Attached files

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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - ALTRIA GROUP, INC.exhibit311q32018.htm
EX-99.2 - TRIAL SCHEDULE FOR CERTAIN CASES - ALTRIA GROUP, INC.exhibit992q32018.htm
EX-99.1 - CERTAIN LITIGATION MATTERS - ALTRIA GROUP, INC.exhibit991q32018.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 - ALTRIA GROUP, INC.exhibit322q32018.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 - ALTRIA GROUP, INC.exhibit321q32018.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - ALTRIA GROUP, INC.exhibit312q32018.htm
EX-12 - STATEMENT 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, 2018
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 every Interactive Data File required to be submitted 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 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
 
¨   
  
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 15, 2018, there were 1,879,045,481 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, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,393

 
$
1,253

Receivables
 
187

 
142

Inventories:
 

 

Leaf tobacco
 
794

 
941

Other raw materials
 
188

 
170

Work in process
 
506

 
560

Finished product
 
589

 
554

 
 
2,077

 
2,225

Income taxes
 
84

 
461

Other current assets
 
424

 
263

Total current assets
 
5,165

 
4,344

Property, plant and equipment, at cost
 
4,861

 
4,879

Less accumulated depreciation
 
2,970

 
2,965

 
 
1,891

 
1,914

Goodwill
 
5,307

 
5,307

Other intangible assets, net
 
12,385

 
12,400

Investment in AB InBev
 
17,825

 
17,952

Finance assets, net
 
848

 
899

Other assets
 
532

 
386

Total Assets
 
$
43,953

 
$
43,202

 
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, 2018
 
December 31, 2017
Liabilities
 
 
 
 
Current portion of long-term debt
 
$
2,007

 
$
864

Accounts payable
 
289

 
374

Accrued liabilities:
 

 

Marketing
 
690

 
695

Employment costs
 
147

 
188

Settlement charges
 
3,230

 
2,442

Other
 
775

 
971

Dividends payable
 
1,508

 
1,258

Total current liabilities
 
8,646

 
6,792

Long-term debt
 
11,896

 
13,030

Deferred income taxes
 
5,427

 
5,247

Accrued pension costs
 
260

 
445

Accrued postretirement health care costs
 
1,983

 
1,987

Other liabilities
 
207

 
283

Total liabilities
 
28,419

 
27,784

Contingencies (Note 10)
 

 

Redeemable noncontrolling interest
 
38

 
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
 
5,959

 
5,952

Earnings reinvested in the business
 
43,805

 
42,251

Accumulated other comprehensive losses
 
(2,034
)
 
(1,897
)
Cost of repurchased stock
(925,893,647 shares at September 30, 2018 and
904,702,125 shares at December 31, 2017)
 
(33,171
)
 
(31,864
)
Total stockholders’ equity attributable to Altria
 
15,494

 
15,377

Noncontrolling interests
 
2

 
3

Total stockholders’ equity
 
15,496

 
15,380

Total Liabilities and Stockholders’ Equity
 
$
43,953

 
$
43,202

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,
 
For the Three Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net revenues
 
$
19,250

 
$
19,475

 
$
6,837

 
$
6,729

Cost of sales
 
5,509

 
5,719

 
2,037

 
1,952

Excise taxes on products
 
4,409

 
4,695

 
1,545

 
1,606

Gross profit
 
9,332

 
9,061

 
3,255

 
3,171

Marketing, administration and research costs
 
1,959

 
1,681

 
700

 
574

Asset impairment and exit costs
 
2

 
24

 
(2
)
 
8

Operating income
 
7,371

 
7,356

 
2,557

 
2,589

Interest and other debt expense, net
 
503

 
525

 
159

 
169

Net periodic benefit income, excluding service cost
 
(37
)
 
(37
)
 
(21
)
 
(18
)
Earnings from equity investment in AB InBev
 
(759
)
 
(332
)
 
(189
)
 
(169
)
Loss (gain) on AB InBev/SABMiller business combination
 
33

 
(445
)
 

 
(37
)
Earnings before income taxes
 
7,631

 
7,645

 
2,608

 
2,644

Provision for income taxes
 
1,915

 
2,386

 
664

 
777

Net earnings
 
5,716

 
5,259

 
1,944

 
1,867

Net earnings attributable to noncontrolling interests
 
(3
)
 
(3
)
 
(1
)
 
(1
)
Net earnings attributable to Altria
 
$
5,713

 
$
5,256

 
$
1,943

 
$
1,866

Per share data:
 
 
 
 
 
 
 
 
Basic and diluted earnings per share attributable to Altria
 
$
3.02

 
$
2.72

 
$
1.03

 
$
0.97

Dividends declared
 
$
2.20

 
$
1.88

 
$
0.80

 
$
0.66

See notes to condensed consolidated financial statements.


5



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

 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net earnings
 
$
5,716

 
$
5,259

 
$
1,944

 
$
1,867

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
 
 
 
 
Benefit plans
 
126

 
96

 
39

 
31

AB InBev
 
(262
)
 
9

 
(422
)
 
(139
)
Currency translation adjustments and other
 
(1
)
 
1

 
1

 

Other comprehensive (losses) earnings, net of deferred
income taxes
 
(137
)
 
106

 
(382
)
 
(108
)
 
 
 
 
 
 
 
 
 
Comprehensive earnings
 
5,579

 
5,365

 
1,562

 
1,759

Comprehensive earnings attributable to noncontrolling interests
 
(3
)
 
(3
)
 
(1
)
 
(1
)
Comprehensive earnings attributable to Altria
 
$
5,576

 
$
5,362

 
$
1,561

 
$
1,758

See notes to condensed consolidated financial statements.


6



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Year Ended December 31, 2017 and
the Nine Months Ended September 30, 2018
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
Attributable to Altria
 
 
 
 
 
 
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, 2016
 
$
935

 
$
5,893

 
$
36,906

 
$
(2,052
)
 
$
(28,912
)
 
$
3

 
$
12,773

Net earnings (1)
 

 

 
10,222

 

 

 

 
10,222

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
155

 

 

 
155

Stock award activity
 

 
59

 

 

 
(35
)
 

 
24

Cash dividends declared ($2.54 per share)
 

 

 
(4,877
)
 

 

 

 
(4,877
)
Repurchases of common stock
 

 

 

 

 
(2,917
)
 

 
(2,917
)
Balances, December 31, 2017
 
935

 
5,952

 
42,251

 
(1,897
)
 
(31,864
)
 
3

 
15,380

Net earnings (1)
 

 

 
5,713

 

 

 

 
5,713

Other comprehensive losses, net of deferred income taxes
 

 

 

 
(137
)
 

 

 
(137
)
Stock award activity
 

 
7

 

 

 
10

 

 
17

Cash dividends declared ($2.20 per share)
 

 

 
(4,159
)
 

 

 

 
(4,159
)
Repurchases of common stock
 

 

 

 

 
(1,317
)
 

 
(1,317
)
Other
 

 

 

 

 

 
(1
)
 
(1
)
Balances, September 30, 2018
 
$
935

 
$
5,959

 
$
43,805

 
$
(2,034
)
 
$
(33,171
)
 
$
2

 
$
15,496


(1) 
Amounts attributable to noncontrolling interests for the nine months ended September 30, 2018 and for the year ended December 31, 2017 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, 2018 and December 31, 2017.

See notes to condensed consolidated financial statements.




7


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

 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
5,716

 
$
5,259

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
168

 
155

Deferred income tax provision (benefit)
 
215

 
(223
)
Earnings from equity investment in AB InBev
 
(759
)
 
(332
)
Dividends from AB InBev
 
477

 
434

Loss (gain) on AB InBev/SABMiller business combination
 
33

 
(445
)
Asset impairment and exit costs, net of cash paid
 
(24
)
 
(30
)
Cash effects of changes:
 
 
 
 
Receivables
 
(45
)
 
4

Inventories
 
147

 
67

Accounts payable
 
(79
)
 
(154
)
Income taxes
 
308

 
341

Accrued liabilities and other current assets
 
(319
)
 
(525
)
Accrued settlement charges
 
757

 
(318
)
Pension plan contributions
 
(19
)
 
(18
)
Pension provisions and postretirement, net
 
(19
)
 
(70
)
Other
 
9

 
(1
)
Net cash provided by operating activities
 
6,566

 
4,144

Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
(132
)
 
(151
)
Proceeds from finance assets
 

 
133

Other
 
(5
)
 
(184
)
Net cash used in investing activities
 
$
(137
)
 
$
(202
)

8


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
Cash Used in Financing Activities
 
 
 
 
Repurchases of common stock
 
$
(1,317
)
 
$
(2,359
)
Dividends paid on common stock
 
(3,909
)
 
(3,544
)
Other
 
(25
)
 
(47
)
Cash used in financing activities
 
(5,251
)
 
(5,950
)
Cash, cash equivalents and restricted cash:
 
 
 
 
Increase (decrease)
 
1,178

 
(2,008
)
Balance at beginning of period
 
1,314

 
4,651

Balance at end of period
 
$
2,492

 
$
2,643

 
 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s condensed consolidated balance sheets:
 
 
At
September 30,
 2018
 
At
 December 31,
2017
Cash and cash equivalents
 
$
2,393

 
$
1,253

Restricted cash included in other current assets (1)
 
59

 
25

Restricted cash included in other assets (1)
 
40

 
36

Cash, cash equivalents and restricted cash
 
$
2,492

 
$
1,314

(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending appeals. See Note 10. Contingencies.

See notes to condensed consolidated financial statements.

9


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

Note 1. Background and Basis of Presentation:

Background

At September 30, 2018, Altria Group, Inc.’s (“Altria”) 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’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 wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria and its subsidiaries. Altria’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, 2018, Altria’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, 2018, Altria had an approximate 10.1% ownership of Anheuser-Busch InBev SA/NV (“AB InBev”), which Altria accounts for under the equity method of accounting using a one-quarter lag. Altria receives cash dividends on its interest in AB InBev if and when AB InBev pays such dividends.

Dividends and Share Repurchases

During the first quarter of 2018, Altria’s Board of Directors (the “Board of Directors”) approved a 6.1% increase in the quarterly dividend rate to $0.70 per share of Altria common stock versus the previous rate of $0.66 per share. During the third quarter of 2018, the Board of Directors approved an additional 14.3% increase in the quarterly dividend rate to $0.80 per share of Altria common stock, resulting in an overall quarterly dividend rate increase of 21.2% since the beginning of 2018. The current annualized dividend rate is $3.20 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”). In January 2018, Altria completed the July 2015 share repurchase program. Under this program, Altria repurchased a total of 58.7 million shares of its common stock at an average price of $68.15 per share (including 0.3 million shares at an average price of $71.68 in January 2018).

Following the completion of the July 2015 share repurchase program, the Board of Directors authorized a new $1.0 billion share repurchase program in January 2018 that it expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”). During the nine and three months ended September 30, 2018, Altria repurchased 21.5 million shares and 6.2 million shares, respectively, of its common stock (at an aggregate cost of approximately $1,299 million and $367 million, respectively, and at an average price of $60.40 per share and $59.18 per share, respectively) under the January 2018 share repurchase program. At September 30, 2018, Altria had approximately $700 million remaining in the January 2018 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.


10


Altria’s share repurchase activity was as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions, except per share data)
Total number of shares repurchased
 
21.8

 
33.2

 
6.2

 
11.1

Aggregate cost of shares repurchased
 
$
1,317

 
$
2,359

 
$
367

 
$
759

Average price per share of shares repurchased
 
$
60.53

 
$
70.97

 
$
59.18

 
$
67.99


Basis of Presentation

The interim condensed consolidated financial statements of Altria are unaudited. It is the opinion of Altria’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’s Annual Report on Form 10-K for the year ended December 31, 2017.

On January 1, 2018, Altria adopted the following Accounting Standards Updates (“ASU”):
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all related ASU amendments (collectively “ASU No. 2014-09”);
ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the related ASU amendment (collectively “ASU No. 2016-01”);
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”);
ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”); and
ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU No. 2017-07”).

Altria has reclassified certain prior-period amounts to conform with the current period’s presentation due to Altria’s adoptions of ASU No. 2016-18 and ASU No. 2017-07.

ASU No. 2014-09 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Altria has elected to apply the guidance using the modified retrospective transition method. For further discussion, see Note 2. Revenues from Contracts with Customers.

ASU No. 2016-01 addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The adoption of ASU No. 2016-01 did not impact Altria’s condensed consolidated financial statements.

ASU No. 2016-15 addresses how eight specific cash flow issues are to be presented and classified in the statement of cash flows. The adoption of ASU 2016-15 did not impact Altria’s condensed consolidated statements of cash flows. In addition, Altria made an accounting policy election to continue to classify distributions received from equity method investees using the nature of distribution approach.

ASU No. 2016-18, which Altria adopted retrospectively, requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. As a result of the adoption, restricted cash of $99 million, $61 million, $61 million and $82 million at September 30, 2018, September 30, 2017, December 31, 2017 and December 31, 2016, respectively, was included in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows.

ASU No. 2017-07 requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost

11


are required to be presented in the statement of earnings separately from the service cost component and outside the subtotal of operating income. Additionally, only the service cost component is eligible for capitalization. Altria retrospectively adopted the guidance for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of earnings, and prospectively adopted the capitalization of service cost. Altria used the practical expedient provided in ASU No. 2017-07 that permits Altria to use the amounts disclosed in its benefit plans note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. For the nine months ended September 30, 2017, the adoption of ASU No. 2017-07 resulted in a reclassification of net periodic benefit income of $20 million and $17 million from cost of sales and marketing, administration and research costs, respectively, to net periodic benefit income, excluding service cost in Altria’s condensed consolidated statement of earnings. For the three months ended September 30, 2017, the adoption of ASU No. 2017-07 resulted in a reclassification of net periodic benefit income of $12 million and $6 million from cost of sales and marketing, administration and research costs, respectively, to net periodic benefit income, excluding service cost in Altria’s condensed consolidated statement of earnings. In addition, certain prior-period segment data has been reclassified to conform with the current period’s presentation. For further discussion, see Note 7. Segment Reporting.

For a description of recently issued accounting guidance applicable to, but not yet adopted by, Altria, see Note 12. Recent Accounting Guidance Not Yet Adopted.

Note 2. Revenues from Contracts with Customers:

On January 1, 2018, Altria adopted ASU No. 2014-09, which establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Altria elected to apply the guidance using the modified retrospective transition method. The adoption of this guidance had no impact on the amount and timing of revenue recognized by Altria’s businesses; therefore, no adjustments were recorded to Altria’s condensed consolidated financial statements.

Altria’s businesses generate substantially all of their revenue from sales contracts with customers. While Altria’s businesses enter into separate sales contracts with each customer for each product type, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. Contract durations do not exceed one year; therefore, there is no significant financing component, costs to obtain contracts are expensed as incurred and unsatisfied performance obligations are not disclosed.

Altria’s businesses define net revenues as revenues, which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns (also referred to as returned goods) and sales incentives. Altria’s businesses exclude from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on cigarettes, cigars, smokeless tobacco or wine).

Altria’s businesses recognize revenues from sales contracts with customers upon shipment of goods when control of such products is obtained by the customer. Altria’s businesses determine that a customer obtains control of the product upon shipment when title of such product and risk of loss transfers to the customer. Altria’s businesses account for shipping and handling costs as fulfillment costs and such amounts are classified as part of cost of sales in Altria’s condensed consolidated statements of earnings. Altria’s businesses record an allowance for returned goods, based principally on historical volume and return rates, which is included in other accrued liabilities on Altria’s condensed consolidated balance sheets. Altria’s businesses record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction to revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period) based principally on historical volume, utilization and redemption rates. Expected payments for sales incentives are included in accrued marketing liabilities on Altria’s condensed consolidated balance sheets.

Payment terms vary depending on product type. Altria’s businesses consider payments received in advance of product shipment as deferred revenue, which is included in other accrued liabilities on Altria’s condensed consolidated balance sheets until revenue is recognized. PM USA receives payment in advance of a customer obtaining control of the product. USSTC receives substantially all payments within one business day of the customer obtaining control of the product. Ste. Michelle receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in receivables on Altria’s condensed consolidated balance sheets.

Altria’s businesses promote their products with consumer incentives, trade promotions and consumer engagement programs. These consumer incentive and trade promotion activities, which include discounts, coupons, rebates, in-store display incentives and volume-based incentives, do not create a distinct deliverable and are, therefore, recorded as a reduction of revenues.

12


Consumer engagement program payments are made to third parties. Altria’s businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs on Altria’s condensed consolidated statements of earnings. For interim reporting purposes, Altria’s businesses charge consumer engagement programs and certain consumer incentive expenses to operations as a percentage of sales, based on estimated sales and related expenses for the full year.

Altria disaggregates net revenues based on product type. For further discussion, see Note 7. Segment Reporting.

Altria’s businesses offer cash discounts to customers for prompt payment and calculate cash discounts as a percentage of the list price based on historical experience and agreed-upon payment terms. Altria’s businesses record an allowance for cash discounts, which is included as a contra-asset against receivables on Altria’s condensed consolidated balance sheets. There was no allowance for cash discounts at September 30, 2018 and December 31, 2017, and there were no differences between amounts recorded as an allowance for cash discounts and cash discounts subsequently given to customers.

Altria’s businesses that receive payments in advance of product shipment record such payments as deferred revenue. These payments are included in other accrued liabilities on Altria’s condensed consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $116 million and $267 million at September 30, 2018 and December 31, 2017, respectively. When cash is received in advance of product shipment, Altria’s businesses satisfy their performance obligations within three days of receiving payment. At September 30, 2018 and December 31, 2017, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.

Receivables, which primarily reflect sales of wine produced and/or distributed by Ste. Michelle, were $187 million and $142 million at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, there were no expected differences between amounts recorded and subsequently received, and Altria’s businesses did not record an allowance for doubtful accounts against these receivables.

Altria’s businesses record an allowance for returned goods, which is included in other accrued liabilities on Altria’s condensed consolidated balance sheets. While all of Altria’s tobacco operating companies sell tobacco products with dates relative to freshness as printed on product packaging, due to the limited shelf life of USSTC’s smokeless tobacco products, it is USSTC’s policy to accept authorized sales returns from its customers for products that have passed such dates. Altria’s businesses record estimated sales returns, which are based principally on historical volume and return rates, as a reduction to revenues. Actual sales returns will differ from estimated sales returns to the extent actual results differ from estimated assumptions. Altria’s businesses reflect differences between actual and estimated sales returns in the period in which the actual amounts become known. These differences, if any, have not had a significant impact on Altria’s condensed consolidated financial statements. All returned goods are destroyed upon return and not included in inventory. Consequently, Altria’s businesses do not record an asset for their right to recover goods from customers upon return.

Sales incentives include variable payments related to goods sold by Altria’s businesses. Altria’s businesses include estimates of variable consideration as a reduction to revenues upon shipment of goods to customers. The sales incentives that require significant estimates and judgments are as follows:

Price promotion payments- Altria’s businesses make price promotion payments, substantially all of which are made to their retail partners to incent the promotion of certain product offerings in select geographic areas.

Wholesale and retail participation payments- Altria’s businesses make payments to their wholesale and retail partners to incent merchandising and sharing of sales data in accordance with each business’s trade agreements.

These estimates primarily include estimated wholesale to retail sales volume and historical acceptance rates. Actual payments will differ from estimated payments to the extent actual results differ from estimated assumptions. Differences between actual and estimated payments are reflected in the period such information becomes available. These differences, if any, have not had a significant impact on Altria’s condensed consolidated financial statements.

Note 3. Investment in AB InBev:
At September 30, 2018, Altria had an approximate 10.1% ownership of AB InBev, consisting of approximately 185 million restricted shares of AB InBev (the “Restricted Shares”) and approximately 12 million ordinary shares of AB InBev. Altria accounts for its investment in AB InBev under the equity method of accounting because Altria has the ability to exercise

13


significant influence over the operating and financial policies of AB InBev, including having active representation on AB InBev’s Board of Directors (“AB InBev Board”) and certain AB InBev Board Committees. Through this representation, Altria participates in AB InBev policy making processes.

Altria reviews its investment in AB InBev for impairment by comparing the fair value of its investment to its carrying value. If the carrying value of its investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and impairment is recognized in the period identified. The factors used to make this determination include the duration and magnitude of the fair value decline, AB InBev’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in AB InBev until recovery.

The fair value of Altria’s equity investment in AB InBev is based on: (i) unadjusted quoted prices in active markets for AB InBev’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder forecloses on the Restricted Shares, the relevant Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.

The fair value of Altria’s equity investment in AB InBev at September 30, 2018 and December 31, 2017 was $17.2 billion and $22.1 billion, respectively, compared with its carrying value of $17.8 billion and $18.0 billion, respectively. The fair value of Altria’s equity investment has continued to decline after September 30, 2018. On October 25, 2018, AB InBev announced a 50% rebase in the dividends it pays to its shareholders, which will result in a reduction of cash dividends AB InBev shareholders receive. The fair value of Altria’s equity investment at October 25, 2018 was approximately $14.5 billion. Based on its evaluation of the factors identified above, Altria concluded that the decline in fair value of its investment in AB InBev below its carrying value is temporary and, therefore, no impairment was recorded.

Note 4. Benefit Plans:

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
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service cost
$
61

 
$
57

 
$
13

 
$
12

 
$
20

 
$
19

 
$
4

 
$
3

Interest cost
207

 
216

 
52

 
57

 
69

 
72

 
15

 
17

Expected return on plan assets
(438
)
 
(451
)
 
(14
)
 

 
(146
)
 
(151
)
 
(5
)
 

Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
168

 
147

 
16

 
19

 
56

 
49

 
(1
)
 
3

Prior service cost (credit)
3

 
3

 
(31
)
 
(28
)
 
1

 
1

 
(10
)
 
(9
)
Net periodic benefit
cost (income)
$
1

 
$
(28
)
 
$
36

 
$
60

 
$

 
$
(10
)
 
$
3

 
$
14


Employer Contributions

Altria 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. Altria made employer contributions of $19 million to its pension plans during the nine months ended September 30, 2018. Currently, Altria anticipates making additional employer contributions to its pension plans during the remainder of 2018 of up to approximately $25 million, based on current tax law. Altria did not make any employer contributions to its postretirement plans during the nine months ended September 30, 2018. Currently, Altria anticipates making employer contributions to its postretirement plans of up to approximately $70 million in 2018. However, estimates for current-year contributions to Altria’s pension and postretirement plans may be 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 assets, changes in interest rates or other considerations.

14



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,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Net earnings attributable to Altria
 
$
5,713

 
$
5,256

 
$
1,943

 
$
1,866

Less: Distributed and undistributed earnings attributable to share-based awards
 
(7
)
 
(7
)
 
(2
)
 
(2
)
Earnings for basic and diluted EPS
 
$
5,706

 
$
5,249

 
$
1,941

 
$
1,864

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
1,891

 
1,927

 
1,883

 
1,915


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:
 
 
For the Nine Months Ended September 30, 2018
 
 
Benefit Plans
 
AB InBev
 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2017
 
$
(1,839
)
 
$
(54
)
 
$
(4
)
 
$
(1,897
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 

 
(288
)
 
(1
)
 
(289
)
Deferred income taxes
 

 
57

 

 
57

Other comprehensive losses before reclassifications, net of deferred income taxes
 

 
(231
)
 
(1
)
 
(232
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
168

 
(41
)
 

 
127

Deferred income taxes
 
(42
)
 
10

 

 
(32
)
Amounts reclassified to net earnings, net of deferred income taxes
 
126

 
(31
)
 

 
95

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
126

 
(262
)
(1 
) 
(1
)
 
(137
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2018
 
$
(1,713
)
 
$
(316
)
 
$
(5
)
 
$
(2,034
)


15


 
 
For the Three Months Ended September 30, 2018
 
 
Benefit Plans
 
AB InBev
 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, June 30, 2018
 
$
(1,752
)
 
$
106

 
$
(6
)
 
$
(1,652
)
 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings before reclassifications
 

 
(513
)
 
1

 
(512
)
Deferred income taxes
 

 
107

 

 
107

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

 
(406
)
 
1

 
(405
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
50

 
(21
)
 

 
29

Deferred income taxes
 
(11
)
 
5

 

 
(6
)
Amounts reclassified to net earnings, net of deferred income taxes
 
39

 
(16
)
 

 
23

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
39

 
(422
)
(1 
) 
1

 
(382
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2018
 
$
(1,713
)
 
$
(316
)
 
$
(5
)
 
$
(2,034
)

 
 
For the Nine Months Ended September 30, 2017
 
 
Benefit Plans
 
AB InBev
 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2016
 
$
(2,048
)
 
$

 
$
(4
)
 
$
(2,052
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 

 
9

 
1

 
10

Deferred income taxes
 

 
(3
)
 

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

 
6

 
1

 
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
 
96

 
9

(1 
) 
1

 
106

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

 
$
(3
)
 
$
(1,946
)


16


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

 
$
(3
)
 
$
(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
 
$
(1,952
)
 
$
9

 
$
(3
)
 
$
(1,946
)
(1) Primarily reflects 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,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Benefit Plans: (1)
 
 
 
 
 
 
 
 
Net loss
 
$
196

 
$
179

 
$
59

 
$
56

Prior service cost/credit
 
(28
)
 
(25
)
 
(9
)
 
(8
)
 
 
168

 
154

 
50

 
48

 
 
 
 
 
 
 
 
 
AB InBev (2)
 
(41
)
 
5

 
(21
)
 
3

 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
127

 
$
159

 
$
29

 
$
51

(1) Amounts are included in net defined benefit plan costs. For further details, see Note 4. Benefit Plans.
(2) Amounts are primarily included in earnings from equity investment in AB InBev.


17


Note 7. Segment Reporting:

The products of Altria’s subsidiaries include smokeable tobacco products, consisting of combustible 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, consisting of moist smokeless tobacco and snus products manufactured and sold by USSTC; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria’s reportable segments of smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in all other.

As discussed in Note 1. Background and Basis of Presentation, on January 1, 2018, Altria adopted ASU 2017-07, which resulted in a change to prior-period operating income. As a result, certain immaterial prior-period operating companies income (loss) data has been reclassified to conform with the current period’s presentation.

Altria’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, net periodic benefit cost/income, excluding service cost, 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,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
16,995

 
$
17,355

 
$
6,035

 
$
5,975

Smokeless products
 
1,690

 
1,580

 
586

 
550

Wine
 
489

 
471

 
181

 
181

All other
 
76

 
69

 
35

 
23

Net revenues
 
$
19,250

 
$
19,475

 
$
6,837

 
$
6,729

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income (loss):
 
 
 
 
 
 
 
 
Smokeable products
 
$
6,516

 
$
6,536

 
$
2,277

 
$
2,276

Smokeless products
 
1,085

 
941

 
370

 
348

Wine
 
73

 
82

 
29

 
36

All other
 
(121
)
 
(31
)
 
(38
)
 
(10
)
Amortization of intangibles
 
(30
)
 
(15
)
 
(20
)
 
(5
)
General corporate expenses
 
(152
)
 
(157
)
 
(61
)
 
(56
)
Operating income
 
7,371

 
7,356

 
2,557

 
2,589

Interest and other debt expense, net
 
(503
)
 
(525
)
 
(159
)
 
(169
)
Net periodic benefit income, excluding service cost
 
37

 
37

 
21

 
18

Earnings from equity investment in AB InBev
 
759

 
332

 
189

 
169

(Loss) gain on AB InBev/SABMiller business combination
 
(33
)
 
445

 

 
37

Earnings before income taxes
 
$
7,631

 
$
7,645

 
$
2,608

 
$
2,644



18


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

Non-Participating Manufacturer (“NPM”) Adjustment Items - Pre-tax (income) expense for NPM adjustment items was recorded in Altria’s condensed consolidated statements of earnings as follows:
 
 
For the Nine Months Ended
September 30,
 
For the Three Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Smokeable products segment
 
$
(145
)
 
$
(5
)
 
$

 
$
3

Interest and other debt expense, net
 

 
9

 

 
2

Total
 
$
(145
)
 
$
4

 
$

 
$
5


NPM adjustment items result from the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 10. Contingencies). The amounts shown in the table above for the smokeable products segment were recorded by PM USA as (reductions) increases to cost of sales, which (increased) decreased operating companies income in the smokeable products segment.

Tobacco and Health Litigation Items - Pre-tax charges related to certain tobacco and health litigation items were recorded in Altria’s condensed consolidated statements of earnings as follows:
 
 
For the Nine Months Ended
September 30,
 
For the Three Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Smokeable products segment
 
$
94

 
$
16

 
$
10

 
$

Smokeless products segment
 
10

 

 
10

 

Interest and other debt expense, net
 
15

 
2

 
1

 

Total
 
$
119

 
$
18

 
$
21

 
$


The amounts shown in the table above for the smokeable and smokeless products segments were recorded in marketing, administration and research costs. For further discussion, see Note 10. 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 estimated that 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 - In October 2016, Altria announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. In the first quarter of 2018, Middleton completed the transfer of its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”), and USSTC completed the transfer of its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. The pre-tax charges related to the consolidation are complete.


19


Pre-tax asset impairment, exit and implementation costs recorded in connection with the facilities consolidation consisted of the following:
 
For the Nine Months Ended September 30, 2018
 
For the Nine Months Ended September 30, 2017
 
Asset Impairment and Exit Costs
 
Implementation Costs (1)
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs (1)
 
Total
 
(in millions)
Smokeable products
$
(4
)
 
$
1

 
$
(3
)
 
$
2

 
$
17

 
$
19

Smokeless products
6

 
3

 
9

 
22

 
30

 
52

Total
$
2

 
$
4

 
$
6

 
$
24

 
$
47

 
$
71

 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended September 30, 2017
 
Asset Impairment and Exit Costs
 
Implementation Costs (1)
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs (1)
 
Total
 
(in millions)
Smokeable products
$
(5
)
 
$
(1
)
 
$
(6
)
 
$

 
$
5

 
$
5

Smokeless products
3

 

 
3

 
8

 
2

 
10

Total
$
(2
)
 
$
(1
)
 
$
(3
)
 
$
8

 
$
7

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
(1) The pre-tax implementation costs were included in cost of sales in Altria’s condensed consolidated statements of earnings.

Note 8. Debt:

Short-term Borrowings and Borrowing Arrangements

At September 30, 2018 and December 31, 2017, Altria had no short-term borrowings.

On August 1, 2018, Altria entered into a senior unsecured 5-year revolving credit agreement (the “Credit Agreement”). The Credit Agreement, which is used for general corporate purposes, provides for borrowings up to an aggregate principal amount of $3.0 billion. The Credit Agreement expires on August 1, 2023 and includes an option, subject to certain conditions, for Altria to extend the Credit Agreement for two additional one-year periods. The Credit Agreement replaced Altria’s prior $3.0 billion senior unsecured 5-year revolving credit agreement, which was to expire on August 19, 2020 and was terminated effective August 1, 2018. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”) plus a percentage based on the higher of the ratings of Altria’s long-term senior unsecured debt from Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. The applicable percentage based on Altria’s long-term senior unsecured debt ratings at September 30, 2018 for borrowings under the Credit Agreement was 1.0%. The Credit Agreement does not include any other rating triggers, or any provisions that could require the posting of collateral. At September 30, 2018, credit available to Altria under the Credit Agreement was $3.0 billion.

The Credit Agreement includes various covenants, one of which requires Altria to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Consolidated Interest Expense of not less than 4.0 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. At September 30, 2018, the ratio of consolidated EBITDA to Consolidated Interest Expense, calculated in accordance with the Credit Agreement, was 14.8 to 1.0. At September 30, 2018, Altria was in compliance with, and expects to continue to meet, its covenants associated with the Credit Agreement. The terms “Consolidated EBITDA” and “Consolidated Interest Expense,” each as defined in the Credit Agreement, include certain adjustments.

Any commercial paper issued by Altria and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 11. Condensed Consolidating Financial Information.
   

20


Long-term Debt

Altria’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’s total long-term debt at September 30, 2018 and December 31, 2017, was $14.2 billion and $15.3 billion, respectively, as compared with its carrying value of $13.9 billion for each period.

At September 30, 2018 and December 31, 2017, accrued interest on long-term debt of $155 million and $219 million, respectively, was included in other accrued liabilities on Altria’s condensed consolidated balance sheets.

Note 9. Income Taxes:

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The main provisions of the Tax Reform Act that impact Altria include: (i) a reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system. The transition to a modified territorial tax system required Altria to record a deemed repatriation tax and an associated tax basis benefit in 2017. Substantially all of the deemed repatriation tax was related to Altria’s share of AB InBev’s accumulated earnings. Dividends received from AB InBev beginning in 2017, to the extent that such dividends represent previously taxed income attributable to the deemed repatriation tax, result in an associated tax basis expense, which reverses the tax basis benefit recorded in 2017. The Tax Reform Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries. Altria made an accounting policy election to treat taxes due under the GILTI provision as a current period expense.

The income tax rate of 25.1% for the nine months ended September 30, 2018 decreased 6.1 percentage points from the nine months ended September 30, 2017. This decrease was due primarily to the following:

a reduction in tax expense in 2018 from the decrease in the U.S. federal statutory corporate income tax rate as a result of the Tax Reform Act; and
tax expense of $114 million in 2017 for tax reserves related to the calculation of certain foreign tax credits;

partially offset by:

tax benefits of $232 million in 2017 for the release of a valuation allowance related to deferred income tax assets for foreign tax credit carryforwards;
tax benefits of $152 million in 2017 related primarily to the effective settlement of the IRS audit of Altria and its consolidated subsidiaries’ 2010-2013 tax years;
tax expense of $122 million in 2018, resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax;
tax expense of $51 million in 2018 for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017 for the Tax Reform Act; and
tax benefits of $36 million in 2017 for the reversal of tax accruals no longer required.

The income tax rate of 25.5% for the three months ended September 30, 2018 decreased 3.9 percentage points from the three months ended September 30, 2017. This decrease was due primarily to the following:

a reduction in tax expense in 2018 from the decrease in the U.S. federal statutory corporate income tax rate as a result of the Tax Reform Act; and
tax expense of $114 million in 2017 for tax reserves related to the calculation of certain foreign tax credits;

partially offset by:

tax benefits of $232 million in 2017 for the release of a valuation allowance related to deferred income tax assets for foreign tax credit carryforwards;
tax expense of $40 million in 2018, resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax;
tax benefits of $36 million in 2017 for the reversal of tax accruals no longer required; and
tax expense of $17 million in 2018 for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017 for the Tax Reform Act.

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During the nine and three months ended September 30, 2018, Altria recorded net tax expense of $1 million and a tax benefit of $1 million, respectively, as adjustments to the provisional estimates recorded in 2017 for the tax basis adjustment and the deemed repatriation tax attributable to the Tax Reform Act. Altria may be required to adjust these provisional estimates based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information to be received from AB InBev, including information regarding AB InBev’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. This additional guidance and information could result in increases or decreases to the provisional estimates, which may be significant in relation to these estimates. Altria will record any such adjustments in 2018.

Altria 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. At September 30, 2018, Altria’s total unrecognized tax benefits were $(34) million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2018 was $58 million, along with $(92) million affecting deferred taxes. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a change to Altria’s total unrecognized tax benefits to approximately $(75) million. At December 31, 2017, Altria’s total unrecognized tax benefits were $66 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2017 was $43 million, along with $23 million affecting deferred taxes.

Note 10. Contingencies:

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria 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, shareholders 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 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 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 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. States, including Florida, may also seek to repeal or alter bond cap statutes through legislation. Although Altria cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, 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 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 10. 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

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amounts in the condensed consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.

Altria 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, 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 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 and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria to do so.

Overview of Altria 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 as of October 22, 2018, October 23, 2017 and October 24, 2016:
 
October 22, 2018
 
October 23, 2017
 
October 24, 2016
Individual Smoking and Health Cases (1)
101
 
87
 
66
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
2
 
4
 
5
Health Care Cost Recovery Actions (3)
1
 
1
 
1
“Lights/Ultra Lights” Class Actions
2
 
4
 
9
(1) Includes 29 cases filed in Massachusetts and 38 non-Engle cases filed in Florida. 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 (these Engle progeny cases are discussed below in Smoking and Health Litigation - Engle Class Action). Also does not include 1,491 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. In March 2018, 923 of these cases were voluntarily dismissed without prejudice.
(2) The 2016 and 2017 pending cases include as one case the 30 civil actions that were to be tried in six consolidated trials in West Virginia (In re: Tobacco Litigation). PM USA was a defendant in nine of the 30 cases. The parties resolved these cases for an immaterial amount and in the second quarter of 2018, the court dismissed all 30 cases.
(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.

International Tobacco-Related Cases

As of October 22, 2018, PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight of which also name Altria as a defendant. PM USA and Altria 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 and Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.


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Tobacco-Related Cases Set for Trial

As of October 22, 2018, 5 Engle progeny cases are set for trial through December 31, 2018. In addition, there are two individual smoking and health case against PM USA set for trial during this period. Cases against other companies in the tobacco industry may also 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 64 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 43 of the 64 cases. These 43 cases were tried in Alaska (1), California (7), Connecticut (1), Florida (10), Louisiana (1), Massachusetts (3), 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 jury returned a verdict in favor of PM USA in April 2018 in the third trial of this case. In May 2018, plaintiff filed a motion for a new trial, which the court denied.

Of the 21 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 19 have reached final resolution.

See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of verdicts in state and federal Engle progeny cases involving PM USA as of October 22, 2018.

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 $578 million and interest totaling approximately $195 million as of September 30, 2018. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $186 million, interest totaling approximately $33 million and payment of approximately $43 million in connection with the Federal Engle Agreement, discussed below.

The changes in Altria’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,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Accrued liability for tobacco and health litigation items at beginning of period (1)
$
106

 
$
47

 
$
107

 
$
47

Pre-tax charges for:
 
 
 
 
 
 
 
Tobacco and health litigation
104

 
16

 
20

 

Related interest costs
15

 
2

 
1

 

Payments (1)
(118
)
 
(18
)
 
(21
)
 

Accrued liability for tobacco and health litigation items at end of period (1)
$
107

 
$
47

 
$
107

 
$
47

(1) Includes amounts related to the costs of implementing the corrective communications remedy related to the Federal Government’s Lawsuit discussed below.

The accrued liability for tobacco and health litigation items, including related interest costs, was included in liabilities on Altria’s condensed consolidated balance sheets. Pre-tax charges for tobacco and health litigation were included in marketing, administration and research costs on Altria’s condensed consolidated statements of earnings. Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria’s condensed consolidated statements of earnings.


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Security for Judgments

To obtain stays of judgments pending appeal, PM USA has posted various forms of security. As of September 30, 2018, PM USA has posted appeal bonds totaling approximately $99 million, which have been collateralized with cash deposits that are included in 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 2018 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.

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). In April 2018, the trial court entered final judgment in favor of plaintiff and PM USA posted a bond in the amount of approximately $8 million. In May 2018, PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal.

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. On appeal, the U.S. Court of Appeals for the Ninth Circuit affirmed the judgment. In the fourth quarter of 2017, PM USA recorded a provision on its consolidated balance sheet of approximately $1 million for the judgment, interest and associated costs. I