment costs
 
152

 
289

Settlement charges
 
3,383

 
3,701

Other
 
834

 
1,025

Dividends payable
 
1,264

 
1,188

Total current liabilities
 
6,662

 
7,375

Long-term debt
 
13,890

 
13,881

Deferred income taxes
 
8,234

 
8,416

Accrued pension costs
 
611

 
805

Accrued postretirement health care costs
 
2,185

 
2,217

Other liabilities
 
372

 
427

Total liabilities
 
31,954

 
33,121

Contingencies (Note 9)
 

 

Redeemable noncontrolling interest
 
37

 
38

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

 
935

Additional paid-in capital
 
5,940

 
5,893

Earnings reinvested in the business
 
38,542

 
36,906

Accumulated other comprehensive losses
 
(1,946
)
 
(2,052
)
Cost of repurchased stock
(896,340,584 shares at September 30, 2017 and
862,689,093 shares at December 31, 2016)
 
(31,305
)
 
(28,912
)
Total stockholders’ equity attributable to Altria Group, Inc.
 
12,166

 
12,770

Noncontrolling interests
 
3

 
3

Total stockholders’ equity
 
12,169

 
12,773

Total Liabilities and Stockholders’ Equity
 
$
44,160

 
$
45,932

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,
 
 
2017
 
2016
Net revenues
 
$
19,475

 
$
19,492

Cost of sales
 
5,699

 
5,841

Excise taxes on products
 
4,695

 
4,888

Gross profit
 
9,081

 
8,763

Marketing, administration and research costs
 
1,664

 
1,871

Asset impairment and exit costs
 
24

 
123

Operating income
 
7,393

 
6,769

Interest and other debt expense, net
 
525

 
571

Loss on early extinguishment of debt
 

 
823

Earnings from equity investment in AB InBev/SABMiller
 
(332
)
 
(564
)
Gain on AB InBev/SABMiller business combination
 
(445
)
 
(205
)
Earnings before income taxes
 
7,645

 
6,144

Provision for income taxes
 
2,386

 
2,178

Net earnings
 
5,259

 
3,966

Net earnings attributable to noncontrolling interests
 
(3
)
 
(3
)
Net earnings attributable to Altria Group, Inc.
 
$
5,256

 
$
3,963

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
2.72

 
$
2.02

Dividends declared
 
$
1.88

 
$
1.74

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,
 
 
2017
 
2016
Net revenues
 
$
6,729

 
$
6,905

Cost of sales
 
1,940

 
2,043

Excise taxes on products
 
1,606

 
1,712

Gross profit
 
3,183

 
3,150

Marketing, administration and research costs
 
568

 
766

Asset impairment and exit costs
 
8

 
2

Operating income
 
2,607

 
2,382

Interest and other debt expense, net
 
169

 
179

Loss on early extinguishment of debt
 

 
823

Earnings from equity investment in AB InBev/SABMiller
 
(169
)
 
(299
)
Gain on AB InBev/SABMiller business combination
 
(37
)
 
(48
)
Earnings before income taxes
 
2,644

 
1,727

Provision for income taxes
 
777

 
633

Net earnings
 
1,867

 
1,094

Net earnings attributable to noncontrolling interests
 
(1
)
 
(1
)
Net earnings attributable to Altria Group, Inc.
 
$
1,866

 
$
1,093

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
0.97

 
$
0.56

Dividends declared
 
$
0.66

 
$
0.61

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,
 
 
2017
 
2016
Net earnings
 
$
5,259

 
$
3,966

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

 
1

Benefit plans
 
96

 
(116
)
AB InBev/SABMiller
 
9

 
117

Other comprehensive earnings, net of deferred income taxes
 
106

 
2

 
 
 
 
 
Comprehensive earnings
 
5,365

 
3,968

Comprehensive earnings attributable to noncontrolling interests
 
(3
)
 
(3
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
5,362

 
$
3,965

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,
 
 
2017
 
2016
Net earnings
 
$
1,867

 
$
1,094

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Benefit plans
 
31

 
28

AB InBev/SABMiller
 
(139
)
 
34

Other comprehensive (losses) earnings, net of deferred income taxes
 
(108
)
 
62

 
 
 
 
 
Comprehensive earnings
 
1,759

 
1,156

Comprehensive earnings attributable to noncontrolling interests
 
(1
)
 
(1
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
1,758

 
$
1,155


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, 2016 and
the Nine Months Ended September 30, 2017
(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, 2015
 
$
935

 
$
5,813

 
$
27,257

 
$
(3,280
)
 
$
(27,845
)
 
$
(7
)
 
$
2,873

Net earnings (1)
 

 

 
14,239

 

 

 

 
14,239

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
1,228

 

 

 
1,228

Stock award activity
 

 
90

 

 

 
(37
)
 

 
53

Cash dividends declared ($2.35 per share)
 

 

 
(4,590
)
 

 

 

 
(4,590
)
Repurchases of common stock
 

 

 

 

 
(1,030
)
 

 
(1,030
)
Other
 

 
(10
)
 

 

 

 
10

 

Balances, December 31, 2016
 
935

 
5,893

 
36,906

 
(2,052
)
 
(28,912
)
 
3

 
12,773

Net earnings (1)
 

 

 
5,256

 

 

 

 
5,256

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
106

 

 

 
106

Stock award activity
 

 
47

 

 

 
(34
)
 

 
13

Cash dividends declared ($1.88 per share)
 

 

 
(3,620
)
 

 

 

 
(3,620
)
Repurchases of common stock
 

 

 

 

 
(2,359
)
 

 
(2,359
)
Balances, September 30, 2017
 
$
935

 
$
5,940

 
$
38,542

 
$
(1,946
)
 
$
(31,305
)
 
$
3

 
$
12,169


(1) 
Amounts attributable to noncontrolling interests for the nine months ended September 30, 2017 and for the year ended December 31, 2016 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 on the condensed consolidated balance sheets at September 30, 2017 and December 31, 2016.

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,
 
 
2017
 
2016
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
5,259

 
$
3,966

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
155

 
149

Deferred income tax benefit
 
(223
)
 
(69
)
Earnings from equity investment in AB InBev/SABMiller
 
(332
)
 
(564
)
Dividends from AB InBev/SABMiller
 
434

 
403

Gain on AB InBev/SABMiller business combination
 
(445
)
 
(205
)
Asset impairment and exit costs, net of cash paid
 
(30
)
 
71

Loss on early extinguishment of debt
 

 
823

Cash effects of changes:
 
 
 
 
Receivables
 
4

 
(21
)
Inventories
 
67

 
54

Accounts payable
 
(154
)
 
(102
)
Income taxes
 
341

 
(122
)
Accrued liabilities and other current assets
 
(525
)
 
(257
)
Accrued settlement charges
 
(318
)
 
(161
)
Pension plan contributions
 
(18
)
 
(520
)
Pension provisions and postretirement, net
 
(70
)
 
(56
)
Other
 
20

 
141

Net cash provided by operating activities
 
4,165

 
3,530

Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
(151
)
 
(128
)
Proceeds from finance assets
 
133

 
207

Other
 
(184
)
 
(44
)
Net cash (used in) provided by investing activities
 
(202
)
 
35

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

 
1,976

Long-term debt repaid
 

 
(933
)
Repurchases of common stock
 
(2,359
)
 
(512
)
Dividends paid on common stock
 
(3,544
)
 
(3,321
)
Premiums and fees related to early extinguishment of debt
 

 
(809
)
Other
 
(47
)
 
(37
)
Net cash used in financing activities
 
(5,950
)
 
(3,636
)
Cash and cash equivalents:
 
 
 
 
Decrease
 
(1,987
)
 
(71
)
Balance at beginning of period
 
4,569

 
2,369

Balance at end of period
 
$
2,582

 
$
2,298

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, 2017, Altria Group, Inc.’s wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged 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; Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”), which are engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; 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, 2017, 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. In October 2016, Anheuser-Busch InBev SA/NV (“Legacy AB InBev”) completed its business combination with SABMiller, and Altria Group, Inc. received cash and shares representing a 9.6% ownership in the combined company (the “Transaction”). The newly formed Belgian company, which retained the name Anheuser-Busch InBev SA/NV (“AB InBev”), became the holding company for the combined businesses. Subsequently, Altria Group, Inc. purchased approximately 12 million ordinary shares of AB InBev, increasing Altria Group, Inc.’s ownership to approximately 10.2% at December 31, 2016. At September 30, 2017, Altria Group, Inc. had an approximate 10.2% ownership of AB InBev, which Altria Group, Inc. accounts for under the equity method of accounting using a one-quarter lag. For the nine and three months ended September 30, 2017, Altria Group, Inc. recorded a pre-tax gain of $445 million and $37 million, respectively, related to the completion of AB InBev’s planned divestitures of certain SABMiller assets and businesses resulting from Legacy AB InBev obtaining necessary regulatory clearances to proceed with the Transaction (“AB InBev divestitures”). For the nine and three months ended September 30, 2016, Altria Group, Inc. recorded a pre-tax gain of $205 million and $48 million, respectively, for the change in the fair value of the derivative financial instruments that it entered into in connection with the Transaction (“derivative financial instruments”). The pre-tax gains related to the AB InBev divestitures and the derivative financial instruments were included in gain on AB InBev/SABMiller business combination in Altria Group, Inc.’s condensed consolidated statements of earnings. Altria Group, Inc. receives cash dividends on its interest in AB InBev if and when AB InBev pays such dividends.

Dividends and Share Repurchases

During the third quarter of 2017, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved an 8.2% increase in the quarterly dividend rate to $0.66 per share of Altria Group, Inc. common stock versus the previous rate of $0.61 per share. The current annualized dividend rate is $2.64 per share. Future dividend payments remain subject to the discretion of the Board of Directors.

In July 2015, the Board of Directors authorized a $1.0 billion share repurchase program that it expanded to $3.0 billion in October 2016 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”). At September 30, 2017, Altria Group, Inc. had approximately $576 million remaining in the July 2015 share repurchase program. 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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in millions, except per share data)
Total number of shares repurchased
 
33.2

 
8.1

 
11.1

 
2.6

Aggregate cost of shares repurchased
 
$
2,359

 
$
512

 
$
759

 
$
171

Average price per share of shares repurchased
 
$
70.97

 
$
63.28

 
$
67.99

 
$
66.23


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, 2016.

On January 1, 2017, Altria Group, Inc. adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU No. 2016-09”) and ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU No. 2015-11”).

ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of ASU No. 2016-09 did not have a material impact on Altria Group, Inc.’s condensed consolidated financial statements. The portions of the guidance that have an impact on Altria Group, Inc.’s condensed consolidated financial statements have been adopted prospectively, with the exception of the classification of employee taxes paid by Altria Group, Inc. on the condensed consolidated statements of cash flows related to shares withheld by Altria Group, Inc. for tax withholding purposes, which has been adopted retrospectively. Altria Group, Inc. has made an accounting policy election to continue to estimate the number of share-based awards that are expected to vest, which includes estimating forfeitures. Certain prior-year amounts in the condensed consolidated statements of cash flows have been reclassified to conform with the current year’s presentation due to Altria Group, Inc.’s adoption of ASU No. 2016-09.

ASU No. 2015-11 requires inventory that is measured using the first-in, first-out (“FIFO”) or average cost methods to be measured at the lower of cost and net realizable value. Previous guidance required inventory that was measured using the FIFO or average cost methods to be measured at the lower of cost or market. The adoption of this guidance did not have a material impact on Altria Group, Inc.’s condensed consolidated financial statements.

For a description of recently issued accounting guidance applicable to, but not yet adopted by, Altria Group, Inc., see Note 11. Recent Accounting Guidance Not Yet Adopted.

12

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

Note 2. Asset Impairment, Exit and Implementation Costs:

Pre-tax asset impairment, exit and implementation costs consisted of the following:
 
For the Nine Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2016
 
Asset Impairment and Exit Costs
 
Implementation Costs
 
Total
 
Asset Impairment and Exit Costs (1)
 
Implementation Costs
 
Total
 
(in millions)
Smokeable products
$
2

 
$
17

 
$
19

 
$
99

 
$
6

 
$
105

Smokeless products
22

 
30

 
52

 
13

 
1

 
14

All other

 

 

 
6

 

 
6

General corporate

 

 

 
5

 

 
5

Total
$
24

 
$
47

 
$
71

 
$
123

 
$
7

 
$
130


(1) Includes termination and curtailment costs of $20 million. See Note 3. Benefit Plans.
 
For the Three Months Ended September 30, 2017
 
For the Three Months Ended September 30, 2016
 
Asset Impairment and Exit Costs
 
Implementation Costs
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs
 
Total
 
(in millions)
Smokeable products
$

 
$
5

 
$
5

 
$
1

 
$
3

 
$
4

Smokeless products
8

 
2

 
10

 

 
1

 
1

All other

 

 

 
1

 

 
1

Total
$
8

 
$
7

 
$
15

 
$
2

 
$
4

 
$
6


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, 2017
 
(in millions)
Balances at December 31, 2016
$
79

Charges
17

Cash spent
(54
)
Balances at September 30, 2017
$
42


The pre-tax asset impairment, exit and implementation costs shown above for 2017 and 2016 related to the facilities consolidation and productivity initiative, respectively, are discussed below.
Facilities Consolidation
In October 2016, Altria Group, Inc. announced the consolidation of certain of its 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 (“Richmond Manufacturing Center”). USSTC is in the process of transferring its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. Separation benefits are being paid to non-relocating employees. The consolidation is expected to be completed by the first quarter of 2018.
As a result of the consolidation, Altria Group, Inc. expects to record total pre-tax charges of approximately $150 million, or $0.05 per share. Of this amount, during 2016, Altria Group, Inc. incurred pre-tax charges of $71 million, or approximately $0.03 per share, and recorded $71 million during the first nine months of 2017. The total estimated charges relate primarily to

13

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

accelerated depreciation and asset impairment ($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.
For the nine and three months ended September 30, 2017, Altria Group, Inc. incurred pre-tax asset impairment, exit and implementation costs of $71 million and $15 million, respectively. The pre-tax implementation costs were included in cost of sales in Altria Group, Inc.’s condensed consolidated statements of earnings. Total pre-tax charges incurred since the inception of the consolidation through September 30, 2017 were $142 million.
Cash payments related to the consolidation of $46 million were made during the nine months ended September 30, 2017, for total cash payments of $51 million since inception.
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 the initiative, for the nine and three months ended September 30, 2016, Altria Group, Inc. incurred pre-tax asset impairment, exit and implementation costs of $130 million and $6 million, respectively. At December 31, 2016, total pre-tax charges related to this initiative were substantially completed.

Cash payments related to the initiative of $31 million were made during the nine months ended September 30, 2017, for total cash payments of $105 million since inception.
Note 3. Benefit Plans:

Components of Net Periodic Benefit (Income) Cost

Net periodic benefit (income) cost consisted of the following: 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
Pension
 
Postretirement
 
Pension
 
Postretirement
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Service cost
$
57

 
$
55

 
$
12

 
$
12

 
$
19

 
$
18

 
$
3

 
$
4

Interest cost
216

 
211

 
57

 
58

 
72

 
70

 
17

 
18

Expected return on plan assets
(451
)
 
(416
)
 

 

 
(151
)
 
(139
)
 

 

Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
147

 
130

 
19

 
19

 
49

 
43

 
3

 
3

Prior service cost (credit)
3

 
4

 
(28
)
 
(29
)
 
1

 
2

 
(9
)
 
(10
)
Termination and curtailment

 
20

 

 

 

 

 

 

Net periodic benefit
   (income) cost
$
(28
)
 
$
4

 
$
60

 
$
60

 
$
(10
)
 
$
(6
)
 
$
14

 
$
15


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 August 2017, the Board of Directors approved a voluntary, limited-time offer to approximately 8,200 former employees with vested benefits in the Altria Retirement Plan who have not commenced receiving benefit payments and who meet certain other conditions. Eligible participants can make a one-time election to receive their pension benefit as a single lump sum payment or as a monthly annuity. Eligible participants who wish to receive the lump sum payment or monthly annuity must make an election by November 3, 2017. Lump sum payments will be made in December 2017 and monthly annuity payments will begin on January 1, 2018. Payments will be made from the Altria Retirement Plan’s assets. If the lump sum acceptance rate results in settlement accounting, a one-time charge will be recorded in the fourth quarter of 2017.

14

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

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 (“IRS”) regulations. Employer contributions of $18 million were made to Altria Group, Inc.’s pension plans during the nine months ended September 30, 2017. Altria Group, Inc. anticipates making additional employer contributions to its pension plans during the remainder of 2017 of up to $10 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. 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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Net earnings attributable to Altria Group, Inc.
 
$
5,256

 
$
3,963

 
$
1,866

 
$
1,093

Less: Distributed and undistributed earnings attributable to unvested restricted shares and restricted stock units
 
(7
)
 
(6
)
 
(2
)
 
(1
)
Earnings for basic and diluted EPS
 
$
5,249

 
$
3,957

 
$
1,864

 
$
1,092

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
1,927

 
1,954

 
1,915

 
1,952



Note 5. 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, 2017
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
AB InBev
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2016
 
$
(4
)
 
$
(2,048
)
 
$

 
$
(2,052
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 
1

 

 
9

 
10

Deferred income taxes
 

 

 
(3
)
 
(3
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 
1

 

 
6

 
7

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
154

 
5

 
159

Deferred income taxes
 

 
(58
)
 
(2
)
 
(60
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
96

 
3

 
99

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 
1

 
96

 
9

(1) 
106

 
 
 
 
 
 
 
 
 
Balances, September 30, 2017
 
$
(3
)
 
$
(1,952
)
 
$
9

 
$
(1,946
)

15

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


 
 
For the Three Months Ended September 30, 2017
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
AB InBev
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, June 30, 2017
 
$
(3
)
 
$
(1,983
)
 
$
148

 
$
(1,838
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 

 

 
(216
)
 
(216
)
Deferred income taxes
 

 

 
75

 
75

Other comprehensive losses before reclassifications, net of deferred income taxes
 

 

 
(141
)
 
(141
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
48

 
3

 
51

Deferred income taxes
 

 
(17
)
 
(1
)
 
(18
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
31

 
2

 
33

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

 
31

 
(139
)
(1) 
(108
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2017
 
$
(3
)
 
$
(1,952
)
 
$
9

 
$
(1,946
)

(1) For the nine and three months ended September 30, 2017, other comprehensive earnings/losses related to Altria Group, Inc.’s investment in AB InBev consisted primarily of currency translation adjustments.

 
 
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

(2) 
2

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


16

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

 
 
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

(2) 
62

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

(2) For the nine and three months ended September 30, 2016, other comprehensive earnings/losses related to Altria Group, Inc.’s investment in SABMiller consisted primarily of currency translation adjustments.

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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Benefit Plans: (1)
 
 
 
 
 
 
 
 
Net loss
 
$
179

 
$
162

 
$
56

 
$
50

Prior service cost/credit
 
(25
)
 
(35
)
 
(8
)
 
(8
)
 
 
154

 
127

 
48

 
42

 
 
 
 
 
 
 
 
 
AB InBev/SABMiller (2)
 
5

 
24

 
3

 
5

 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
159

 
$
151

 
$
51

 
$
47


(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 AB InBev/SABMiller.

17

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

Note 6. Segment Reporting:

The products of Altria Group, Inc.’s subsidiaries include smokeable tobacco products, consisting of cigarettes manufactured and sold by PM USA and Nat Sherman, machine-made large cigars and pipe tobacco manufactured and sold by Middleton and premium cigars sold by Nat Sherman; smokeless tobacco products 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 (the “CODM”) 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 the CODM.
Segment data were as follows: 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
17,355

 
$
17,398

 
$
5,975

 
$
6,147

Smokeless products
 
1,580

 
1,530

 
550

 
528

Wine
 
471

 
498

 
181

 
182

All other
 
69

 
66

 
23

 
48

Net revenues
 
$
19,475

 
$
19,492

 
$
6,729

 
$
6,905

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income (loss):
 
 
 
 
 
 
 
 
Smokeable products
 
$
6,564

 
$
5,955

 
$
2,290

 
$
2,086

Smokeless products
 
951

 
930

 
352

 
312

Wine
 
82

 
100

 
36

 
38

All other
 
(31
)
 
(46
)
 
(10
)
 
8

Amortization of intangibles
 
(15
)
 
(15
)
 
(5
)
 
(5
)
General corporate expenses
 
(158
)
 
(150
)
 
(56
)
 
(57
)
Corporate asset impairment and
exit costs
 

 
(5
)
 

 

Operating income
 
7,393

 
6,769

 
2,607

 
2,382

Interest and other debt expense, net
 
(525
)
 
(571
)
 
(169
)
 
(179
)
Loss on early extinguishment of debt
 

 
(823
)
 

 
(823
)
Earnings from equity investment
in AB InBev/SABMiller
 
332

 
564

 
169

 
299

Gain on AB InBev/SABMiller business combination
 
445

 
205

 
37

 
48

Earnings before income taxes
 
$
7,645

 
$
6,144

 
$
2,644

 
$
1,727



18

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

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

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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Smokeable products segment
 
$
16

 
$
72

 
$

 
$
45

Interest and other debt expense, net
 
2

 
16

 

 

Total
 
$
18

 
$
88

 
$

 
$
45

During the second quarter of 2017, PM USA recorded pre-tax charges related to four Engle progeny cases of $15 million in marketing, administration and research costs and $2 million in interest costs related to those cases. For further discussion, see Smoking and Health Litigation in Note 9. Contingencies.
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 Certification Settlements in Note 9. Contingencies.
Smokeless Products Recall - During the first quarter of 2017, USSTC voluntarily recalled certain smokeless tobacco products manufactured at its Franklin Park, Illinois facility due to a product tampering incident (the “Recall”). USSTC estimates that the Recall-related costs and the share impact from the Recall reduced smokeless products segment operating companies income by approximately $60 million in the first quarter of 2017.
Asset Impairment, Exit and Implementation Costs - See Note 2. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.
Note 7. Debt:

At September 30, 2017 and December 31, 2016, Altria Group, Inc. had no short-term borrowings.

Long-term Debt

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, 2017 and December 31, 2016, was $15.3 billion and $15.1 billion, respectively, as compared with its carrying value of $13.9 billion for each period.

During the third quarter of 2016, Altria Group, Inc. issued $0.5 billion aggregate principal amount of 2.625% senior unsecured notes due 2026 and $1.5 billion aggregate principal amount of 3.875% senior unsecured notes due 2046. 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 debt tender offer discussed below and for other general corporate purposes, including voluntary contributions to Altria Group, Inc.’s pension plans.

During the third quarter of 2016, Altria Group, Inc. purchased for cash $441 million aggregate principal amount of its 9.95% senior unsecured notes due 2038, and $492 million aggregate principal amount of its 10.20% senior unsecured notes due 2039 in a debt tender offer. As a result of the debt tender offer, during the third quarter of 2016, Altria Group, Inc. recorded a pre-tax loss on early extinguishment of debt of $823 million, which included premiums and fees of $809 million and the write-off of related unamortized debt discounts and debt issuance costs of $14 million.


19

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

Note 8. Income Taxes:

The income tax rate of 29.4% for the three months ended September 30, 2017 decreased 7.3 percentage points from the three months ended September 30, 2016. This decrease was due primarily to the following:

tax benefits of $232 million for the release of a valuation allowance related to deferred income tax assets for foreign tax credit carryforwards, which Altria Group, Inc. determined are more-likely-than-not to be fully utilized based upon new information received from AB InBev in the third quarter of 2017; and
tax benefits of $36 million in 2017 for the reversal of tax accruals no longer required;
partially offset by:
tax expense of $114 million in 2017 for tax reserves related to the calculation of certain foreign tax credits.
The income tax rate of 31.2% for the nine months ended September 30, 2017 decreased 4.2 percentage points from the nine months ended September 30, 2016. This decrease was due primarily to the items discussed above and tax benefits of $152 million related primarily to the effective settlement in June 2017 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2010-2013 tax years.

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 entirely within the control of Altria Group, Inc. At September 30, 2017, Altria Group, Inc.’s total unrecognized tax benefits were $194 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2017 was $126 million, along with $68 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 $7 million. At December 31, 2016, Altria Group, Inc.’s total unrecognized tax benefits were $169 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2016 was $67 million, along with $102 million affecting deferred taxes.
Note 9. 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, have ranged 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

20

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

jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, may also seek to repeal or alter bond cap statutes through legislation. 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 9. 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.

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 and, in some instances, Altria Group, Inc. as of October 23, 2017, October 24, 2016 and October 26, 2015:

 
October 23, 2017
 
October 24, 2016
 
October 26, 2015
Individual Smoking and Health Cases (1)
87
 
66
 
65
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
4
 
5
 
5
Health Care Cost Recovery Actions (3)
1
 
1
 
1
“Lights/Ultra Lights” Class Actions
4
 
9
 
12

(1) Does not include 2,423 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. Also, does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (discussed below in Smoking and Health Litigation - Engle Class Action).

21

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

(2) Includes as one case the 600 civil actions (of which 344 were actions against PM USA) that were to be tried in a single proceeding in West Virginia (In re: Tobacco Litigation). The West Virginia Supreme Court of Appeals ruled that the United States Constitution did not preclude a trial in two phases in this case. Issues related to defendants’ conduct and whether punitive damages are permissible were tried in the first phase. Trial in the first phase of this case began in April 2013. In May 2013, the jury returned a verdict in favor of defendants on the claims for design defect, negligence, failure to warn, breach of warranty, and concealment and declined to find that the defendants’ conduct warranted punitive damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should have included use instructions for the period 1964 - 1969. The second phase will consist of trials to determine liability and compensatory damages. In November 2014, the West Virginia Supreme Court of Appeals affirmed the final judgment. In July 2015, the trial court entered an order that will result in the entry of final judgment in favor of defendants and against all but 30 plaintiffs who potentially have a claim against one or more defendants that may be pursued in a second phase of trial. The court intends to try the claims of these 30 plaintiffs in six consolidated trials, each with a group of five plaintiffs. PM USA is a defendant in nine of the remaining 30 cases. The first trial is currently scheduled to begin May 1, 2018. Dates for the five remaining consolidated trials have not been scheduled. The parties have agreed to resolve the cases for an immaterial amount and have so notified the court together with a motion that the court vacate the May trial date.
(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.

International Tobacco-Related Cases

As of October 23, 2017, PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.

Tobacco-Related Cases Set for Trial

As of October 23, 2017, seven Engle progeny cases are set for trial through December 31, 2017. There are no other individual smoking and health cases and no “Lights/Ultra Lights” class actions against PM USA set for trial during this period. Cases against other companies in the tobacco industry may be scheduled for trial during this period. Trial dates are subject to change.

Trial Results

Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 62 smoking and health, “Lights/Ultra Lights” and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 41 of the 62 cases. These 41 cases were tried in Alaska (1), California (7), Florida (10), Louisiana (1), Massachusetts (2), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2). A motion for a new trial was granted in one of the cases in Florida and in the case in Alaska. In the Alaska case (Hunter), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. In December 2015, the Alaska Supreme Court reversed the trial court decision and remanded the case with directions for the trial court to reassess whether to grant a new trial. In March 2016, the trial court granted a new trial and PM USA filed a petition for review of that order with the Alaska Supreme Court, which the court denied in July 2016. The retrial began in October 2016. In November 2016, the court declared a mistrial after the jury failed to reach a verdict. The plaintiff subsequently moved for a new trial. In October 2017, the trial court vacated the October 16, 2017 trial date. A new date for trial has not been set. See Types and Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).

Of the 21 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 18 have reached final resolution.

As of October 23, 2017, 114 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision as follows: 62 verdicts were returned in favor of plaintiffs; 45 verdicts were returned in favor of PM USA. Five verdicts that were initially returned in favor of plaintiff were reversed post-trial or on appeal and remain pending and two verdicts in favor of PM USA were reversed for a new trial. See Smoking and Health Litigation - Engle Progeny Trial Court Results below for a discussion of these verdicts.

Judgments Paid and Provisions for Tobacco and Health Litigation Items (Including Engle Progeny Litigation)

After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments and settlements (including related costs and fees) totaling approximately $490 million and interest totaling approximately $184 million as of September 30, 2017. These amounts include payments for

22

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

Engle progeny judgments (and related costs and fees) totaling approximately $99 million, interest totaling approximately $22 million and payment of approximately $43 million in connection with the Federal Engle Agreement, discussed below.

The changes in Altria Group, Inc.’s accrued liability for tobacco and health litigation items, including related interest costs, for the periods specified below are as follows:

 
For the Nine Months Ended
September 30,
 
For the Three Months Ended
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Accrued liability for tobacco and health litigation items at beginning of period
$
47

 
$
132

 
$
47

 
$
30

Pre-tax charges for:
 
 
 
 
 
 
 
Tobacco and health judgments
16

 
5

 

 

Related interest costs
2

 
6

 

 

Agreement to resolve Aspinall including related
interest costs

 
32

 

 

        Agreement to resolve Miner 

 
45

 

 
45

Payments
(18
)
 
(145
)
 

 

Accrued liability for tobacco and health litigation items at end of period
$
47

 
$
75

 
$
47

 
$
75


The accrued liability for tobacco and health litigation items, including related interest costs, was included in liabilities on Altria Group, Inc.’s condensed consolidated balance sheets. Pre-tax charges for tobacco and health judgments and the agreements to resolve the Aspinall case (excluding related interest costs of approximately $10 million) and the Miner case were included in marketing, administration and research costs on Altria Group, Inc.’s condensed consolidated statements of earnings. Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria Group, Inc.’s condensed consolidated statements of earnings.

Security for Judgments

To obtain stays of judgments pending current appeals, as of September 30, 2017, PM USA has posted various forms of security totaling approximately $61 million, the majority of which has been collateralized with cash deposits that are included in other assets on the condensed consolidated balance sheet.

Smoking and Health Litigation

Overview

Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.

Non-Engle Progeny Litigation

Summarized below are the non-Engle progeny smoking and health cases pending during 2017 in which a verdict was returned in favor of plaintiff and against PM USA. Charts listing certain verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.


23

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

Gentile: In October 2017, a jury in a Florida state court returned a verdict in favor of plaintiff, awarding approximately $7.1 million in compensatory damages and allocating 75% of the fault to PM USA (an amount of approximately $5.3 million).

Bullock: In December 2015, a jury in the U.S. District Court for the Central District of California returned a verdict in favor of plaintiff, awarding $900,000 in compensatory damages. In January 2016, the plaintiff moved for a new trial, which the district court denied in February 2016. In March 2016, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit and plaintiff cross-appealed. Oral argument is scheduled for November 7, 2017.

Federal Government’s Lawsuit: See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America health care cost recovery case.

Engle Class Action

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.

In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Court’s order.

In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Florida Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Florida Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Florida Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion

24

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

of appellate review was denied by the Florida Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court, which the United States Supreme Court denied later in 2007.

In February 2008, the trial court decertified the class, except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Court’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and would receive no credit at that time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.

In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs’ claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.

Engle Progeny Cases

The deadline for filing Engle progeny cases, as required by the Florida Supreme Court’s Engle decision, expired in January 2008. As of October 23, 2017, approximately 2,500 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 3,200 state court plaintiffs.  Because of a number of factors, including, but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. While the Federal Engle Agreement (discussed below) resolved nearly all Engle progeny cases pending in federal court, as of October 23, 2017, approximately 12 cases were pending against PM USA in federal court representing the cases excluded from that agreement.

Agreement to Resolve Federal Engle Progeny Cases

In 2015, PM USA, R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and Lorillard Tobacco Company (“Lorillard”) resolved approximately 415 pending federal Engle progeny cases (the “Federal Engle Agreement”). Under the terms of the Federal Engle Agreement, PM USA paid approximately $43 million. Federal cases that were in trial and those that previously reached final verdict were not included in the Federal Engle